The real test of this week’s Budget will be whether George Osborne strengthens the management of the public finances. He must avoid ringfencing, while committing to surpluses that are measured comprehensively and linked to new fiscal rules
Charles Dickens’ character Mr Micawber was always hoping for something to turn up to help solve his money problems. This is like the approach that recent UK governments have taken to keeping the public finances on track. There is always the hope that higher growth will turn up to help the chancellor of the day balance the books.
This may come as a surprise to some people. After all, the previous Labour government did run some surpluses. Yet, so far this century, the pattern has largely been in one direction – with governments running deficits and public debt increasing every year since 2001-02. In the years from 2001-02 to 2007-08 general government gross debt increased from 37.0% to 43.6% of GDP. This was while the economy was growing and debt should have been falling.
The reason for mentioning this is not to blame individuals, but to highlight that UK governments have had an on-going over-spending habit. Weak management of the public finances is an important factor in explaining the deterioration of the UK’s public finances. The effect of the global financial crisis was to make a bad situation even worse.
After 2010 the coalition government correctly set out to try and eliminate the structural deficit and then put public debt on a downward track. Yet this has been hard going. Continuing challenges in the global economic environment have been one reason for this, particularly problems in the eurozone, which is the UK’s largest market. But the way in which fiscal consolidation has been tried in the UK must take some blame too. In their efforts to balance the books, the coalition has scored some own goals.
One of the most serious mistakes was to refuse to properly consider how savings could be made in areas like the NHS, pensioner benefits and schools. It is no surprise that the coalition has struggled to hit its fiscal targets when it has avoided some of the biggest budgets. The protected budgets of health, pensions and schools accounted for two out of every five pounds the government spent in 2012-13.
This approach has been like putting the public finances on a crash diet that actually reduces the chances of long-term weight loss. There is a perception that services are being underfunded, while the real drivers of spending have been left untouched.
Sixty per cent of the total increase in spending between 2011-12 and 2014-15 is expected to be in the NHS, pensioner benefits and schools. Spending on the NHS alone will account for close to a quarter of the total increase. This means there is no fiscal headroom for unfunded tax reductions or increased capital spending without borrowing more.
Ringfencing has also been a political own goal. It is harder to make the political case for reform when some budgets are protected. When all budgets are subject to the sample principles of value for money, it is, quite simply, harder for individual ministers to complain. Ringfencing creates divisions in Cabinet and means that the government no longer presents a unified front on their mission of rescuing the public finances.
This raises the question of how the management of the public finances could be strengthened. There have been some positive steps in recent years, particularly the introduction of the independent Office for Budget Responsibility. Yet the persistent failure of fiscal rules (such as New Labour’s Golden Rule to ensure a budget balance) remains a real problem.
Both New Labour and the coalition have failed to introduce rules that bond them to a sustainable medium-term plan to deal with the UK’s public debt. For the past decade, chancellors have been living by the motto that ‘rules are made to be broken’.
The real test of George Osborne’s fourth Budget this week should not be the size or distribution of any poorly targeted giveaways, or the early responses of lobby groups and leader writers. The real test must be whether he strengthens the management of the UK’s public finances. To do this he should commit the government to ongoing, sustainable surpluses that are measured comprehensively.
And he must make sure that he and all future chancellors have their feet held to the fire over their success in keeping the public finances on track.
Dr Patrick Nolan is the chief economist at the independent think tank Reform. Reform is holding a public pre-Budget briefing at 12.30 pm on Tuesday 19 March. Details can be found at www.reform.co.uk.
