Kids not being able
to go to their normal school because those schools are crumbling away
is as good an example as any of the impact of 13 years of austerity
government. It began with Gove scrapping Labour’s Building Schools
for the Future programme (a decision he subsequently
said was one of the worst he made) when the
Conservatives came to power in 2010, and it may well end with
thousands of children being forced to relocate to temporary
accommodation because Sunak when Chancellor failed to respond to
warnings from his own Education department.
It is also an
example of the impact bad fiscal rules can have. As I have argued
many times, whether to undertake public investment (which can vary
from large infrastructure projects to replacing crumbling concrete)
should depend on the merits of the investment, and not on some
arbitrary aggregate limits. Yet governments have at various times
imposed fiscal rules that either included public investment (a target
for the total deficit, or a falling debt to GDP target) or in some
cases imposed a limit on total public investment itself. [1]
The case of
crumbling schools caused by RAAC concrete also clearly shows why
arbitrary aggregate limits on public investment make no sense. When
the
roof of a primary school in Kent collapsed in 2018, ignoring the
problem became, in
the words of the National Audit Office, a “critical
risk to life”, which meant many schools with Raac concrete in them
needed replacing fast. That means spending a lot of money quickly. As
we now know, and as the Treasury were told, not doing so would mean
some school buildings would become unsafe to use. Unlike current
spending on day to day services, the need for public investment can
vary substantially over time, and sometimes that investment just has to take place.
What did Sunak, or
the Treasury, expect to happen when they revised down a RAAC based
bid from their education department by a factor of 4? Were they
crossing their fingers and hoping that the engineers were being over
cautious, and that no more buildings would collapse? Or did they not
even get as far as reading what the department had written, and
instead just looked at numbers on a spreadsheet? Did no Treasury
official raise their hand and say ‘but minister, what will happen
when they start closing schools because they are unsafe’?
The term ‘Treasury
brain’ is fashionable, but if the politicians in charge are
determined to spend less public money then the Treasury can do little
to stop them. Furthermore, these politicians are invariably short
term in their political outlook, so they will always be tempted to
cut investment rather than current spending. Investment by its nature
has its benefits in the future, while current spending cuts will be
noticed today. This is why it’s important to design fiscal rules
that stop politicians doing this. If the Treasury can tell a minister
that cuts to public investment will not do anything to help that
minister meet their fiscal rules, they are less likely to make those
cuts. [2]
The same is true for
short term cuts that end up costing more in the longer term. Treasury
brains are more than capable of seeing the foolishness of doing this,
but if the remit from politicians is to get down borrowing over the
next few years by whatever means possible, Treasury civil servants
cannot keep options from politicians. Again fiscal rules need to be
medium to long term, to avoid this kind of foolishness.
The whole current
system, where dangerously crumbling concrete is kept in place because fixing it
would require some borrowing, is predicated on a kind of deficit
fetishism that treats reducing government borrowing as more important
than almost anything else, including teaching children. Politicians
are putting reduced borrowing ahead of essential investment. Asked
why, they will mutter phrases like ‘fiscal responsibility’, and
the media will find a City economist to talk about ‘bond market
jitters’. Someone will mention the Truss fiscal event, as if
borrowing to stop schools collapsing on children can be equated to
cutting the top tax rate. (In reality the reaction to the fiscal
event was
all about interest rate uncertainty and pension funds
taking risks rather than excessive government borrowing.)
Fiscal
responsibility does have a real meaning. It makes sense to ensure
taxation matches current spending in the long run so debt to GDP
levels are sustainable. Fiscal rules are useful to prevent
politicians cutting taxes or spending more to win elections and
funding these giveaways by borrowing. But refusing to borrow to
enable schools to remain open and safe is clearly not in any sense
fiscal responsibility. For once household and firm analogies are
appropriate. People borrow if necessary to fix serious problems with
their homes, and firms would of course borrow to prevent their
factories falling apart, so why not the government when it can borrow
more easily and more cheaply than any household or firm?
However there is one
area where aggregate conditions, rather than the individual merits of
any investment, does matter. This is borrowing costs, which should
influence when (not if) investment is done. The
ideal time to start replacing RAAC concrete was when borrowing costs
were almost zero, because short term interest rates were at their
lower bound. Yet, as this graph from the IFS shows, this government
cut capital spending on education compared to levels under Labour,
just at the point when borrowing costs were at their lowest. Cutting
investment when borrowing is cheap, and being forced to do the
investment when borrowing costs are much higher, is a good example of
this government’s economic incompetence.
This is one area
where the way the Treasury does things may be lacking. Whether a
project is worth doing is typically assessed using a constant 3.5%
real discount rate, with some exceptions. There are good arguments
for using a discount rate independent of market rates, although
whether the rate should be as high as 3.5% is another matter. But
deciding that public investment projects are worthwhile to do, and
deciding when to do them, are two different choices. The latter will
depend on many things, including the state of the economy and the
cost of borrowing.
It is obviously
cheaper for the government to undertake a worthwhile investment when
the cost of borrowing is very low. Yet it is unclear how that basic
point influences government spending decisions. Needless to say, a
focus on reducing borrowing when the economy is depressed, and
interest rates and borrowing costs are likely to be low, is
completely the wrong thing to do. But even if that was not the case,
it is not clear that Treasury practice encourages investing when it
is cheap to borrow.
Closing schools
because the government refused to replace crumbling concrete is also
a perfect example of what this government has become in another
sense. Before the 2020 spending review, Sunak as Chancellor was told
by the education department that at least 300 schools needed
replacing a year because of crumbling concrete, and they asked for
funding to replace 200 a year in the first instance. Instead Sunk
decided to halve the school rebuilding programme target from 100 to
50 schools per year. But when presenting the results of this spending
review, he
described it as producing a “once in a generation
investment in infrastructure”. It’s not just that they lie all
the time, but when Sunak like Johnson makes grandiose claims it is
generally to disguise monumental failure.
Unless something
unforeseen happens, we are destined for a year when all we can do is
look forward to a change in government. An incoming Labour government
may not have the same aversion to the public sector as this current
lot, but they will still have fiscal rules. The government will still
be working in a media environment where government borrowing is
viewed with suspicion, and the distinction between how day to day
spending and investment is funded is rarely made. Labour are
committed to borrow to invest, but are saddled with Conservative fiscal plans that
are unworkable and a falling debt to GDP rule that discourages
investment. Rachel Reeves’ priority in government should
be to raise taxes to match increases in day to day
spending, and to scrap
the falling debt to GDP rule so that we can start
investing in the public sector after a decade and a half of complete
neglect.
[1] That limit, of
3% of GDP, has now become redundant as the share of public investment
is planned to fall to almost 2% in five years’ time. (Public
investment reached 3% of GDP three times in recent financial years:
2008/9,2009/10 and 2020/21.
[2] It would be nice
to say that good fiscal rules that excluded public investment would
completely avoid austerity driven cuts to that investment, but
unfortunately the experience of the Coalition government suggests
that is not true. As I noted many times, the structure of the primary
fiscal rule first introduced by George Osborne did exclude public
investment, because it had a target for the current balance (the
total deficit minus net investment). As a result, there was no need
for the Coalition government to cut public investment, yet that is
exactly what they did, particularly in 2011 and 2012. That decision
alone cost the average household thousands of pounds in lost
resources.
It was this cut in
public investment that really hit the UK recovery from the Global
Financial Crisis recession. Quite why the Coalition government
decided to cut public investment so drastically when it did nothing
to meet their fiscal objectives is unclear. Did the Treasury just ask
departments to cut all spending, and naturally (see above) these
departments initially chose investment over current spending? Or did
the Chancellor not understand his own fiscal rule?
This is why I
hesitate to claim better fiscal rules might have prevented this
government cutting back on public investment. When politicians have
an ideological belief that everything in the public sector is
inefficient and wasteful, they may ignore even the most enlightened
fiscal rule.
Equally when fiscal rules become things that are changed every couple of years, as they have been since 2015, then unfortunately it also tempting for politicians that know they are nearing fiscal limits to include public investment in any target, because it is easy to cut.
