Breaking all the rules

Both Labour and the Conservatives have made major announcements on their respective economic policies in the early days of the 2019 general election campaign. Much of this has centred on the fiscal rules that a Government led by either party would follow – essentially, how each party would account for its public spending and taxation plans. Both parties are proposing significant changes to the UK’s current framework for public spending over the next few years, but what are they and what do they mean?

In light of our recent report Capitalism Overthrown? Understanding Labour’s economic policy, there are three key takeaways in particular from Shadow Chancellor John McDonnell’s speech on his party’s approach to economic policy, and where they differ from that outlined by Sajid Javid and the Conservatives.

Labour is proposing a significant change to the UK’s fiscal rules to reflect its public ownership plans

One of the main reasons behind Labour’s new proposed fiscal rules is the need to account for its high-profile commitments on public ownership. This had only been partially recognised by the party previously. In 2016, it proposed a ‘Fiscal Credibility Rule’ which pledged to balance the current budget, borrow only for investment and ensure that the national debt would fall, but there had been little to clarify how its plans for bringing water, rail and energy assets into public ownership would fit into this approach. McDonnell has also previously argued in favour of changing the Treasury’s rules on value for money in public investment, but without much detail on what this would entail.

We now know that Labour would focus on public sector net worth (PSNW) – meaning the whole of the government balance sheet – rather than just public sector debt. In essence, the party is explicitly acknowledging that taking ownership of assets would likely have broken its previous rule by adding to the debt level. It believes that by focusing on measuring net worth it can demonstrate how the cost of the debt incurred would be outweighed by the value created through the Government acquiring those assets.

However, Labour’s rules have more in common with the Conservatives’ than might be expected

It is plain that the two main parties have distinctly different philosophies in relation to levels of public spending and taxation, but in terms of governing fiscal policy-making there is perhaps more that unites their respective sets of rules than divides them. Both the Conservatives and Labour agree that the current budget should be balanced, that there should be a limit placed on debt interest and that investment spending should increase. The approach to the latter is different – Labour’s PSNW approach is more radical than that taken by the Conservatives, which simply sets a 3% limit on net spending – but both effectively place some form of limit on borrowing to invest.

Labour is serious about structural reform to the Treasury and Bank of England

Labour raised eyebrows last year when a report commissioned by the party recommended moving some of the functions of the Bank of England to Birmingham, and it has often mooted the idea of establishing a unit of the Treasury outside of London. McDonnell confirmed his intention for the latter in his speech – the party’s proposed National Transformation Fund which will invest in infrastructure projects will be based in the North of England – and there is a clear thread beginning to run through Labour’s thinking that is focused on devolution and reforming the institutions that shape the UK’s economic policy-making.

Both parties want to spend more

At this early stage in the campaign, what has already become clear from both parties is that this election will be a contest about which of them can spend the largest amount over the coming years, and the choice for voters is about who will spend it most wisely. This is a major shift from the last election, and an even bigger one from the 2015 election only four years ago.

The question is how exactly the money will be spent, who benefits and where the decisions will be made. In education, health and social care, housing, energy, transport and other sectors, the implications could be far-reaching, and businesses will be keen to learn more in the coming days and weeks how individual policies are being shaped by a changing approach to the economy by the main parties.

See more articles by Jamie Cater