‘Not being Liz Truss’ does not a growth strategy make

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England

The UK government’s Spring Statement was a “mini” Budget in all but name. It was also unnecessary, and possibly counter-productive, for the government’s self-declared objectives of stability, reform and growth. 

Creating a stable macroeconomic environment requires stability in fiscal policy. That was why the chancellor, rightly, committed to one fiscal event a year. But the rigidities built into its fiscal framework, in part as a response to the chaotic “mini” Budget of 2022, risk undermining that objective. 

Fiscal rules are said to need to be met at all times. With limited fiscal headroom built into last year’s Budget, even modest amounts of economic news have thus generated frenzied speculation about fiscal responses. This was then validated: higher defence spending prompting foreign aid reductions and the Spring Statement’s worsened fiscal projections prompting significant departmental cuts.

With fiscal headroom still modest and the macroeconomic backdrop uncertain, meeting fiscal rules will result in ongoing speculation and possibly multiple future “mini” Budgets. The announcement of real-time Treasury monitoring of departmental spending may add to this hyperactivity. This degree of fiscal fine-tuning is not conducive to macroeconomic stability.

Forming fiscal projections in this environment is akin to counting angels on pinheads. A framework that then reflexively hardwires these into fiscal decisions can only compound uncertainty, as it has this year. To damp that speculation, a less rigid and reflexive fiscal framework is needed.

A commitment to an annual assessment of the fiscal rules would help. Placing tolerance bands around them, as with the inflation target, is another option. With tolerance bands of +/- 1 per cent of GDP — the average fiscal headroom in the past — a Spring Statement would have been unnecessary, much less a fiscal response to it.

Few doubt the need for serious reform of public services, to lift the dragging anchor of low productivity on growth and to contain otherwise unsustainable spending on health and welfare. But using spending cuts to engineer that risks undermining both the reform’s spirit and implementation.

Take welfare, where cuts were among the largest. The rationale here is both laudable and potentially growth-friendly. A benefits system that discourages people from seeking work or training has contributed to around 9.4mn not doing so, flattering unemployment statistics but flattening growth. Altering incentives could remove hidden unemployment and stimulate employment.

But the transition to work for those currently inactive is fearsomely difficult, requiring long-term support measures around reskilling, work flexibility and occupational health. Few of those are in place. Although £1bn has been set aside, this will not touch the sides. 

Moreover, success also requires a healthy jobs market in which businesses are creating roles with the flexibility and skills mix needed for those most distant from work. With vacancies falling fast, especially in starter jobs in retail and hospitality, none of these conditions are currently in place. 

The welfare reforms will thus intensify work search while doing little to boost employment. That is the OBR’s early assessment too. They risk being not so much welfare-to-work as welfare-to-less-welfare, with sharp income losses for potentially millions on the lowest incomes. The Resolution Foundation estimate they could be £500 worse off by the end of this parliament than at the start.

In rushing its fiscal fences, then, the Spring Statement risks otherwise well-meaning welfare reform being blighted optically and botched substantively. A reform-induced growth tailwind risks being turned into a headwind. In an already stalled economy facing heightened trade and geopolitical uncertainty, this is unwelcome. 

Some have argued that a hair shirt was needed to appease markets. While global markets are indeed fragile, fears of the bond market bogeyman are overblown. What bond vigilantes desire, above all, is stability and growth. Here, growth and stability were preached but, alas, not practised. 

By overreacting to the trauma of 2022, the UK has created an inflexible fiscal framework, an exaggerated fear of financial markets and a lack of ambition. “Not being Liz Truss” does not a growth strategy make. The changed geopolitical scene this year gave Labour the chance for a maxi-reset. That opportunity is not lost, but the Spring Statement was a mini-setback.