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My Lords, this Queen’s Speech has been described by many commentators as a wish list or virtual programme—one that the Government have no majority to deliver. That may be true, but we should also ask whether the Government have not just the majority but the money to deliver on their promises.
In the Queen’s Speech, the Government spoke of a,
“new economic plan … underpinned by a responsible fiscal strategy, investing in economic growth while maintaining the sustainability of the public finances”,
but how responsible is their fiscal strategy and how sustainable are the public finances? Last month, in the spending review, the Chancellor faced criticism for not asking the Office for Budget Responsibility to provide new economic forecasts upon which to base his spending plans. Now, with the date for the Budget set at
The underlying weakness of the UK economy is clear to see. The Institute for Fiscal Studies, in its Green Budget, set out the outlook for economic growth and the implications for fiscal policy. Its findings were stark. It found that the UK’s economic weakness has been both more long-standing and more extensive than that of any other major economy, with growth in the UK since 2016 the lowest in the G7. Business investment has witnessed its most sustained period of weakness outside of a recession and is now also the lowest in the G7. Quarterly private investment has fallen by around 20% compared with pre-referendum trends. The IFS also found that GDP is roughly 2.5% to 3%, or £55 billion to £66 billion, below where it would have been without the Brexit vote. Based on pre-crisis forecasts and global economic comparisons, the IFS believes that the UK has missed out almost entirely on a period of intense global growth, which normally would have boosted exports and investment.
This sustained economic weakness has clear implications for the Government’s fiscal strategy. The Chancellor’s current fiscal mandate—inherited from Philip Hammond—requires him to ensure that borrowing is below 2% of GDP in 2020-21. At the time of his Spring Statement in March, the deficit for 2020-21 was expected to be £19 billion, and the OBR declared that the Chancellor would have £27 billion of headroom. A change to student loan accounting last month subsequently reduced this headroom to £14 billion, and we have already seen a marked deterioration in the borrowing figures for 2019-20, such that this £14 billion could already be reduced by a further £5 billion. If we add in the impact of the weaker than expected economic performance, that could take off another £5 billion. Taking these together, the Chancellor’s £27 billion of borrowing headroom at the time of the Spring Statement now looks more like £4 billion.
All of this means that, while the additional £13 billion announced in the spending round might have been within the fiscal mandate as calculated back in March, it is highly unlikely to still be consistent with it now. Indeed, the Resolution Foundation believes that the Government could break their fiscal rule by some £10 billion, and the IFS now expects borrowing next year to exceed £50 billion. That is more than double the level of borrowing forecast by the OBR just seven months ago. In response, the Chancellor’s reaction has not been to propose new funding measures to pay for his spending but to hint that he would simply jettison his existing mandate, declaring in the spending review that he would set out a new fiscal framework ahead of the Budget. He is not shaping his tax and spending decisions to fit his fiscal rules, but bending his fiscal rules to fit his political goals.
In the Queen’s Speech, the Government promised,
“a responsible fiscal strategy … maintaining the sustainability of the public finances”.
Yet the Government appear not to be showing caution and not to be pursuing a responsible strategy, but instead to be playing fast and loose with the nation’s finances. This lack of caution is all the more reckless given the economic storm clouds that lie ahead. Just this week, the IMF downgraded its global growth forecast to the lowest level since the financial crisis, predicting that the global economy is now on the brink of an economic slump. Meanwhile, the Government pursue the hardest possible Brexit, seeking a goods-only or Canada-minus free trade agreement with the EU, which will introduce significant non-tariff barriers to trade. The Government’s own figures show that such an outcome would be only marginally better than a no-deal outcome in terms of economic growth, reducing GDP by 6.7% compared to the figure if we remained members of the EU. These figures were reinforced this week in a report from the think tank UK in a Changing Europe, which calculates that such an outcome would reduce GDP by 6.4% compared with EU membership. The Government could have used migration policy to mitigate this harm, but are foolishly committed to ending freedom of movement in this Queen’s Speech.
Those who expect new global trade deals to undo the damage will be sorely disappointed. While the Government’s figures show that leaving the single market would reduce UK GDP by 6.7%, they also show that free trade agreements with the USA, Australia, New Zealand and the Trans-Pacific Partnership combined would increase GDP by just 0.2%. At a time of such profound economic risk to the global economy, coupled with the severe economic implications for the UK outside the single market, a fiscal policy response may well be required. The great danger now, if the storm hits and fiscal policy is forced to respond, is that it will be conducted not from a position of sustainability, as the Queen’s Speech claimed, but of unfunded spending and rigged fiscal rules. The risk, to quote a former Chancellor, is that the roof will not have been fixed while the sun was shining.