Chancellor Sajid Javid on Thursday ripped up the government’s fiscal rules to allow a big increase in public borrowing and long-term investment, insisting it made sense in an era of ultra-low interest rates.
Mr Javid’s new fiscal rules will allow an extra £22bn of public sector net investment a year, for what the chancellor called “a new economic plan for a new economic era”, with money targeted at infrastructure projects such as roads and railways.
However, the Conservative party’s election pledges are much less radical than Labour’s: shadow chancellor John McDonnell on Thursday loosened his fiscal targets to allow £55bn a year of new investment — more than doubling current levels.
The economy and public spending took centre stage in the general election campaign as Mr Javid and Mr McDonnell both made keynote speeches.
Mr Javid ditched some of the traditional Conservative guidelines for maintaining prudence in the public finances including the commitment — repeated by prime minister Boris Johnson in August — that government debt should fall as a share of national income every year.
The chancellor’s new fiscal rules are designed to balance the current budget — day-to-day government spending — but to allow borrowing for capital projects worth up to 3 per cent of gross domestic product, compared with a long term average of 1.8 per cent.
Mr Javid said his rules would allow the Conservatives to proceed with tax cuts, although he declined to outline details ahead of the party publishing its election manifesto.
“We can afford some tax cuts . . . We can within these rules have tax cuts, invest in infrastructure and balance the day-to-day funding of the economy,” he said during his speech in Manchester.
Mr Javid also insisted his revised fiscal rules would still maintain stability in Britain’s public finances and were in marked contrast to the “fantasy economics” of Labour, claiming that business feared opposition leader Jeremy Corbyn more than anything else.
The chancellor dropped the Tories’ current fiscal rules, which were intended to keep public borrowing below 2 per cent of national income, as well as secure a balanced budget in the 2020s and debt falling every year as a share of GDP.
With all political parties seeking to take advantage of low UK interest rates and government borrowing costs, investors will be tested whether they still think Britain’s political parties have a firm grip on the public finances.
Pimco, one of the world’s largest bond funds, expressed its concerns on Thursday, but Mr Javid insisted he would put the brakes on borrowing for investment if rates started to rise “significantly”.
The chancellor was already on course to break the Conservatives’ fiscal rule that restricts the deficit to 2 per cent of national income in 2020-21.
Mr Javid is proposing to implement three new rules in a revised fiscal framework.
On borrowing, the Conservatives would seek to balance the current budget — excluding net investment — within three years.
But the revised rules would allow borrowing for investment worth up to 3 per cent of national income. And they would seek to keep debt servicing costs below 6 per cent of tax receipts so that if interest rates rose, the government would rein in its borrowing.
The new fiscal rules would allow debt to rise gently as a share of national income, but the chancellor said borrowing levels would be lower at the end of the next five-year parliament than they are now.
Mr Javid fought a battle with Downing Street to include updated rules in the Conservatives’ manifesto to restrain some of the more ambitious plans by the prime minister’s advisers for higher public spending and lower taxes.
In his speech in Liverpool, Mr McDonnell ditched his “fiscal credibility rule” under which a Labour government would keep the level of government debt falling as a share of national income during each parliament.
The move enabled Mr McDonnell to propose more than doubling the amount Labour would borrow each year for capital spending — mainly on infrastructure — in its first term, if elected. Investment would increase from £47bn in 2019-20 to more than £100bn a year.
The shadow chancellor’s new “cutting edge fiscal rule” will exclude borrowing for investment from his targets.
Labour is planning to borrow £400bn for a national transformation fund that would invest in education, health, energy, housing and transport.
Mr McDonnell said Labour was aiming at “an irreversible shift in the balance of power and wealth in favour of working people”. “That means investment on a scale never seen before in this country,” he added.
The post Sajid Javid tears up UK fiscal rules to increase investment appeared first on Financial Times.