The Guardian view on tax and spend politics: dodging debate by fiddling with fiscal rules | Editorial

The former Labour chancellor Denis Healey famously quipped that the first law of politics is “when you’re in a hole, stop digging”. That advice might serve Rachel Reeves well as she prepares to present her first budget later this month. Leaks suggest the process isn’t going smoothly. Ms Reeves faces backlash from both sides: cabinet ministers on the left are outraged by looming budget cuts, while Conservatives on the right accuse her of breaking a manifesto promise not to raise employers’ national insurance. Her fiscal strategy is at the heart of the criticism. Ms Reeves has promised “no return to austerity”, yet her fiscal rules seem to point to either tax increases or stealth cuts to departmental budgets. The Institute for Fiscal Studies (IFS) thinks the chancellor needs £25bn a year. The economy is improving. But there is little alternative to tax rises. The pandemic has shrunk the number of workers, reducing the slack in the economy and limiting government room to “pay for” its spending through printing money.

There is also a broader issue of fairness and efficiency. Raising taxes could help the government curb wasteful spending, while targeting the wealthy could reduce environmentally damaging practices, like private jet use. This would free up resources for crucial investments in infrastructure or boosting the purchasing power of public sector workers. Yet, Ms Reeves has still to provide a clear, cohesive message on taxation, leaving the public uncertain about her intentions.

Rather than a focus on taxation, the debate has shifted to Ms Reeves’ fiscal rules and whether they might change in the upcoming budget. The IFS estimates that even if she loosens debt rules to allow for more investment spending, the £25bn gap required to avoid austerity will persist. Ms Reeves insists that “day-to-day costs must be met by revenue”. By contrast, New Labour’s fiscal approach aimed to balance the budget “over the cycle”. The IFS believes the chancellor will have to attempt to balance spending “over the medium term”. This matters – without such a long-term commitment, the result could be an additional £20bn in cuts and tax hikes this year.

Ms Reeves has another option. She could exclude transfers from the government to the Bank of England – intended to offset losses from the unwinding of its quantitative easing programme – from her “deficit” rule. This would free up an additional £7bn a year for current spending. However, what value do fiscal rules hold if they’re altered whenever politically convenient? Jagjit S Chadha, the outgoing director of the National Institute of Economic and Social Research, offers a far better solution.

Instead of relying on self-imposed fiscal rules that are “honoured more in the breach than in observance”, Prof Chadha proposes a more transparent approach. He suggests that the Treasury should publish an overview of the government’s balance sheet, showing how ministerial decisions have affected national income. Additionally, a “state of the economy” address could outline areas of progress – and failure. This, he argues, would hold the chancellor accountable for actual economic performance, rather than forecasts that are invariably inaccurate. Given that the UK has seen seven different sets of fiscal rules since 2010, the risk of abandoning the current ones seems minimal. The country faces pressure arising from an ageing society and the demands of net zero. To meet such challenges needs a fresh approach. ​​Prof Chadha’s proposal would offer substantial improvement, especially with Britain in urgent need of economic repair.

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