Playing by the rules isn’t fair if the chancellor keeps changing them

There is a budget due, though it would be quite nice to know when. The chancellor normally would have announced the date in September, yet here we are, halfway through October, none the wiser. Which is all very annoying for those few of us who have to organise our lives around the timing of fiscal events.

Even so, the fiscal world — such as it is — is abuzz with anticipation. The £13 billion of additional spending announced in last month’s spending round takes this government’s plans for day-to-day (that is, non-investment) spending to within spitting distance of those set out in the Labour Party’s 2017 manifesto and a country mile from anything hinted at in the Conservative equivalent.

Add that to a change in accounting rules for student finances, a somewhat surprising failure of HM Revenue & Customs to be able to count its own corporation tax receipts properly and a slowing down in the economy and it looks likely that borrowing next year will exceed £50 billion.

That’s more than double the level of borrowing forecast by the Office for Budget Responsibility back in March. If that’s how it turns out, the government will have broken its own fiscal rules, which state that borrowing next year should be (on a cyclically adjusted basis) below 2 per cent of national income, or about £46 billion.

The so-called Brexit war chest, which was only ever the difference between projected borrowing and the maximum borrowing allowable under this rule, has shrunk from a seemingly healthy £27 billion back in March to less than zero today. If the chancellor does need to undertake more spending or implement tax cuts to tide us over any Brexit-related economic disruption, then he will find no ammunition in this particular war chest.

Luckily, he has already announced a review of the fiscal rules. The trouble is that setting supposedly binding fiscal rules, missing them, abandoning them and replacing them with something new has become something of a habit. The present so-called fiscal mandate is the fourth in less than a decade and is set to become the fourth to be abandoned. We also have had a slew of different rules supposed to limit overall government indebtedness, not to mention the long-forgotten and entirely ignored 2017 manifesto commitment to get rid of the deficit altogether by the mid-2020s.

So if we do get another set of rules, I think we could all be forgiven for viewing them with a certain degree of scepticism, not to say cynicism. That is, to say the least, a shame. Whatever one thinks about the appropriate way to manage the public finances, to be adrift without either a fiscal anchor or any confidence in the capacity of the government to keep to its own stated objectives is a dangerous place to be.

So, assuming that he does get to deliver a budget in the next month or so, what should Sajid Javid do? He could easily cook up something. He could target a measure of the deficit that allows borrowing for investment and sets a cap on overall debt or promises to put it on a downward trajectory. That would be a sensible enough, not dissimilar to what George Osborne did back in 2010; nor, indeed, so different from what Labour had in its 2017 manifesto (not that the rest of the manifesto looked consistent with meeting those stated rules).

But I do hope he doesn’t cook up yet another set of rules. This is probably the worst possible time to to do so. Frankly, we don’t have much of a clue what will happen to the economy over the next couple of years. It depends, above all, on the outcome of Brexit. If we end up without a deal, then the economy is unlikely to grow, a temporary fiscal loosening probably will be required and the deficit will grow. A set of targets for borrowing and debt that could accommodate this outcome would be essentially meaningless in the face of more robust economic growth.

In any case, the currency of fiscal rules has become hopelessly debased. What purpose would be served by announcing yet another set, especially in the run-up to an election? Who would take them seriously?

It is time to look much more carefully at our fiscal framework. Despite recent experience, I’m sure we do need some rules. Transparency is important, as is a visible constraint on government behaviour. But so is credibility.

One way to go would be to find a way of placing clearer legislative constraints on government action, making it harder to break and reset rules on a whim. An alternative would require a more qualitative assessment. Perhaps we should focus much more on the independent Office for Budget Responsibility’s judgments about the medium-term sustainability of the government’s fiscal policy more than its verdict on a precise target. There also have been recent proposals to take account of the wider government balance sheet, counting the physical assets it owns — the road network, for example — as well as the stock of financial assets and debt.

None of these would be straightforward to implement. Wherever we end up, we need to get there with as much consensus as possible that we have moved towards a robust and sustainable framework for policy and not yet another set of patched-together targets that will be jettisoned at the first hint of trouble.

So here’s a call for the chancellor not to pull a new set of rules out of his budget hat this autumn. Instead, he should commit to no further permanent giveaways for now, while setting up an open process aimed at creating the robust and sustainable fiscal framework of which we have so much need.

Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist

This article was first published in The Times and is reproduced here with permission.