The Telegraph, November 19, Professor Patrick Minford
Jeremy Hunt’s Autumn Statement has presented us with big tax rises and spending cuts in order to avoid a large “fiscal hole” created by the need to have the debt-to-GDP ratio falling by 2027-28 – the new “fiscal rule”. But it will worsen the recession and ironically will also wreck the public finances.
Government borrowing is an important policy instrument, which permits a government to do two beneficial things: first, to keep tax rates stable at levels fit for long-term growth, and second to allow for swings in the budget balance to mitigate the business cycle. The government must also balance its books over the long run, as ours has always done for the past two centuries. But the words “long run” are vital. They mean that, looking ahead, the government’s debt must always be reliably serviceable.
In practice we can test this by making long term projections, typically 10 years ahead at least, to check that the debt/GDP ratio is coming down to a level such as 50 per cent where it is poses no problem of sustainability. Now turn to Thursday’s Statement to see how the Government got into this mess. Why has 2027-28 been picked as the year when the debt ratio must be falling?
This choice is both too strong and too weak. Too strong because it is preventing the flexibility needed for the two functions identified above. Tax rates essential to supporting growth, notably corporation tax, are being sacrificed to it. Also a bad looming recession, which the Government should mitigate, will be on the contrary worsened by a pro-cyclical fiscal tightening. So this Statement will worsen the recession and damage growth.
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