The writer is chief economist at the Institute for Government
The UK’s new prime minister and chancellor have had a dire start. The rapidly announced “mini” Budget — which, given the lack of consultation with cabinet, bypassed normal policymaking processes — comprehensively undermined their party’s economic and fiscal credibility. But there might be some hope of redemption if they can demonstrate a new commitment to sound decision-making and strong institutions.
As someone who spends their working hours advocating the principles of good government (dry, often unexciting prescriptions such as looking at evidence, transparency and being open to scrutiny), I sometimes wonder how much these matter in the real world of politics.
It might be better if governments did these things, but why would they want to? Do voters reward those that actually do? Or do they instead admire the politicians who can spin a good yarn and deflect attempts to pick away at the holes in their plans? How much do investors worry about the government’s fiscal credibility when it comes to a large economy like the UK?
If nothing else, the past two weeks seem to have demonstrated that, in fact, these principles really do matter.
One factor that seemed to galvanise critics of Kwasi Kwarteng’s plans was his failure to publish an updated economic and fiscal forecast from the independent Office for Budget Responsibility alongside them. This was despite substantial changes to the economic outlook since the last forecast in March. This meant that public and international investors had no detail on how the chancellor’s package — the biggest set of tax cuts for 50 years — was compatible with fiscal sustainability. Only a strong suspicion that it might not be.
Kwarteng has belatedly understood the importance of being open to this kind of scrutiny. It is welcome that he emphasised the need for a “strong institutional framework” in his party conference speech and has now committed to publishing an OBR forecast alongside his wider fiscal plans. Accepting this kind of independent oversight may help to reassure the public and investors that there is substance beneath the rhetoric of a commitment to “growth” and “debt falling” — though it is also likely to force him to spell out difficult spending cuts to achieve the latter.
The chancellor and his fellow ministers tried to dismiss concerns about the affordability of their large tax cuts by insisting these policies would boost growth and so push up tax revenues, avoiding the need for too many painful choices elsewhere. But the public and investors were not convinced. This may have been because ministers were unable to present any compelling evidence to back up their claims, preferring to trust in ideology.
No one inside or outside government has been able to provide evidence that the tax cuts chosen are the most effective means of boosting growth. If the chancellor was serious about reducing economic disincentives from the tax system, and had £45bn to give away, he would have done better to address the more distortionary elements of the tax regime rather than cutting headline rates. For example, rather than abolishing changes to off-payroll working rules, known as IR35, why not tackle the inequities that encourage people to waste time and money structuring their work as self-employed contractors rather than employees in the first place? Stamp duty is a bad tax that hampers the effective operation of the housing market. But rather than making the kind of marginal change announced last month, why not consider more fundamental reform of property taxation?
Kwarteng is certainly not the first chancellor to cut corners in the policymaking process on tax. While the Treasury requires that other departments put forward well-evidenced business cases for new programmes that demand funding, it does not apply the same rigour to itself. But the chancellor may yet be able to restore public confidence in his plans if he does go through these basic steps: looking at what works, considering the full gamut of policy options and using that evidence to convince the public and his colleagues that it will.
It will take years for supply-side reforms — whether they be tax changes or the announcements expected on planning and immigration — to have much impact on growth. The OBR will want to see evidence that new policies move the dial before they upgrade their forecasts. If Kwarteng and Liz Truss want to get any credit for setting the UK on a path to stronger growth, they will have to convince people that their plans have a chance of success. So far voters and investors are not persuaded. Setting out the evidence and being open to independent scrutiny would be a good way to start rebuilding their trust.
