Despite what Labour and Tory grandees alike have advised, George Osborne has become a very political Chancellor of the Exchequer. Indeed there are many examples of this such as the insistence that MPs say the phrase ‘long term economic plan’ every nineteen seconds, or the Orwellian renaming of the minimum wage as the ‘National Living Wage’ despite the fact that the wage is not national, as it is rightly higher if you work in London, and isn’t a living wage. Another such example was on the topic of the so-called ‘Fiscal Charter’ and surprise surprise that now looks like it will be another example of politics over policy.
Following the election of Jeremy Corbyn as Labour leader and the subsequent appointment of John McDonnell as the Shadow Chancellor, the Tories wanted to immediately hit Labour with something that would reinforce the Tories’ narrative of them being the ‘party of working people’. One of these approaches was the implementation of the Fiscal Charter which was essentially legislation that made it a legal requirement for the Treasury to balance the books by 2019-20 and to maintain this surplus when annual GDP growth is above 1%. To be fair to Osborne it was an excellent bit of politicking as such a proposal could be spun to be evidence of financial prudence, and if Labour rejects it they are not to be trusted on the economy. At the time there was confusion in the ranks of the Labour Party about what should be their line, and the result was a humiliating U-turn by John McDonnell with the final policy to oppose the policy.
On the face of it the Fiscal Charter sounds like a half-decent idea as it prevents expenditure from outstripping Treasury revenues for too long and thus makes the British economy more resilient in the event of another financial crisis. However rudimentary hypothetical situations reveal the policy to be ludicrous. For example, what if in 2018-19 there is a sharp rise in tax avoidance and therefore Treasury revenues drop drastically? What happens if there is a financial crisis in the early part of 2019 which requires the state to intervene in the economy and prevent a depression?
In the first instance the result would be that the Chancellor would have to rapidly increase tax revenues which would impact on businesses, who hadn’t planned for a dramatic tax rise, and individuals, who would see their disposable income cut. In the second hypothetical the Chancellor would be powerless to intervene unless tax rises were also considered. The other alternative would be that the government, in order to stave off a depression, would prop up the economy in one place but rapidly cut the budgets of other government services. The ‘Fiscal Charter’ was a political move designed to make Labour look bad, rather than a financial move designed to improve the British economy in the long term.
So why am I bringing up a story that played out in the media over four months ago? The annual ‘Green Budget’ of the Institute of Fiscal Studies was released yesterday and in it the think-tank says that Osborne’s policy suffers from “severe limitations” because it could force him into making “sharp adjustments” in public spending. Essentially the report stated what critics of Osborne said at the time of his announcement of the Fiscal Charter: the Chancellor has handicapped himself and as a result may have to sharply cut public spending or rapidly raise taxes if circumstances demand it.
However the report from the IFS went even further as it chastised the fact that unlike under the Coalition or the last Labour government, this Tory government has made no provision in their calculations for capital investment. Without resorting to much hyperbole capital investment is universally seen as a good thing. By using capital investment to fund infrastructure projects like building new council houses or increasing railway capacity, the economy grows as more people are put to work in the public sector and the private sector can use this infrastructure for its own benefit. By including capital investment, which by definition doesn’t make an immediate return, the calculation for the Fiscal Charter will mean that every time any Chancellor after 2020 wants to build a massive infrastructure project, rather than use tax revenues and some borrowed funds to pay for the works to begin, that Chancellor will either have to raise taxes or cut expenditure elsewhere.
Again, some may ask why this isn’t a good thing, but this means that rather than investing for future demand, such as in the case of public transport or housing stock, the government will only be able to act when they have the funds. As a result the problems will worsen in the time it takes for the government to raise those funds, thus meaning that more money will be required to tackle the problem and then nothing will be built.
Preventing the Chancellor from borrowing money may sound like a good idea but the premise that this is built upon is that borrowing money is always undesirable. However this is plainly not true, as examples from people’s personal lives know. If it costs £10,000 per year to run a car, but the car enables you to get a job where the salary is £20,000 per year higher than your current job, it makes financial sense to borrow money to run the car in the first year as, even after interest is paid on the loan, you will be in a better financial position. The Fiscal Charter, in this metaphor, would mean that you would purposefully ban yourself from ever getting a bank loan even the loan would enable your net income to be significantly raised.
Osborne has never hidden away from being a politically active Chancellor, and this is largely unsurprising as many believe that he wants to move into Number 10 in 2020. Unfortunately the Fiscal Charter, despite being useful in the short term by making Labour out to be incompetent, is financially disastrous. If there is another economic crisis that reveals Osborne’s decision to be as stupid as it clearly is, the competence of Labour will not be up for debate. Everybody will be asking ‘why the hell did you making it harder for you to fix this problem?’ and when his response is in political platitudes about ‘doing what’s best for Britain’ Osborne will be revealed as economically incompetent and will not become Tory leader.