Autumn Statement: Philip Hammond should learn from Labour's fiscal rule says Institute for Fiscal Studies

Carl Emmerson of the IFS argued that a superior target for the Government would be to aim for a surplus only on the ‘current’ budget, rather than the total budget

Ben Chu
Economics Editor
Thursday 24 November 2016 17:50 GMT
The Chancellor is aiming for a budget surplus in the next Parliament
The Chancellor is aiming for a budget surplus in the next Parliament (Getty)

Philip Hammond should sharpen up his new “woolly” fiscal target and adopt one that is much closer to that of the Labour Party, the Institute for Fiscal Studies has suggested.

In the Autumn Statement the Chancellor ditched George Osborne’s central target of running a budget surplus by 2019-20 at the latest and unveiled a much less arduous new goal of wiping out the deficit “at the earliest possible date in the next Parliament”.

But Carl Emmerson of the IFS argues that a superior target for the Government would be to aim for a surplus only on the “current” budget, rather than the total budget.

This would “carve out” infrastructure spending by the state, meaning ministers would not be tempted to slash back long-term productivity-enhancing capital projects.

“If you say you can only invest in what the current generation can pay for, that seems a recipe for underinvestment,” Mr Emmerson said.

He also suggested that Mr Hammond should target a surplus on a forward-looking rolling basis, rather than pledging to achieve a surplus in any particular year.

This would effectively create a budget target similar to the fiscal rule adopted by the shadow Chancellor John McDonnell, who has said he is committed to balancing the current budget deficit on a rolling five-year forecast.

It would also be something close to the original fiscal mandate adopted by Mr Osborne in 2010, which did carve out capital spending and which was something the IFS itself had previously recommended.

Mr Osborne dropped the capital carve-out after the 2015 election and introduced the hard 2019-20 target for a surplus.

The second part of Labour’s rule is to commit to making the national debt fall as a share of trend GDP over the course of each Parliament.

Mr Hammond’s new debt target only specifies that debt should fall as a percentage of GDP in 2020-21.

The IFS argues that there should be a fiscal target to keep the total national debt as a share of GDP under control, although it does not have any strong recommendation over what the specific new rule should be.

In the Autumn Statement the Office for Budget Responsibility projected an extra £122bn of government borrowing over the five years to 2020-21 relative to its March forecast, with around half of that deterioration attributed to the negative shock of the Brexit vote and leaving the European Union in 2019.

The national debt is now projected to peak at 90 per cent of GDP in 2017-18, before gradually falling thereafter.

For this Parliament Mr Hammond’s self-imposed deficit target is to reduce the cyclically-adjusted Budget deficit to below 2 per cent by 2020-21, equivalent to around £45bn of borrowing in that fiscal year.

This does not carve out capital spending but the Chancellor has given himself a large degree of leeway to hit it.

Despite the deterioration in outlook for tax revenues and £23bn of extra spending on infrastructure over the next five years, cyclically-adjusted borrowing is projected to be £18.5bn in 2020-21, leaving around £26.5bn of fiscal space for Mr Hammond.

Paul Johnson, the director of the IFS, noted that the Government was now planning to borrow a similar sum in 2020-21 as the previous shadow Chancellor, Ed Balls, had proposed ahead of the 2015 general election – proposals that the Conservative Party at the time had portrayed as fiscally reckless.

“It wouldn’t be far from the truth to say that the new fiscal plans aren’t Osborne’s, they are Balls’,” said Mr Johnson.

Mr Johnson said that the Government’s aim for budget balance in the next Parliament was “rather woolly”, although he added that the uncertainty created by Brexit might make “a degree of woolliness sensible”.

Mr Emmerson said Mr Hammond might look to reshape the fiscal rule before the next election in 2020.

“That would be a good time for a review of the fiscal framework,” he said.

A Labour spokesman said that Mr Hammond, by not carving out capital spending, had not learned "the most important lesson" from the failure of Mr Osborne's rule.

“Labour’s Fiscal Credibility Rule was developed in conjunction with world-leading experts to give a sensible route to budget balance. By setting out a target for current spending balance in five years and a debt rule to ensure the long-term sustainability of the public finances, we will give security and clarity to businesses and taxpayers about the future path for the economy,” he said.

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