What should Rishi Sunak, the UK’s 39-year-old chancellor of the exchequer, do in his first Budget on March 11? The answer is, as little as he can. Mr Sunak is still new to the job; economic prospects are uncertain; above all, the UK’s fiscal strategy and institutions need to be reconsidered. The situation demands that he takes his time. His political position is strong enough to allow him to do so. He should use it.
Mr Sunak is still a neophyte at the Treasury, even if he spent a few months as chief secretary. Furthermore, he confronts significant sources of uncertainty. Brexit is the most important, because it is structural. Prospects for growth and for fiscal revenue, spending and deficits will be much affected by the outcome.
Paul Johnson of the Institute for Fiscal Studies has noted that the government is unlikely to meet its manifesto pledge of a balanced current budget three years hence, even under current policy. With rising investment spending, underlying debt would also increase over this parliament. Yet the government has already abandoned 15 fiscal targets since 2010. Would abandoning a 16th threaten stability? No. Would a modest rise in the ratio of government debt to gross domestic product destroy sustainability? The answer is yet again “no”.
The chancellor should treat this Budget as a holding operation. He will announce additional investment spending. Beyond that, he should announce consideration of the following questions.
First, in an environment of extraordinarily low long-term real and nominal interest rates, how should we assess fiscal sustainability? The ratio of public debt to GDP, a favoured target, ignores the assets created by public investment and so the public sector’s overall balance sheet; and, far more importantly, it ignores the cost of borrowing.
It is possible for the UK government to borrow at ultra-low interest rates, long term. The average maturity of its debt is 15.8 years, far longer than that of any other large high-income country. Debt, in short, is cheap and low risk. This matters. A sensible policy would be to focus on debt service, not debt, and the total balance sheet, not just government liabilities.
Second, as Olivier Blanchard, formerly of the IMF, and Lawrence Summers, former US Treasury secretary, note, the current consensus on how best to respond to macroeconomic shocks relies too heavily on monetary policy. We need to ask whether the policy system established in the late 1990s still makes sense amid ultra-low interest rates and low inflation. How might fiscal policy be used in the next big recession? It is also important to evaluate the fiscal and monetary mix that the UK adopts in more normal times.
Third, what does the government want the state to do and on what scale? In consequence, how much revenue will it need? A rigorous assessment is likely to conclude that tax revenue needs to be raised as a share of GDP. If so, what are the options? The persistent inability of British politics to address these questions is a failure of democracy. Mr Sunak should try to do better.
Fourth, the chancellor needs to look at tax reform and simplification. Many areas are crying out for reform: inheritance taxes that the richest do not pay; property taxes that fall disproportionately on the less well-off; anomalous jumps in marginal tax rates; and corporate taxes riddled with perverse incentives. The tax system has become worse over many decades. It needs to be comprehensively reassessed and reformed.
Finally and perhaps most important, the UK needs new institutions. Gordon Brown’s most important achievement as chancellor was independence for the Bank of England. George Osborne’s was the creation of the Office for Budget Responsibility.
Now we need at least two new advisory bodies of high competence: a fiscal and economic council, to advise the chancellor on fiscal policy and other fundamental questions of economic policy, and an office of investment evaluation to provide independent assessments of proposed projects. In brief, we need “experts”, not to make political decisions, but to advise government and public on choices that have to be made.
Do I expect any of this to happen? No. But there can be no harm in setting the fiscal debates the country is having against the one it should be having. Mr Sunak should ask big questions and propose reforms that could help him come up with good answers. He should want to open up options, not close them, and question shibboleths, not cling to them. This could make him a genuinely important policymaker. Does he have the courage to be one?
