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Home Publications A super day for fiscal policy, but not much ‘super’ to look forward to

A super day for fiscal policy, but not much ‘super’ to look forward to

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You probably missed fiscal super-Tuesday, as it was known to a very small number of us. It happened last week. Two weighty fiscal reports were published on the same day, one by the Office for Budget Responsibility and one by the Treasury. Pretty heady stuff in the world of fiscal policy.

The OBR peered into the long term, looking at our fiscal sustainability over the next 50 years. The Treasury provided an analysis of the dizzying array of fiscal risks previously identified by the OBR. As you can probably imagine, neither document makes for terribly comfortable reading.

Indeed, the OBR, which usually plays with a very straight bat, headlined with “spending pressures threaten the sustainability of the public finances”. In particular, it drew attention to the long-run consequences of the recently announced increase in health spending. It represents an extra 1 per cent of national income on spending and borrowing each year. If not paid for with extra taxes, or spending cuts elsewhere, that soon adds hundreds of billions to the national debt.

As ever, the pressures on health, pensions and social care dominate long-term projections. Given present policies and demographic change, they will lead to government spending an additional 9 per cent of national income — nearly £200 billion in today’s terms — by the middle of the century. That’s just to keep things as they are, on an even keel. It accounts for planned increases in state pension age. It doesn’t build in any improvements to our disastrous social care system. It assumes no more than normal historic pressures on the NHS.

Hopefully at some point between now and fiscal catastrophe, we will be able to spare some attention from Brexit and start thinking about how to deal with these challenges. Not that that will be much comfort either to those in the older generation facing a wholly inadequate and unjust social care system, or to younger generations looking at a housing market and a pension system stacked firmly against them.

The Treasury document is no more cheerful. It reminds us that while government borrowing may be down to relatively low levels, debt remains high. Getting it down again will be a long, hard slog — much harder than getting debt down in the 1950s and 1960s, when small deficits, high growth rates and relatively high inflation brought it down remarkably quickly from postwar highs.

With relatively poor growth rates, low inflation and a rising level of student loan debt, even running a balanced budget from the mid-2020s onwards will mean public debt remaining well above pre-crisis levels for a generation and more. History would suggest that the chances of running a balanced budget for a prolonged period are negligible.

There is also a cheerful reminder that we can expect a recession about once every 12 years at an average fiscal cost of 9 per cent of national income, without labouring the point that this might suggest we are due another downturn any year now.

What the Treasury can’t quite do is spell out the two things that really worry it. One, of course, is Brexit and the associated economic uncertainty and potential economic cost, especially if we end up with the “no deal” variety. In that world, all bets are off and even the rather miserable economic forecasts we are working to at the moment are likely to prove overly optimistic. Lost economic growth will translate very quickly into fiscal costs.

The second worry stems from the current parliamentary arithmetic. The report notes that the recent promise of £20 billion for the NHS will need to be paid for. It promises that this will be done while adhering to the fiscal rules and reducing debt. Rather than then going on to give a Treasury view, it moves into quoting the prime minister. “As the prime minister has said this (NHS spending) will be partly funded by lower contributions due to the European Union. In addition she has made clear taxpayers will need to contribute a bit more.”

I doubt there is anyone in the Treasury who believes the first statement. More importantly, it is the deliverability of the second part that has the Treasury worried — and no doubt why it wants to tie in the prime minister as firmly as possible. With no working majority and a number of less-than-wholly-biddable backbenchers, pushing through tax rises is going to be a lot harder than announcing big spending increases.

And the Department of Health is not going to be the only Whitehall department making demands for more spending. Defence, local government, police, education and others are all lining up to make their cases. After eight lean years, some of them have a good case to make.

As if all that weren’t enough excitement, last week also saw another OBR publication on “student loans and fiscal illusions”. I’ve written here before about the weird and wacky world of government accounting for student loans. Suffice to say that government will soon be shelling out knocking on for £20 billion a year in student loans — and this has no impact on recorded borrowing. At least, it has no impact for now. The accounting rules are being reviewed and we might expect a new set of measures before long, measures that will increase recorded borrowing substantially.

Changing accounting rules doesn’t change anything real, but more transparency is always a good thing. Which is why, despite all the gloom, we should celebrate fiscal super-Tuesday. There is a lot to bemoan, but while we have government institutions that can publish such serious, long-term analyses, and challenges to present accounting conventions, some hope surely remains.