Leading economists are today urging chancellor Rachel Reeves to tear up the UK’s fiscal rules in next month’s budget, to allow the government to borrow more to fix the country’s public infrastructure.
In a letter published this morning, the group warn that under-investment has led to a “vicious circle of stagnation and decline” in Britain, weakening the economy and creating greater social and environmental problems. Reeves, they fear, risks repeating “the mistakes of the past” by sticking with spending plans set by the previous government that imply substantial real-terms cuts in public investment over the current parliament.
They warn: "We do not see how the planned 'decade of national renewal' can take place if these cuts are delivered. To follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability."
The eight economists – Lord Gus O’Donnell, Lord Jim O’Neill, MarianaMazzucato, MohamedEl-Erian, SirAnton Muscatelli, and professors SimonWren-Lewi, JonathanPortes and SusanNewman – identify the problem: the UK government’s current debt rules create an 'inbuilt bias' against investment, by forcing ministers to show debt will fall as a share of the economy at a five-year horizon.
In their letter, published in the FT, they say: "A more responsible approach, which better reflects the significant long-term benefits of increased public investment, will require changes to our fiscal rules and to the mandate for the Office for Budget Responsibility."
Reeves’s other fiscal rule is that government can only borrow to invest in capital projects, rather than to fund day-to-day spending, as she laid out in her Mais Lecture in March. That approach, the chancellor argues, will mark a break from a “short-termist approach that disregards the importance of public investment”.
The chancellor is expected to raise taxes, cut spending and get tough on benefits in October’s budget, having warned of a £22bn ‘black hole” of overspend by Whitehall departments. But the leading economists in their letter warn that cuts to investment must be avoided.
Economist professor Danny Blanchflower, a former member of the Bank of England’s monetary policy committee, is backing this morning’s letter.
In response, the Treasury say Reeves has “set out her commitment to the current fiscal rules and will set out precise details at the budget”.
The agenda • 7am BST: Germany’s wholesale price index data for August • 10am BST: eurozone trade data for July • 1.30pm BST: Empire State survey of US manufacturing
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