Reflections on the Spring Statement

The Spring Statement was more-or-less as expected. A worsening economic outlook meant that the Chancellor’s headroom against her primary fiscal rule – a current budget surplus in five years’ time – had been wiped out and then some. As a result, budgeted spending was trimmed – notably on health-related benefits – and yet another crackdown on tax avoidance was announced. In the end, the 2029-30 current budget surplus ended up precisely where it began, at £9.9bn, once the positive economic effects of planning reform (inter alia) were factored in.

Is it all a bit too suspiciously tidy? Perhaps so, especially when you consider that the labour supply effect of the government’s gruesome employment rights bill was not accounted for in the economic forecasts. But two things concern me more than exactly how the ‘headroom’ number has been met.

First, this is, by ‘historical’ standards, a very small amount of fiscal headroom. As such, it is extremely vulnerable to any further deterioration in the economic outlook, whether it comes from tariffs, energy prices, interest rates, or another failure of productivity to ‘bounce back’. (The Office for Budget Responsibility predicts 1% trend productivity growth – half what we had before the financial crisis, but still double what we have managed since.) The upshot is that the next six months are bound to see lots of confidence-sapping discussion of another wave of tax increases in the autumn.

Second, I am taken aback by the degree to which our ‘fiscal events’ have become first and foremost an exercise in gaming the OBR forecast. The most important criterion for judging any policy is its impact on an arbitrary, rolling five-year target – according to some necessarily imprecise economic modelling. This is a mad way to make fiscal policy. Not only does it make a principled, long term strategy for tax and spend difficult to sustain, it also blinds us to the longer term and bigger picture. The most important issues in political economy – economic stagnation and an ageing population – do not fit neatly into the forecast window, and so we tend to neglect them.

Please do not read this as a repudiation of fiscal rules or the OBR. Placing institutional constraints on the growth of government spending is important, given that all the political incentives point in the opposite direction. So is not letting politicians mark their own homework. (The OBR is also one of the few bodies concerned with our long term fiscal sustainability.) No, the problem is not with the principle of the thing, but rather with its contemporary execution.

A sensible, hard-to-game fiscal rule would simply cap the growth of spending at, say, the average rate of growth in tax revenue over the last 3-5 years. Trade-offs would have to be made within that envelope. And if a government wanted to raise spending further, it would have to get tax revenues up first – so that we don’t always run up debt and then hope for the best. Such a rule would be straightforward and based on outturn data rather than a highly variable forecast. The OBR could focus on providing independent analysis and validating government fiscal data and spending plans. It would no longer find itself in the awkward position of appearing to determine elected governments’ fiscal policies.

Leaving the overall framing of fiscal statements aside, I am struck again by how much the government has started to say the right things without really delivering them – or having the plans necessary to do so. The Chancellor says she wants ‘fundamental reform of the British state, driving efficiency and productivity across government’. Great! But that’s going to take a lot more than simply abolishing NHS England.

Or take the government’s growth agenda: a third runway at Heathrow, some planning and infrastructure reforms, policies to boost (private sector) capital investment, and ‘tearing down regulatory barriers in every sector of our economy’. Music to my ears! But where are the policies – the ones that really change institutions and incentives – to make good on the (laudable) ambition?

You don’t necessarily expect a nine-month old government to have all the answers. But if growth is the overriding objective, perhaps you also don’t expect tax policy, labour market laws, or energy regulation all to be pulling in the opposite direction. And if planning reform can deliver a cost-free 0.2% uplift in GDP, without being particularly radical, couldn’t we have a lot more of it?

Ultimately, the fact that we have turned fiscal policy making into a biannual set-piece of political theatre is part of the problem. It encourages short-termism, increasing complexity, and policy incoherence. It produces a ‘bread and circuses’ approach – all-too-evident in the Spring Statement’s attempt to turn increased defence spending into an act of ‘modern industrial strategy’ – with high-tech manufacturing jobs coming soon to a factory near you!

The truth is that a few more ‘rabbits out of the hat’ aren’t going to fix what ails Britain economically. For that, we will need a concerted, years-long programme of reform – of the tax system, the welfare state, of the regulatory mindset, and indeed of government itself. You shouldn’t expect much of that in an update on the economic and fiscal outlook, but it is the yardstick by which a government’s overall agenda should be judged.

Any proper assessment of the Spring Statement must be far less sweeping. I would simply say that the Chancellor did a few good things for which she should be commended, and otherwise generally refrained from making matters worse. But we didn’t really learn anything new, and the big challenges still lie ahead.