Mervyn King hits out at Reeves’ ‘flawed’ fiscal rules
Former Bank of England Governor Mervyn King has slammed forward-looking fiscal rules set by Chancellor Rachel Reeves.
Reeves has defended her rules on spending as essential for boosting investment on infrastructure as she is given more space to borrow.
But King argued today in the House of Lords that her rules in fact means extra burden is put on the public purse.
He suggested the rules, which were set ahead of last year’s Autumn Budget, were not fit for purpose.
“The Chancellor of the Exchequer deserves sympathy for the difficult fiscal position which she inherited,” he said. “But unfortunately her new fiscal rules are flawed.”
Reeves’ two central rules rely heavily on forecasts set by the Office for Budget Responsibility (OBR), the fiscal watchdog.
The first rule states the public budget must be balanced or in surplus by 2029/30 or on a three-year rolling period. The OBR projects public spending and receipts using a number of data points, including forecasts for economic growth, to determine whether the Chancellor is meeting her first rule.
The second rule states net financial debt should fall as a share of UK GDP after a rolling three-year period.
King said these rules gave the Chancellor too much leeway over increasing public spending which he said did not “generate an income to the government” in most cases.
“A rolling horizon permits the rule to be met while debt keeps rising as a share of national income,” he pointed out.
“The Chancellor defended a rolling horizon by arguing that it avoids the need to make sharp policy adjustments in response to small changes in the forecast. Yet in her Spring Statement, only a few weeks ago, the Chancellor did exactly that: cutting spending in order to meet a change in the OBR’s point forecast for 2029-30.”
“Although the OBR discusses risks to the outlook several years ahead, it presents just one precise number to which the chancellor is supposed to respond, and it does so every six months. This is no way to manage public spending… We owe it to our grandchildren to take seriously the challenge of reducing the national debt,” King added.
The former BoE governor was one of the earliest critics of Reeves’ fiscal rule changes.
In late September, he said that it did not make “any sense” to measure public debt via a rolling forward-looking estimate as he suggested the government should set a fixed date for reducing debt.
He has also been among a number of leading economists who have said that tax rises will be needed to cover a rise in defence spending.
King suggested that the government should U-turn on a key manifesto pledge and raise income taxes in order to reduce the budget deficit.