MNI INTERVIEW: UK Budget's Imaginary Cuts A "Fiscal Fiction"

The UK budget to be unveiled on Wednesday looks set to show the government meeting its self-imposed fiscal rule based on unspecified spending cuts scheduled for beyond the next election but a Spending Review will ensure reality bites before the year is out, Institute for Government Deputy Chief Economist Thomas Pope told MNI.

While the official fiscal forecaster, the Office for Budget Responsibility, must take the budget’s spending projections at face value when it prepares five-year forecasts, this week looks set to mark a high point for fiscal fiction from a Conservative government aware that it is heading for a heavy electoral defeat and so will bear no responsibility for implementing spending plans beyond next January at the very latest. Its proposed real-term spending cuts, timed to fall once the Tories are safely in opposition, are likely to be significant enough for it announce well-trailed plans for tax cuts while still claiming to meet its fiscal rule under which debt should be falling as a percentage of GDP by the end of the forecast period.

A more accurate picture of the UK’s fiscal position should however be available by the end of 2024, when the government then in office will have to specify departmental spending plans, noted Pope.

"There has to be a Spending Review at some point before March and really at some point before December, because it's in December that the local government finance settlement is issued, at least in draft form," Pope said in an interview.

RISING BORROWING

Despite what are likely to be ambitious spending cuts scheduled for an incoming Labour government, markets still anticipate a rise in borrowing, taking planned total issuance of GBP237.3 billion in the 2024-25 fiscal year up by an extra GBP20 billion according to the market mid-point.

"We just have a top level spending line for day-to-day spending and a top level spending line for capital with no indication about where that's going to be spent,” said Pope, “This is a period of what we call fiscal fiction ... you can basically invent that top line spending number and worry about how you're going to do it later.”

The IfG is calling for the introduction of five-year spending reviews, which set out departmental budgets, with a reset in year three. Under this arrangement, a new government would initially spell out departmental spending for a single year before moving to five years, Pope said.

An election is widely expected by November. While Labour has not publicly commented on the IfG proposal it does have echoes of what it did in office when it previously came to power back in 1997.

NEW GOVERNMENT

While the IfG’s proposal is for five-year spending reviews to match the OBR's five year forecasts, Pope accepts that committing to this would be impractical for a new government until it has had time to settle.

"We wouldn't say rush forward with a five-year spending review," he said, adding "Our general view is that it will make sense to do a multi-year spending review in 2025 rather than in 2024, because you really want to make sure you do it right and do it properly."

The Labour government that came to power in 1997 deployed three-year spending reviews with a reset every two years.

The IfG would also favor “neutral” spending projections by the OBR, showing the cost of maintaining real-term spending, an idea backed by former senior OBR official Andy King. (See MNI INTERVIEW: Fiscal Ratchet Puts UK Debt On Untenable Path)

"The absolute first best solution here is the government sorts out how it's doing its spending plans rather than relying on the OBR to find more effective ways to expose the unrealistic plans that the government is announcing,” Pope said. “But in the absence of the government doing what we think would be a sensible thing for them to do something like the neutral baseline.”