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Pete Hoskin

Peter Hoskin: The lesson of recent years is that there are few fiscal certainties

British politics? Right now? It’s just the disquiet before the storm. I mean, the froth and fury currently whirling around the party conferences and Andrew Mitchell is but a prelude to the main event: George Osborne’s Autumn Statement on 5th December. That is when we shall discover whether the Chancellor has any more ideas for encouraging growth. That is when it might be confirmed that he’s set to break one of his two fiscal rules. That is when we will experience hurricane-force turbulence.

The fiscal rule under question is, as we know, Mr Osborne’s “supplementary” one, to have our national debt growing no faster than the economy by 2015. And last week provided more evidence that it will eventually tumble. The latest official figures had public borrowing in August this year as high as it was in August last year, at £14.4 billion. Overall borrowing for this fiscal year (when distortive effects to do with Royal Mail pensions are discounted) could even surpass last year’s total. As Robert Burns didn’t quite put it, things gang aft agley when the economy stops growing.

There was, admittedly, some encouraging news woven into those official numbers. The borrowing total for the last fiscal year has been revised downwards, such that the Coalition managed to cut the deficit by around a quarter in its first two years of existence, and … so on and so on. But although we can pore over the numbers until our minds bleed, there is increasingly only one lesson to be learnt from them: that there are few certainties when it comes to the public finances. They are, in significant part, a hash of revisions, counter-revisions, overshoots and undershoots. We need only look at the Office for Budget Responsibility’s fluctuating forecasts to realise that.      

This uncertainty should have been obvious to our politicians after 2008, when a gigantic Black Swan crash-landed on the City and destroyed heaps of tax revenue in the process. But it might have been obvious before then, too. If you compare the actual amounts borrowed in the five years to 2007 with the original forecasts made in Gordon Brown’s Budgets — as I once did, during my previous life as a researcher — then you’ll see that New Labour exceeded their expectations by over £100 billion. That may have been down to rampant spending rather than sudden economic shock, but the lesson persists: the public finances have a habit of veering off course.

And yet, as simple as this lesson is, it has been neglected during this Parliament. By encoding his fiscal rules into the Budget, Mr Osborne has staked a lot of political capital — his own, as well as the government’s — on the idea that the public finances can be controlled. And it wasn’t just the Chancellor: Labour’s election manifesto contained a pledge that “over the next Parliament the structural deficit will be cut by more than two thirds”. This self-assured language belies what would have been very different results. According to the Institute for Fiscal Studies’ estimates, a Labour government would have borrowed around £50 billion more than the Coalition by 2017, and the debt would be £200 billion higher.         

Mr Osborne would probably say that he had to devise his fiscal rules for the sake of the country. The markets, he’d point out, needed persuading that this Government would be suitably tough on the deficit. And the credit-rating agencies had made it a condition of our continuing triple-A rating that the debt is put on a downwards trajectory by the middle of this decade.

But, while we can sympathise with Mr Osborne here, there are misplaced ideas about control, and who exerts it, in these arguments too. And they are ideas that people such as me bought into. I would, for instance, be much prouder of an article that I wrote last year — warning that the Chancellor could break his debt rule — were if not for one detail: I implied that the credit-rating agencies could also cast Britain into an economic “oblivion”. Yet we have since seen that a downgrade means “oblivion” for very few of the countries it afflicts. When the whole world is dysfunctional, investors aren’t as eager to fly from one territory into another. They and their money stay put.   

None of this is to say that the Treasury’s five-year plans are pointless. They patently make a difference, and can even by useful. A sufficiently detailed Spending Review now, for example, would give the civil service time to prepare for cuts after the election. It would make those cuts more likely to happen.  

But politicians should also be quicker to slap health warnings all over the Budget box. They need to make it clear that spending cuts are often little more than aspirations, which may or may not be met by Whitehall’s bean-counters. They need to be less confident about tax revenue, predicated as it is on economic growth and various unknowable dynamic effects. And, above all, they must be sceptical of the borrowing forecasts that depend on all of the above. The general attitude should be that suggested by those “fan charts” produced by the OBR, the IFS and others: an expectation that the unexpected can happen over time, and that the Government will have to rethink its position.        

In the end, the truth behind all the hype and numbers is that it’s what individuals actually do that matters. The choices made by investors, the number of people setting up small businesses; these factors, and a thousand others, deserve as much attention as the latest fiscal dictates from central office. And hopefully George Osborne’s experience will help imprint this lesson on our collective mind. After all, who’d want to rely on grand fiscal forecasts now?


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