Response from Anthony Painter

We don’t do fiscal policy very well in this country. This is a general observation rather than a political point. The annual Budgets, financial statements, and periodic spending reviews are very good at the adding up. They are very bad at assessing risk and preparing for contingency. That is why the deficit we now face bears no resemblance to anything that was forecast or even risk-assessed in, say, 2007. And now we are having to both fiscally boost the economy and consolidate at the same time, we were ill-prepared for how to do that in an economically sane fashion.   There is an immediate argument that the SMF’s Osborne’s choice makes. There is a different way to consolidate – and it enables us to protect growth to a greater degree. Essentially, this involves, in the American vernacular, shifting expenditures from recurring entitlements to discretionary investments. Once you have built a road you don’t need to build it again. However, you have to pay a tax credit every year while you are legislatively committed to do so. What’s more, entitlements are more politically sticky.   The problem is that in economic terms it is the easy cuts that are the most damaging. That is why net public investment is scheduled to fall from £38.6billion in 2010-11 to £21billion in 2016-17. And it’s economically mad.   It is the deeper insight that this report provokes that is just as critical, however. In the responses, Evan Davis questions whether there are sufficient ‘shovel-ready’ capital projects in which we could invest £15billion immediately. This goes to the heart of our pretty insane way of conducting our fiscal affairs.   There is an obvious need for tens of billions of capital investment – transport, energy, digital infrastructure, higher education facility, schools, and, perhaps more controversially, new housing. What’s more we classify things like youth unemployment programmes or skills investment as current expenditure when they are more clearly investments in human capital. There should be a register of ‘shovel’ or service-ready projects running into the tens of billions that should be ready at any time to be brought forward should the economic need be there.   So we fail to properly assess risk. And when the worst happens, we are ill-prepared so we cut the most practically and politically easy expenditure. This causes the maximum economic damage as the OBR’s multiplier calculations show. This is party-neutral and applies irrespective of your view of the pace of fiscal consolidation. My guess is that £15billion is doable this year if we include investments in human capital. But that’s more by chance than design.   Back in December I co-authored a report called In the black Labour ( ). It argued that there should be a shift from a ‘welfare state’ to an ‘enterprise state.’ In my view, Osborne’s choice brings some more of that argument to life.   The one element of the report that leaves me slightly uncomfortable is the proposal to cap ISAs at £15,000. Beyond the immediate context, we will as a nation need to consider how we become a more thrifty society – relying on the international pool of savings is very destabilising as we have discovered. Ultimately, it is a much bigger argument about low wages and the nature of productivity and reward. However, we do need to consider what role tax incentives and regulatory structures have at the margins on the propensity to save – and invest.   I only raise this as an issue because it is something that needs further thought over the course of the next few years.  It is certainly not a deal-breaker when it comes to the SMF’s excellent report. Osborne’s choice is serious and challenges both our short-term discussion about fiscal consolidation and growth while provoking deep questions about how we do fiscal policy in the UK. The hope is that this leads to a more relevant political and public discussion about our economic future. It’s about time.
Anthony Painter is a writer and commentator.  Related publications
Osborne’s Choice: Combining fiscal credibility and growth


Related items:

Page 1 of 1