From austerity Britain to hard-hat Britain – both main parties’ set out fiscal rules to usher in an era of big spending increases

Speeches from the two leading candidates to become Chancellor in the next parliament both set out new fiscal rules today (Thursday) that allow major spending increases over the next parliament, the Resolution Foundation said.

Sajid Javid formally ditched the Conservative Party’s commitment to eliminate the deficit and instead set out rules to ensure that day-to-day spending is fully funded from tax revenues (via a current balanced budget for current spending) in three years’ time, allowing investment spending to rise to up to 3 per cent of GDP, and ensure debt servicing costs remain contained below 6 per cent of tax revenues.

The Foundation says that these new rules would allow Sajid Javid to increase investment spending by £25 billion relative to previous plans by the end of the next parliament. This would mean investment reaching levels last seen in the 1970s, and three times those seen during the Conservative governments of the 1980s and 1990s.

The Chancellor would also have headroom of £7 billion for promised tax cuts in the yet-to-be published Conservative manifesto. This extra spending would mean the Treasury abandoning its previous view that debt should be falling as a share of GDP, once the impact of Bank of England schemes are excluded.

John McDonnell also committed the Labour party to ensuring day-to-day spending is funded (albeit later in the parliament) and debt service costs are contained (although at a higher level). But he also set out an innovative new fiscal rule which commits the next government to increasing public sector net worth.

This means that the rules take into account the value of the assets created, not just the debt required to create them. This would allow the Labour Party to deliver their £400 billion infrastructure plans over the next decade, with much of it coming in the next five years, if the money was invested in projects that delivered real value for money. This represents an annual increase in investment of £55 billion relative to recent plans.

The Foundation says that while there are big differences between the two parties’ fiscal frameworks, the plans set out today show that both parties are planning a big break from the fiscal rules that have governed the economy over the past decade. They also show that fiscal rules have moved away from a narrow focus on deficits and debt, as recommended in recent Resolution Foundation work.

The Foundation says that low borrowing costs and the clear need for investment to raise productivity, increase social housing, and tackle climate change, means that there is a strong justification for increasing infrastructure spending in the next parliament.

However, given the scale of spending increases being planned, it is crucial that there is discipline on how investment projects are valued so that British taxpayers get value for money. Neither party’s rules provide much of a margin for error, or scope for fiscal policy to support the economy in a downturn – at a time when monetary policy is constrained, and the risks facing the economy are large.

James Smith, Research Director at the Resolution Foundation, said:

“The economic plans set out by Labour and the Conservative parties today represent a dramatic shift from the narrow debt-driven debate that has dominated the past decade.

“Both main parties’ have announced considerably looser fiscal rules than the current ones, allowing them to significantly increase investment spending over the next decade. With the low cost of borrowing, austerity Britain is going to turn into hard-hat Britain whoever wins the next election. This shifts the focus to ensuring that investment delivers real returns not just higher debt.

“There remain big differences between the main parties’ economic plans, which will be fought over in the election. But the even bigger difference, following today’s speeches, is between the UK’s recent economic past and its plans for the future, as both parties have signalled a major shift towards a far bigger, investment-focused state.”