The budget process has become an archaic political ritual. It does not lead to better policy making – it creates instability and results in worse public policy. The Autumn Statement should be abolished and replaced by tough fiscal rules to incentivise long-term fiscal planning. Sweden provides us with an excellent model for the way forward.
The relative merits of the Chancellor’s statement will no doubt be thoroughly debated in other articles on this website. For what it’s worth, I thought that the infrastructure plans and pension reforms were positive though it is regrettable that it provided little in the form of tax cuts. Not that anyone was hearing these policies for the first time on Thursday. In recent years it has become a habit for the major policy announcements to be paradoxically concocted in secret but also freely leaked. It’s a long way from the 1930’s, when Jimmy Thomas, then a Cabinet Minister, was forced to resign for leaking the planned increase in tea duty (by using the phrase “tee up” whilst golfing). Such a toxic combination leads to the worst of both worlds: uncertainty due to the fact that measures are announced in one fell swoop and huge speculation as to whether some or all of the many leaks will make it into the budget.
The Autumn Statement is a relatively modern tradition. The budget was not a bi-annual affair until 1975, when the Industry Act required the Treasury to publish twice-yearly forecasts of important economic indicators including GDP, unemployment and the retail price index. It was a response to the unstable economic climate of the 1970’s, in which forecasts were prone to change. Nowadays, with the newly independent Office of National Statistics releasing quarterly growth forecasts, the Autumn Statement’s role as a disseminator of information has been surpassed. Releasing the remaining market-sensitive information in this way would make the Autumn Statement redundant. The Autumn Statement of today is a purely political device of little economic importance. It is an ideal political soapbox from which to launch an electoral pitch to the country due to the unmatched media concentration on a single speech. Last year’s penny off Beer Duty and this year’s £50 cut to energy bills have generated media interest that far outweighs their economic importance. This is hardly a co-incidence. The Autumn Statement incentivises Chancellors to seek to generate good headlines rather than good policy. This is deleterious to economic policy. By forcing the Chancellor’s concentration to shift towards the short term, greater value is placed tinkering with tax legislation to create short-term crowd pleasers rather than concentrating on the long-term structural reform that is required.
Such a problem goes deeper than the Autumn Statement, right to the anachronistic absence of fiscal rules in the budget process in the United Kingdom. Requiring the government to make a twice-yearly statement to the House of Commons does absolutely nothing to incentivise a long-term fiscal outlook. Gordon Brown’s vague and non-binding ‘Golden Rules’ are an example of a flawed fiscal rule which did not lead to better long-term
fiscal policy. Similarly, the debt ceiling in the USA, which Congress routinely raises, is an example of a rule that leads to greater instability without any effect on the long-term fiscal outlook. The welfare cap (which made an appearance in this year’s Autumn Statement) will also likely be flawed at incentivising long-term fiscal planning. By including benefits that are ‘automatic stabalisers’ it is too rigid to deal with the fluctuations of the business cycle, yet by allowing the cap to be routinely set every Parliament it also combines the ineffective nature of the US debt ceiling. What Britain needs is a budget process and fiscal rules that forces budgets to comply with long-term goals.
Like many policies, it is peculiar that the right wing is increasingly looking to the famously social democratic Sweden for inspiration. In Sweden, tough fiscal rules have led to the national debt decreasing by almost two-thirds in the last two decades. This includes the astonishing fact that the Swedish national debt is lower now than before the financial crisis, much lower in fact. In 2009 the Swedish national debt stood over 40% of GDP, whereas now it is just 25%. The Swedish, it seems, are doing something right with fiscal policy. Whilst its tendency to balance the budget through higher taxes rather than lower spending is unwelcome, its fiscal framework, which is in no way dependent on a specific level of government spending, leads to long-term fiscal planning and a lower national debt.
The first, and most important, element of the Swedish fiscal framework is a requirement to run a structural budget surplus equal to 1 percent of GDP over the business cycle. This allows flexibility to deal with countercyclical ‘automatic stabalisers’ whilst restraining the almost universal tendency for governments to squander surpluses in the good years. The second rule is that the budget sets a spending target for the third year ahead so that spending in the current year is restrained by the cap set three years earlier. Individually these rules are insufficient but when combined they incentivise longer term planning and discourage profligacy. In the context of Britain, such a rule would have prevented the hundreds of billions squandered under Brown’s Chancellorship to postpone inevitable public service reform.
Such a budget process would have less drama – but it would result in better policy. Next year, the Chancellor should announce that this Autumn Statement was the last of its kind.