Once upon a time Rachel Reeves hoped that she could get away with only one fiscal policy event a year. Indeed many, including us at The Future Governance Forum (FGF), had argued for just that. The argument being that it would reduce uncertainty and avoid the need to find new announcements every six months giving rise to enormous temptations of headline-grabbing but fiddly changes to tax and spend that make things more complex.
But in the tense and interconnected world of policy-making and politics, life rarely leaves you alone. So it is almost certain that in fact on the back of the forthcoming new Office for Budget Responsibility (OBR) forecast for the economy on March 26th the Chancellor will indeed undertake a mini fiscal policy event.
She has to do this because the world has turned out to be far more precarious than expected when she gave her first Budget back in the autumn – a lot of that due to the election of President Trump. Uncertainty will always surround the progress of an economy, but it becomes more of an issue when you have chained yourself to fiscal rules which you have made very clear you will not break.
People will argue whether this is the right political and economic stance, whether the fiscal rules were right in the first place and whether Reeves should have set a Budget in the autumn with a bit more leeway in case the economy and public finances went awry.But that is all history at the moment and the real-world focus will be on what the Chancellor does to avoid being judged by the OBR as having broken her own fiscal rules.
She will have been in close contact with the OBR, given it is their forecast and judgement is the one she needs to follow. They have seen the UK economy stuttering, partly no doubt due to a certain amount of gloom and doom talk after the unexpected rise in employer National Insurance Contributions (NICs) announced in the autumn Budget and due to come into effect next month. And they will also have seen a new world taking shape where trade wars, real wars, a likely US slowdown and a European surge for re-arming make forecasting very difficult but bound to be more pessimistic.
Added to this mix is the fact that the government has put a massive amount of real and rhetorical energy into pushing economic growth as its number one mission. So the Spring Statement needs to be seen as a contributor to that, not undercutting it.
That is why, as the statement on welfare by Work and Pensions Secretary, Liz Kendall, last week made clear, we will see cuts to future spending, at least on welfare, announced in the Spring Statement (with more details in the Comprehensive Spending Review due in June). Indeed the Treasury will have communicated these cuts to the OBR already so that they can see what difference they make to their forecasts.
When you are in a situation like this in the Treasury, you tend to see the options before you as being about welfare spending or about public service spending. Cuts to welfare budgets are hard for a Labour government, but with the rise in health-related benefit claims in the UK since the pandemic rising sharply when they have fallen in many other countries, something needed to be done. So it is surely right to think of this in terms of attempting to help the extraordinarily large number of people who seem to have lost contact with the labour market to get back into work where they can. Nevertheless, it is never an easy option.
But then nor is the alternative of cutting spending on programmes. Even the so-called protected areas, like the NHS and defence, could do with more not less money, while many of the unprotected areas – like prisons and local government – are really struggling. Voters notice the consequences if the quality of the public realm drifts down and the chances of robust growth diminish. Of course most of these problems are a consequence of the public spending and fiscal choices of governments after the financial crisis, but voters don’t always see it that way.
We’re bound to hear government talk about cutting back on wasteful spending and bureaucracy, of increasing efficiency and whipping the civil service into shape. These make sense, but in reality can rarely produce the big savings needed – let alone on the right timescale.
So this Spring Statement is unlikely to make for glorious reading and both the government and its supporters will have to hold their nerve. The inheritance left by the previous government was far worse than anyone really imagined, and with world events buffeting the economy, keeping inflation and debt interest payments high, these are tough times. The Chancellor is right to try to get a grip now.
She is also right to be laying the foundations for growth to return, as seen in the Planning and Infrastructure Bill and planning reforms. We hope the Chancellor will also pick up ideas FGF has formulated including:
- Leveraging in private finance for infrastructure by taking a new approach to public-private partnerships through Infrastructure Investment Partnerships
- Boosting innovation by maximising the ability of institutional investors, including the proposed pension megafunds, to finance scale-ups across the UK
The test will be whether the government can, to coin an old phrase of Gordon Brown, present any belt-tightening as ‘prudence for a purpose’ not just for its own sake. These sort of bold measures will help ensure that the purpose is genuinely delivered in future.
