The Prime Minster has promised a decade of national renewal – the Chancellor needs to act now for that to be possible

Introduction

Things have not been going well in the UK for some time.

At the 2025 Labour Party Conference, the Chancellor said, “Conference, let us reaffirm our commitment that we will never, ever do what the Conservatives did to ordinary working people in this country. But I do know that there are still those who peddle the idea that we could just abandon economic responsibility and cast off any constraints on spending.”

In reality, no serious commentator would “peddle the idea that we could just abandon economic responsibility and cast off any constraints on spending.” The most plausible explanation for the Chancellor’s slightly bizarre claim is that she wants to make arguments against her fiscal rules sound sufficiently ridiculous that she can avoid addressing challenges to her current set of rules.

This article is precisely about exploring these challenges: it asks: Are the Chancellor’s current fiscal rules compatible with delivering national renewal, and if not, what would a responsible Chancellor do now?

Our conclusion is that she should start to change course immediately:

• As currently set out, the fiscal rules are incompatible with national renewal;
• A responsible government still needs some constraints on spending – but we need to redefine responsibility in a way which matches real-world experience and rewire our institutions accordingly; so
• The Chancellor should begin a process of adjusting the remits of our key institutions to support national renewal.

Current fiscal rules are incompatible with national renewal

If we want national renewal, we must have economic renewal; and that is where the fiscal rules are supposed to come in. They are meant to ensure that the government spends responsibly and brings down the level of debt:GDP; responsible spending is supposed to help kickstart growth. Because, we are told, this is so important, these fiscal rules are fixed; they are iron-clad; they are non-negotiable.

These are very important claims and, if true, they would constitute a strong argument for sticking with the fiscal rules even if it is difficult. So, we should take them seriously and investigate whether there is any truth in the arguments for fiscal rules of the kind we have today.

The best test is the real-world results we have seen from our fiscal rules.

This chart summarises the UK’s post war economic history, with and without fiscal rules.

The horizontal axis shows gross debt:GDP. Generally speaking we would be happier to see that declining over time. The vertical axis shows real per capita GDP – the size of the economy adjusted for inflation and population growth. We would want to see that growing over time. So, ideally, we would see the line moving diagonally upwards from the bottom right.

The line is colour-coded to show the period before we had fiscal rules and the period since.

As you can see, in the period before we had fiscal rules (1945-97), the line was moving in the right direction: debt:GDP was falling, and real per capita GDP rose from around £6,000 to around £26,000. Not bad. The first set of fiscal rules also saw reasonable performance up until the global financial crisis.

But every subsequent set of fiscal rules – and we are now on the 10th set – has corresponded with very poor performance.

The rules have not prevented debt:GDP from rising significantly; they have corresponded with almost zero growth; and they have not been immutable.

The current fiscal rules, based on a combination of debt hysteria, inflation hysteria and fear of capital flight have resulted in the government closing all its avenues for increased spending. And without being able to spend responsibly, the government will be forced into hoping that the ‘magic of market forces’ will somehow rescue the UK.

As they say in the City, “Hope is not a strategy.”

What’s the alternative?

So, if we didn’t want to have static fiscal rules because they don’t promote growth and they don’t contain debt, what should we do? We don’t want to “peddle the idea that we could just abandon economic responsibility and cast off any constraints on spending.”

Well, here is one option: we move from static fiscal rules to dynamic fiscal rules, and we define a responsible Budget as one which provides a responsible answer to three questions:

1. How much growth should we stimulate? Given the poor growth over recent decades, it is clear that it is a long time since we had a government that gave a responsible answer to that question;
2. What public services does a civilised society need? Both our own pre-financial crisis history and comparison with other developed countries shows that we have not recently had a responsible answer to that question either;
3. How much risk-free saving does the private sector require? Both Banks and Pension funds need risk-free ways to borrow – their business models depend on it. And of course many savers like the certainty that their bank, NSI will not go under.

In contrast to what we are normally told:

·         A government deficit equals stimulus to the economy (spending more money into it than we take out in tax), something which has been inadequate for the last 14 years – a deficit is not something to be eliminated;

·         Public services are a critical part of being civilised, not a profligate indulgence;

·         The private sector needs risk-free ways to save and this is provided by government borrowing.

And there is really no risk of our government debt becoming unsustainable.

The Chancellor should begin a process of rewiring our rules and institutions to support national renewal

There are three things we need to do if we want to see national renewal:

1. We need to adopt a genuinely responsible approach to economic management – the current approach denies government responsibility and effectively says it is ‘the markets’ job to get the economy moving again. Dynamic fiscal rules would allow the government to step up to its responsibilities;
2. We need to rewire our institutions to support government initiatives – we have seen how powerful they are when they act: we just need them to be a force for renewal;
3. We need a genuine, and courageous strategy for national renewal – to grow the pie and share the proceeds of growth fairly.

All this is not trivial and would take time, even if implementation started tomorrow. So, realistically, what could the Chancellor do in November? Here are some possibilities, all of which mean government taking responsibility for driving our key institutions rather than being driven by them:

1. Refine the Bank of England’s remit: currently the Bank must raise interest rates whenever forecast inflation exceeds 2% – even when it knows that will harm the economy and not actually reduce inflation. As the Governor told MPs in 2022, “It’s a very, very difficult place to be. To forecast 10 per cent inflation and to say there isn’t a lot we can do about it is an extremely difficult place to be. … This is a bad situation to be in.” He nevertheless felt obliged to raise rates. A new remit would enable him to make a balanced recommendation to the Chancellor in such circumstances;
2. Refine the OBR’s remit: currently, we are in an extraordinary situation where the OBR’s remit obliges it to call out a ‘risk’ that in 50-years’ time our debt:GDP might be higher than we would ideally like, while not calling out the real risk of rising poverty, failing universities, crumbling infrastructure and a stagnant economy right now. Redefining responsibility in line with the dynamic framework set out above would enable it to comment on the real issues of responsibility;
3. Refine the remit of the Treasury: When a company buys-back its bonds, they are defeased – the company cancels the debt, seeing it as a nonsense to regard money that it owes to itself or to a subsidiary as debt. The Treasury ‘owes’ money to its wholly-owned subsidiary, the Bank of England, but it has not cancelled the debt and instead permits its subsidiary to sell the bonds into the market at a loss. It also allows interest rates to remain too high for the good of either government finances or the health of the private sector although it already has the power to prevent this. When Johnson and Sunak were forced to accept the need for a lockdown during COVID (when government debt:GDP was around 95%), even though we had been told that there was ‘no money’, there was suddenly a way to find an additional £70 billion to spend on the furlough scheme. The Treasury instructed the Bank of England to buy the bonds directly, without even troubling the bond markets. It has the power – and has used it quite recently – to keep interest rates low. It should be instructed to use this power in the national interest.

Conclusion

Finally, I would like to ask you join me in a little thought experiment: what would have happened after WWII if Attlee had been constrained by today’s fiscal rules?

There is no question that the UK is in a difficult situation now: more difficult than in 1997. But it’s not as difficult as in 1946. After the Second World War, our debt: GDP stood at around 250%, roughly half of GDP had been diverted to the war effort – we were making things that nobody wanted any more. Huge investment would be needed to manufacture what peace required. We had lost around 1 million people. The economy was in recession. And our infrastructure was in worse shape than today.

National renewal was a priority then as now. But if Attlee had tried to follow today’s fiscal rules, he could not have prevented mass unemployment as the troops were demobilised, and he could not have implemented the Beveridge Plan. He would have had to say, “Nobody would like more than I to implement this excellent plan, but somebody has to be the grown-up in the room and admit that we simply don’t have the money. My first job therefore is to rebuild our government finances, which I shall do by sticking rigorously to my fiscal rules and then – perhaps in a generation – we can look seriously at this idea of a National Health Service and a Welfare State.”

Thankfully, he did not do that, he listened to Keynes who said,

“Assuredly we can afford this and much more. Anything we can actually do, we can afford. Once done, it is there. Nothing can take it from us. We are immeasurably richer than our predecessors. Is it not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life?”

Attlee found the money. And he ushered in the most successful period in the UK’s economic history.

When governments are determined, they can find a way.

We have a lot to do, and we need to do it quickly. Ideally, the process should start today.

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