Written by Dr Eamonn Butler
16 May 2010
Our new prime minister and his deputy agree: our government has been spending and borrowing too much. Good, as Alcoholics Anonymous might say — admitting your problem is the first step towards dealing with it.
The new Treasury team might actually manage to re-cork the bottle. George Osborne, the chancellor, is blunt about wanting to balance the budget and David Laws, his Liberal Democrat deputy, is also known to be a hawk on economic matters. It bodes well, too, that Iain Duncan Smith, who knows how to get people off welfare and into work, is now installed at work and pensions.
The message they are all receiving is clear: we must spend less and work more. Intentions, however, are not enough because fiscal alcoholics have a habit of telling themselves that just one more little splurge can’t hurt.
Remember Gordon Brown’s “golden rules”, which stipulated that the government should borrow only to invest and it should keep its debts “prudently” down to about two-fifths of what the nation earns? Unfortunately, he fudged the first rule, showering us with treats on tick, and abandoned the second when the going got tough.
The world’s central bankers have warned us that if Britain carries on in this fashion, our debts will rocket to five times our earnings by 2040. Even with firm action they are expected to soar to three times earnings.
So we need new rules on the public finances that politicians can’t wriggle out of — if not constitutional restraints, then at least limits that cannot be brushed aside for the sake of political convenience.
That’s why I want to propose a new economic responsibility act, which would set in stone the spending and borrowing targets to be hit by the end of the coalition’s five-year term.
Here are my suggestions:
— Cap the budget at one-third of gross domestic product, so the government can’t spend more than £1 for every £3 that the nation earns. The experience of other countries tells us this is as much as the public can bear before it starts concealing income or voting out governments. This cap should be set on the basis of what we’ve actually earned, not on the jam-tomorrow budget forecasts of over-optimistic chancellors. And if the economy nosedives, it’s not just private sector workers who should suffer pay and job cuts — government programmes would have to share the pain, too.
— Cap the deficit at 3% of GDP — the limit that “prudent” Brown commendably foisted on his government and the European Union. Three per cent gives a bit of flexibility but keeps the total debt under control.
— Cap the national debt at 40% of GDP. Without strict limits, as recent times have shown, government debts spin quickly out of control. In 1997 the debt was £350 billion. Now it has more than doubled to £770 billion. It is expected to double again to £1,406 billion in five years’ time. Now I would love to be able to double my own borrowings whenever I liked — but that would just encourage me to live beyond my means; pretty soon, lenders would get nervous and want their money back. The same applies to governments. The international agencies that rate our creditworthiness think that a debt of 40% of GDP is sustainable. It’s a good target.
— No off-the-books fiddling. Brown claimed that his borrowings were scarcely more than those of other European countries. But many other commitments that he made, a dozen times larger, are conveniently unrecorded in the Treasury’s books. Why? The government requires companies to state their future commitments, such as staff pensions. But its own civil service pensions, not to mention future state pensions and contractual payments to school and hospital builders and countless other items are never accounted for. That must change.
— Borrow only to invest. It makes perfect sense, but Brown kept labelling his spending as “investments” for the future. In fact, most of his vast budget increases went on hiring more public workers and raising their wages.
— Limit tax rises. High taxes choke off investment and growth, which are our only way out of this slump. I suggest we hold public referendums before any tax rises and before any local government budget is approved. And the office of budget responsibility should be given full power to block counterproductive rises — such as the 50% envy tax that will drive high earners abroad.
Am I being too hard on a new and well intentioned government? Alas, even the most “prudent” politicians cannot always be trusted. So we need these strict rules to protect our personal and public finances. Only from that solid, restrained foundation can we build Britain’s future economic growth.
Dr Eamonn Butler is director of the Adam Smith Institute and author of The Rotten State of Britain
Published in the Sunday Times here.