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Judgment day has been postponed for UK public finances. The government’s fiscal plan will not now be delivered on Halloween, which would have given new prime minister Rishi Sunak all of six days to prepare his best chance of ending the market pandemonium his predecessor had unleashed.
Sunak’s mere arrival has largely returned gilt yields to where they were before September’s tax-cutting “mini” Budget. (Or in the words of one FT story, a “dullness dividend” beats a “moron premium”.)
It clearly pays to present as a grown-up rather than a rebel. It also means Sunak can afford to take a bit more time to devise a new approach. Indeed, he will be paid to do so, in the sense that the new date of November 17 means the Office for Budget Responsibility will no longer have to base its public finance forecasts on the rising government borrowing costs from a few weeks ago. Already, Bloomberg reports that the annual deficit reduction needed to put the ratio of public debt to national output on a downward path is £35bn.
According to the same report, the Treasury has prepared a list of 104 spending cuts for the government to choose from. That always seemed to be on the cards, after interest rates soared when the previous government planned huge tax cuts without any proposals for making up the lost revenue elsewhere. In the shift from one Conservative government to the next, we have gone from the tax cuts without the spending cuts, to the spending cuts without the tax cuts.
Neither tax cuts nor spending cuts, however, are going to do much good for economic growth. As my colleague Sarah O’Connor explained so well in a column last week, spending less on public services in the UK will only make them “less efficient and therefore more expensive in the long run”.
But what else is there? I’m glad you asked. Here are four other ideas Sunak and his chancellor Jeremy Hunt could consider.
First, sustainable and credible public finances don’t require your plans to ensure public debt will be falling as a share of the national economy. The more modest goal of a constant debt-to-gross domestic product ratio will do just fine. Wanting the debt burden to go towards zero for its own sake is irrational — a fetish. Accepting a stable debt ratio reduces the gap to be filled between revenues and expenditures. (Incidentally, what that stable ratio is, and when it should be reached, could also be adjusted so as to time the deficit reduction for when the economy is best placed for it.)
Second, the Nike approach to deficits: just pay it. In other words, just raise taxes rather than cut spending further. If £35bn is what it takes to put debt-to-GDP on a downward path, that’s just over 1.5 per cent of GDP. Settling for a stable rather than falling debt ratio would require less, perhaps 1 per cent. Raising tax revenue by that much would simply lift the UK to the OECD average, leaving it still well below almost all other European countries. Politically difficult, perhaps, but economically completely do-able.
My personal preference would be a net wealth tax, which should both encourage more productive uses of capital and bring in significant revenue. A 1 per cent annual tax on net wealth above the level needed to get into the top 10 per cent richest in the UK, for example, would raise enough to cover what the government is reportedly trying to find. (Try out the Wealth Tax Commission’s excellent tax simulator yourself.)
Third, rescue the Liz Truss baby from the bathwater that can still be heard sloshing down the drain. If you can find measures to boost the growth rate, that is, of course, the best way to make the public sector finance maths add up. And the fact that her tax cuts would not boost growth doesn’t mean there are no tax cuts that would. In particular, allowing full expensing of investment spending by business (immediately deducting the full cost of investment from taxable profits) should make it more attractive for businesses to invest in productive capital, other things being equal.
The UK’s temporary “superdeduction”, where businesses can immediately deduct more than 100 per cent of investment expenditure, should have made it more attractive still (certainly businesses say so, but then they would). It is hard to measure the effect, since it has been combined with a future rise in corporate tax, but there are signs it prevented a decline in investment. And who better to make the superdeduction permanent than the man who, as chancellor, implemented it in the first place?
Since if tax cuts lead to sustained higher growth rates, they do so by increasing investment, it is a small step to this (not so) radical thought: why be obsessed with the intermediary step of tax cuts, and not focus more directly on the investment itself? Some tax cuts, such as the superdeduction, plausibly boost investment, but there are other things — in particular, increases in spending — that could also increase investment, and do so much more reliably than generalised tax cuts.
So here is the fourth idea: try to raise the growth rate by spending more on smart things. Things such as public investment, for example. There is no shortage of productivity-enhancing investments such as renewable energy generation or thermal efficiency retrofits in buildings. There are also expenditures that are not accounted for as investments but have the same economic function of permanently raising productivity. Health spending is the most important example — devoting more resources to shrink the population being prevented from working by untreated illness would clearly boost output. So would spending more on the right education and training.
None of this sits easily with traditional Conservative sensibilities. But what the Truss market debacle showed was that those making investment decisions have long since moved on from 1980’s-style small-state ideology. The Tory party should do the same if it doesn’t want to expose itself as the true anti-growth coalition.
I detect rising unease among political leaders over central banks’ determination to slow down economic growth — and warn about a political backlash if we don’t openly discuss whether this is the best response to Russian president Vladimir Putin’s energy war.
The fallout from US restrictions on semiconductor exports to China is massive.
Why more common EU spending could be just the cure for stagflation.
Ikea does ketchup-bottle economics, and so do natural gas prices.
China’s official number crunchers could not avoid coming up with a weak growth figure. My colleague John Burn-Murdoch shows how the embarrassing delay in publishing the figure forms part of a pattern of growing statistical obscurantism. Ruchir Sharma spells out how dramatically weak Chinese growth can crush any illusion that the country could overtake the US any time soon.
As the European Central Bank meets today, it faces a panoply of challenges: banks are restricting credit to the economy, financial institutions are warning of liquidity problems in key markets, and higher policy rates make for politically awkward profits paid to banks that are keeping ECB loans on deposit.
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