Sadly, this will be my last column as director of the Institute for Fiscal Studies. Happily, I will, after a summer break, be carrying on with this column as I move into a new role at The Queen’s College, Oxford. Sadly, I am going to devote this semi-valedictory piece to bemoaning the increasingly fantastical economic beliefs that seem to be assailing ever more people among our political class and beyond.
After last week’s humiliating climbdown on disability benefit reform we’ve heard the same old fantasies. I would be in tears if I were the chancellor trying to deal with the, let me be kind, naivety of my own backbenchers and cynicism of the opposition. I’m pretty much in tears after nearly 15 years trying to introduce some rationality into the fiscal debate.
Let me take just one example. It stands for many. On the The Week in Westminster on Radio 4 this weekend we heard from one Labour MP who had signed the rebel amendment against the planned welfare cuts, and one Conservative MP who was defending the Tories’ unwillingness to support the changes. Challenged to explain how they would deal with the costs of the U-turn and additional likely pressures on the public finances, they both gave the usual fatuous answers that display some combination of ignorance of reality and contempt for the listening public.
The first response, from Ms Labour, was to say that she would like some relaxation of the fiscal rules. Did she not see what happened to government borrowing costs last week at the merest hint that the chancellor might not have the full backing of the prime minister, and hence that the government might follow a looser fiscal policy?
The truth is this government — just like the last one — is already pushing right against the limits of what is possible. Our borrowing costs are higher than those of almost all other comparable countries. A full two percentage points more than in Germany and higher than in Italy and Greece, for goodness sake.
Borrowing is high, debt is high and not falling. Our fiscal rules are loose. They constrain because we are even now not properly facing up to choices we are going to have to make. The answer to our problems is not to borrow more, it is to face up to those choices.
Reluctantly acknowledging the party’s manifesto pledge to keep to the fiscal rules, and the chancellor’s determination to do so, our Labour MP then went on to suggest that it might not be so bad to put a penny or two onto the price of a litre of petrol.
I agree. In real terms petrol prices are at their lowest levels in a very long time and 15 years of freezes in petrol duties — that is real terms cuts — is costing the government at least £15 billion a year in lost revenues.
But a penny or two? Two pence on petrol and diesel duty might raise half a billion pounds — an entirely trivial amount. In fact we would need to increase duties by almost that just to stop them falling again in real terms.
And an inflationary increase is already baked in to the fiscal forecasts, because the Office for Budget Responsibility is legally obliged to “believe” the fiction that they will rise in line with inflation. And that was it. Not the first sense of scale, no conception of the real choices facing us.
Mr Conservative, of course, went into full outrage mode. This would be an appalling attack on motorists. His “solution” was to suggest the chancellor should deal with the public finance problems by cutting taxes. You couldn’t make it up. His party tried that in 2022. It didn’t go well. He would then cut working age welfare, but not for the disabled or the vulnerable. Rather he would cut benefits for those who can work, and should work, but are choosing not to, in his words.
Who these people might be he did not elucidate. Very little of the welfare bill goes to those who are out of work for reasons other than ill health or disability.
In any case, unemployment benefits are staggeringly ungenerous already. One element of the welfare bill that did get agreed was in fact a modest increase in these benefits, the first in more than 50 years.
I’m sorry, but if you do want to cut the working age welfare bill then it is incapacity and disability benefits you have to look at. They are the only part of the bill that is rising as a fraction of national income, and rising fast. You might not like the details of the government’s proposals, but don’t pretend you can cut the working age benefit bill without tackling disability benefits.
It’s unfair of me to pick on these two particular individuals speaking on this one programme that I happened to listen to, but I do so simply as an illustration of a much more general lack of seriousness. All I hear from our elected representatives is calls to loosen the fiscal rules, impose a wealth tax, tax the rich, cut waste, cut welfare, cut taxes. Not a hint of seriousness to be found.
In these circumstances it’s not so hard to see why the markets wobble at the slightest indication that the chancellor, and her fiscal rules, might be under threat. It does rather look as though she and the Treasury are the last bulwark against chaos.
Last year Reeves increased taxes but did not formulate a narrative or strategy, nor did she give us a sense of where next. This autumn I fear she will need to raise taxes again, but in doing so she needs also to provide that narrative and come out all guns blazing against the unserious — on her own benches and beyond.
This article was first published in The Times, and is reproduced with kind permission.
