“The conspiracy of silence” on fiscal policy

Good morning from New Economy Brief.
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In this week’s ITV debate, the host quoted the IFS’s Paul Johnson warning of a ‘conspiracy of silence’ about the state of the public finances after the general election. 

Both Labour and the Conservatives have committed to spending plans that imply massive ‘austerity-era’ spending and investment cuts until 2029, but this has barely featured in the election debates so far.

This New Economy Brief clarifies the fiscal position the next government will inherit, and outlines the options available to avoid further spending cuts.

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We are currently heading for austerity-era cuts. 

The effects of years of austerity on the UK’s capital stock and public services is undeniable. The Institute for Government’s ‘Performance Tracker’ examined nine separate public services in 2023 and concluded that all, with the exception of schools, were performing ‘much worse’ or ‘worse’ than in 2010. The Centre for Progressive Policy (CPP) found that £142 billion per year is needed by 2030 just to maintain public services at their current (already struggling) levels – partly because of increased demand due to an ageing population. Despite this, under the spending envelope which both main parties are using as a baseline, the IFS calculates that unprotected public services, including courts, prisons, further education, local government and housing, would see a further 13% cut in day-to-day spending until 2029 – “broadly in line” with the 2010-2015 austerity era cuts.

But there’s nothing left to cut. The Office for Budget Responsibility (OBR) appeared to cast doubt on the feasibility of the government’s tight post-election spending plans given rising demand for public services and the constrained ability of local authorities to borrow and spend. Likewise the Resolution Foundation dubbed them a ‘fiscal fiction’, noting that "[t]he idea that there is as much scope to cut spending today as there was in 2010, given the deterioration of public services is far-fetched". 

The cuts are politically undeliverable. It is perhaps because no one really believes that these cuts are even possible that no one seems to be talking about them. Yet they are still on paper the plans that any incoming government would inherit. Fixing public services, particularly the NHS, is high on the public's priorities for the incoming government. A government that cuts spending even further is unlikely to be re-elected for another term.


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Something's got to give. 

The Conservatives committed to these cuts so they could spend the ‘fiscal space’ on last-minute pre-election tax cuts and force Labour to choose between accepting the cuts and opening up a dividing line on tax. They hoped Labour might announce tax rises in the run up to the campaign so the Conservatives could run a 1992-style ‘Labour’s tax bombshell’ attack. Labour have responded with a 1997-style ‘prudence for purpose’ tactic to commit to the government’s spending plans to secure market credibility, while trying to avoid any communications traps that suggest they might raise taxes. But given that these cuts are undeliverable, the next government will have to raise taxes after the election to ease funding pressures, and/or change the fiscal framework to enable more borrowing. That is why Labour has found it difficult to shake off attacks over tax rises this week. (We will look in more detail at the debate on tax next week.)

Changing the fiscal framework. Ultimately all this political game playing with fiscal space stems from both major parties trying to game one of the current fiscal rules, which says  debt must be falling as a % of GDP after five years. Reforming these rules is part of a new consensus of establishment organisations, with the National Institute of Economic and Social Research (NIESR), the Institute for Government and the Financial Times’ editorial board, as well as economists ranging from Diane Coyle and Andy Haldane to Jim O’Neill, all calling for a new fiscal framework. Sound fiscal rules would allow a government to invest to fix public services and grow the economy, and therefore improve its ability to service debt. Labour have set out some changes they would make to the fiscal rules, but crucially not to the central debt/GDP rule – the main driver behind these spending choices. Unless Labour’s  position changes in government, or there is a hugely beneficial external development, this conversation over tax is likely to continue.

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