John McDonnell’s fiscal flip-flop

13 October 2015

Last night it unexpectedly emerged that John McDonnell, the shadow chancellor, is dropping his support for George Osborne’s new fiscal rule.

The chancellor’s ‘Charter for Budget Responsibility’ will be voted on tomorrow and will commit government to maintain an absolute budget surplus in “normal times”—that is, every year real GDP growth exceeds one percent after 2019-20. The Office for Budget Responsibility will adjudge when RGDP growth falls below this level, and, hence, when the rule should be suspended. In this circumstance, the government of the day will be required to present a plan to Parliament to return the country to surplus, after which the rule is again applied.

Heading into party-conference season, the shadow chancellor announced he would support Osborne’s fiscal rule in principle. McDonnell told The Guardian that “[w]e will support the charter on the basis we are going to want to balance the books, we do want to live within our means and we will tackle the deficit.”

Fiscal rules—designed properly—can achieve this. They ensure chancellors are fiscally prudent and avoid the ratcheting effect, seen for so long in British politics, of debt building up during recessions, but not being paid off during the good years. Specifically, Osborne’s Charter has the potential to do this, while not being too rigid: the “normal times” rule avoids government having to meet strict targets during economic downturns.  Additionally, the indefinite period of suspension when recession strikes will avoid arbitrary surplus requirements, which, as the recent recession shows, are unlikely to be met.

McDonnell’s support for the rule, however, came with two caveats: he would not support the Government’s intention to cut tax credits as a means to balance the books nor would he sign up to the absolute budget surplus commitment. Instead, he indicated that the Government should borrow to fund infrastructure.

Leaving aside concerns regarding how McDonnell could balance the budget without signing up to expenditure cuts, support for the Charter and his argument in favour of investing in infrastructure were welcome. Reform has warned of the twin dangers that an absolute surplus would force tax revenues to cover both departmental and infrastructure spending and require today’s taxpayers to pay for tomorrow’s infrastructure.

McDonnell might have used tomorrow’s debate to underline these points, alongside other shortcomings of Osborne’s rule, while committing to stable fiscal policy. This option appears to have been passed up. Yet, to prove his commitment to “balance[ing] the books”, McDonnell would do well to return to his support of a strong fiscal rule.

Alex Hitchcock, Researcher, Reform

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