Labour and the Conservatives are already likely to be on course to break their new fiscal rules announced less than a month ago, as a result of pledges made in and around their Manifestos, according to new research published today (Thursday) by the Resolution Foundation.
The Foundation says that fiscal rules are important for the government’s stewardship of the public finances, and framing its economic priorities. It welcomes the new fiscal rules adopted by the main parties, which broadly follow the approach recommended by the Foundation in recent months.
However, it warns that fiscal rules are only useful if they are credible and adhered to. Failing to meet them at the first opportunity – as both main parties risk doing – would damage rather than enhance the UK’s economic credibility.
Playing by their own rules? examines the new fiscal rules announced by the Chancellor and Shadow Chancellor in speeches made on 7 November in light of their party manifestos, and Labour’s pledge to spend £58 billion on women affected by recent State Pension Age increases.
It notes that the main parties’ new fiscal rules commit them to: balancing the current budget; limiting debt servicing costs; and, in the case of Labour, increasing public sector net worth.
The report warns that the parties’ rules on balancing day-to-day spending and receipts – which the Conservatives have committed to within a three-year period, and Labour within five – are already likely to be broken, even before the ink on them is dry.
The research estimates that the Conservatives have left themselves only the thinnest of margins against their current balance rule. The party argues that it is on course to have £5 billion headroom in 2023. However, this headroom:
- Does not include the full implications of their investment plans, which are estimated to increase current spending (through additional interest on government borrowing and depreciation) by £1 billion in 2023.
- Does not include any funding for their £6 billion goal of further increasing the point at which you start paying National Insurance to £12,500.
- Is unlikely to be sufficient to achieve a current budget balance in 2023. It is the smallest headroom any Chancellor has had against a new fiscal rule, and has an 86 per cent chance of being wiped out, given the pattern of historic errors in forecasting the current balance three-years ahead.
The Foundation argues that in the event of even a tiny downgrade in the economic or fiscal outlook, a future Conservative government would have to either raise taxes, return to austerity or abandon their new fiscal rules at the first hurdle. This is a very real prospect given recent deteriorations in the global economic and UK fiscal outlooks.
Labour is already on course to break its goal of a current budget balance in five years’ time. While the party argues it has £6 billion of headroom in 2025, this is more than wiped out by:
- Failing to account for the £10 billion interest and depreciation costs that their investment plans would add to current spending by the end of the forecast period.
- The commitment to women born in the 1950s affected by increase in the State Pension age that could add a further £12 billion to current spending.
A future Labour government would therefore need to either row back on several big manifesto commitments, announce further tax rises, or take a big economic credibility hit from missing its fiscal rules.
James Smith, Research Director at the Resolution Foundation, said:
“During this election, all the main parties have set out new fiscal rules that would frame their stewardship of the economy. They are right to have adopted new approaches that avoid some of the pitfalls of previous narrow focuses on debt levels.
“However, the parties seem all too willing to bend or even break their own fiscal rules before they’ve even got started. Both parties have failed to account for the wider costs of their very significant investment programmes.
“The Conservatives have left themselves almost no fiscal headroom, and would fail to balance the books with even the smallest deterioration in the economic outlook. Labour meanwhile already look to have broken one of their rules with a £58 billion unfunded spending commitment to WASPI women.
“After a decade of austerity, the desire of politicians to move on and invest in our economy is understandable. But taking huge risks with the brand new fiscal rules that are supposed to bind the next government for its whole time in office risks seriously undermining the UK’s economic credibility, at a time when it is already under strain.”