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Rachel Reeves, the shadow chancellor, promised on Tuesday that a Labor government would aim to borrow only to invest, echoing former Labor chancellor Gordon Brown’s fiscal rules.
Reeves said his rules would ensure “the current budget reaches balance so that daily costs are covered by revenue,” but a senior union leader denounced his economic plan as too timid and “for the birds.”
The shadow chancellor confirmed at her Mais conference in the City of London that the Labor Party would also adapt to Prime Minister Rishi Sunak’s fiscal rule that overall government debt should fall year on year as a percentage of gross domestic product by year five of the official forecasts.
The moving target, which is always five years away, has been criticized by economists. The director of the Institute for Fiscal Studies, Paul Johnson, said his rules would be “identical in effect” to those followed by the current chancellor, Jeremy Hunt.
“A rule that debt should decline in the fifth year of the forecast period is as vague as it can be,” he said. “Yet it is constraining, and that is what makes it so difficult to increase spending, both capital and current.
“If she wants to stick to this rule, Ms. Reeves will have to hope for real growth. Without that she will be forced to make unpleasant decisions like cutting spending or raising taxes,” Johnson added.
Reeves described Labor as a disciplined party and hit back at claims that it would raise taxes to support more spending. Reeves said: “We will not hesitate to enforce strong fiscal rules.”
But Sharon Graham, general secretary of the Unite union, was stern. “If you stick to bogus tax rules, excluding taxation of the rich and pandering to profiteers, you will end up in a straitjacket of your own making,” she said.
Graham added: “The overturning of building regulations and attempts in the public sector will not lead to serious growth – that’s for the birds.”
When he was chancellor in the second half of the 1990s, Brown introduced formal fiscal rules for the first time as part of what he called a “historic break” from the short-term orientation in budget policy.
Brown promised to borrow only to invest in the business cycle. But the rules have been revised several times by successive chancellors, damaging efforts to bring stability to UK budgetary policy.
A February report from the Institute for Government think tank found that the duration of the UK’s budget rules was the shortest of any OECD country for which data was available.
Reeves’ allies said the rule requiring daily costs to be covered by revenue would not be implemented immediately because that would require deeper initial cuts in spending on struggling public services. They said it would be achieved during the first term of a Labor administration.
They added that it seemed “sensible” to follow the current Conservative government’s plan to bring debt down as a percentage of GDP by the fifth year of the forecast. But the timetable will depend on whether Hunt holds another tax-cutting event in the fall.
Reeves said that by moving to a fiscal rule that targets day-to-day spending rather than the overall deficit, Labor would “prioritise investment within a framework that would bring debt down as a share of GDP over the medium term”.
The government currently targets the overall budget deficit, including capital spending. The Labor Party argues that this creates an incentive to cut investment to meet the deficit target.
The shadow chancellor also announced a requirement for the independent Office for Budget Responsibility to report on the long-term impact of growth investment measures.
He also confirmed for the first time that the Labor Party will maintain the Bank of England’s current 2% inflation target, as he seeks to reassure the City that it will maintain macroeconomic stability.
Reeves said the next election would represent “a turning point” similar to the one the country faced in 1979, when Margaret Thatcher’s government replaced a tired Labor administration.
Although she argued that the new Labor government would differentiate itself from Thatcher’s administration by ensuring a “broad, inclusive and resilient” recovery, her allies said the shadow chancellor admired some aspects of what the former Tory prime minister achieved.
Hunt on Tuesday defended his decision to introduce “slightly more flexible” tax rules when he took over from his short-lived predecessor, Kwasi Kwarteng, amid market upheaval.
Giving ourselves five years, instead of the previous three, to put government debt back on a downward path has “allowed us to avoid a serious recession,” he said.
The Chancellor’s current plans are that he will stick to the debt rule only by keeping spending on public services almost frozen on a per capita basis.
Hunt insisted that his plans were credible, arguing that critics were wrong to believe that economic growth and productivity would remain stagnant.
“I am chancellor because I want to change the situation,” he told the House of Lords economic affairs committee.
“If we are able to manage public services more efficiently and increase [the UK’s] long-term growth rate, then it is entirely possible that we can continue to have the levels of public provision that we currently have. . . and I sincerely hope that is the case,” she said.