Britain needs a Swedish-style fiscal rule to end its yearly Budget farce
18 March 2013 1:57am
HERE we are again, two days before the budget, and the chancellor is inundated with advice about what he should do to “fix” the British economy. It has become a tiresome ritual that comes around twice a year before the Budget and the Autumn Statement: a litany of suggestions, papers and proposals pushed towards the Treasury team from anyone with a platform and an economic view.
Yet what the chancellor says on Wednesday will have little short-term impact. The most significant announcements will take months to come into force and years to show their full effect. He can maintain confidence, which is vital but very different from seeing policies bear fruit in the decades ahead.
The myth that these bi-annual set pieces can somehow create growth is a dangerous fallacy: not just because it suits the narrative of an irresponsible Opposition, or provides fodder for a restless commentariat, or even because it further disorientates a public evermore doubtful of the ability of politicians to change things at all. It is dangerous because it plays against making decisions for the medium and long term – precisely where tax and spending decisions have their real effect – denying us all the kind of hard political discourse we need if we are to avoid the slow decline and impoverishment of our state.
So, for all the millions of words written around each of Gordon Brown’s budgets, he still managed to run a structural deficit from 2001, increasing public debt from 37 per cent of GDP in 2001-02 to 44 per cent of GDP in 2007-08. As a result, we entered the banking crisis without wriggle room: we had boxed ourselves in with accumulated debt. That was his fault and he will be dammed by history for doing so, but it was also the responsibility of the press and of politicians to point it out. That most did not was not some oversight: it is simply that the architecture of government budgeting distracts from the real effects of what a chancellor has or has not actually done.
What allowed Brown to get away with economic murder makes life almost impossible for George Osborne. In seeking to make the right decisions for the long term, he must do battle with the short-termism of Labour politicians and those know-it-alls who think that a tax cut here or a spending increase there will make all the difference he and we so desperately need.
The root of the problems lies in the way we budget. Tinkering with the Comprehensive Spending Review every six months at the despatch box is no way to match government spending to income, nor to gauge whether that income is appropriate to the size and speed of growth of the economy. Departmental expenditure is controlled backwards – not by assessing priorities and what they will cost, but by fitting priorities to the previous amount that a department has spent. The chancellor’s most noticed sentences should be about meeting our massive demographic and competitive challenge, not the price of petrol or a pint of beer. Our budgeting system is bust. We are trying to plough a field with a hoe.
The good news is that there is an answer, and one we can easily and quickly adopt. Sweden and Switzerland have both transformed their public finances by turning their governmental budgeting on its head, forcing governments, opponents and commentators to think strategically rather than simply gaze at the short term. Both did it by the introduction of tough and binding fiscal rules that set budgets with a medium-term outlook and mandate surpluses when the going is good. As a result, Switzerland has reduced its debt from 70 per cent of GDP in 2005 to 47 per cent in 2012, while Sweden forced down its total debt from 78 per cent of GDP in 2000 to less than 34 per cent today. The rules were not only successful because they made governments live within their means but because they ensured that the only way to grow government revenue was to grow the economy, which in turn encouraged both countries to concentrate on supply side reforms and reducing tax.
We can do the same here. But given that until the chancellor announces that he will copy the Swiss and the Swedes we are stuck with the system we have got, I want to add my own recommendation to the thousands he has had already received. If he makes one announcement in the Budget, changing the way our government sets budgets should be it.
Ben Gummer is Conservative MP for Ipswich.
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