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Rachel Reeves, shadow chancellor, on Tuesday pledged a Labour government would aim to borrow only to invest, echoing the fiscal rules of former Labour chancellor Gordon Brown.
Reeves said her rules would ensure “the current budget must move into balance so that day-to-day costs are met by revenues”, but a top union boss denounced her economic plan as too timid and “for the birds”.
The shadow chancellor confirmed in her Mais lecture in the City of London that Labour would also match Prime Minister Rishi Sunak’s fiscal rule that overall public debt should fall year-on-year as a share of gross domestic product by the fifth year of official forecasts.
The rolling target, which is always five years away, has been criticised by economists. Institute for Fiscal Studies director Paul Johnson said her rules would be “identical in effect” to those being followed by the current chancellor, Jeremy Hunt.
“A rule that debt should be falling in the fifth year of the forecast period is about as loose as a debt rule can be,” he said. “Yet it is binding, and that is what makes increasing spending, whether capital or current, so difficult.
“If she is to keep to this rule Ms Reeves is going to have to hope for quite a spurt of growth. Without that she is going to be forced into some nasty decisions on cutting spending or increasing taxes,” Johnson added.
Reeves portrayed Labour as a party of discipline and hit back at claims she would put up taxes to support higher spending. Reeves declared: “We will not waver from strong fiscal rules.”
But Sharon Graham, general secretary of the Unite union, was scathing. “If you stick to phoney fiscal rules, rule out taxing the wealthy and pander to the profiteers, you end up in a straitjacket of your making,” she said.
Graham added: “Ripping up building regulations and tinkering in the public sector are not going to deliver serious growth — that’s for the birds.”
When he was chancellor in the second half of the 1990s, Brown first introduced formal fiscal rules as part of what he said was a “historic break” from short-termism in budgetary policy.
Brown promised to borrow only to invest over the economic cycle. But the rules have repeatedly been overhauled by successive chancellors, damaging efforts to convey stability in the UK’s budget policy.
A report in February from the Institute for Government think-tank found the lifespan of the UK’s budget rules was the shortest of any OECD country for which data was available.
Allies of Reeves said the rule requiring that day-to-day costs be met by revenues would not be achieved immediately because this would have required deeper upfront spending cuts to strained public services. They said it would be met over the first term of a Labour administration.
They added that it seemed “sensible” to follow the current Conservative government’s plan to have debt falling as a percentage of GDP by the fifth year of the forecast. But the timetable would depend on whether Hunt holds another tax-cutting fiscal event in the autumn.
Reeves said that by shifting to a fiscal rule that targeted day-to-day spending instead of the overall deficit, Labour would “prioritise investment within a framework that would get debt falling as a share of GDP over the medium term”.
The government presently targets the overall budget deficit, including capital spending. Labour argues this creates an incentive to cut investment to meet the deficit target.
The shadow chancellor also announced a requirement for the independent Office for Budget Responsibility to report on the long-term impact of investment measures for growth.
She also confirmed for the first time that Labour would retain the Bank of England’s current 2 per cent inflation target, as she tries to reassure the City that she will maintain macroeconomic stability.
Reeves said the next election would be “an inflection point” similar to the one that faced the country in 1979, when Margaret Thatcher’s government replaced a tired Labour administration.
Though she argued an incoming Labour government would differ from the Thatcher administration by ensuring a recovery was “broad-based, inclusive and resilient”, her allies said the shadow chancellor admires aspects of what the former Tory premier achieved.
Hunt on Tuesday defended his decision to put “slightly looser” fiscal rules in place when he took over from his shortlived predecessor, Kwasi Kwarteng, in the midst of market upheaval.
Allowing himself five years, rather than the previous three, to put public debt on a downwards path had “enabled us to avoid a serious recession”, he argued.
The chancellor’s current plans mean he will stick to the debt rule only by keeping spending on public services almost frozen on a per capita basis.
Hunt insisted his plans were credible, arguing critics were wrong to assume economic growth and productivity would remain stagnant.
“I’m chancellor because I want to change that,” he told the House of Lords economic affairs committee.
“If we are able to run public services more efficiently and increase [the UK’s] long-term growth rate, then it’s entirely possible we can continue to have the levels of public provision we currently have . . . and I very much hope that’s the case,” he said.
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