What is the purpose of fiscal policy? Don’t ask Rachel Reeves!

It’s been a week of grand fiscal statements. Tuesday, it was for Australia as I discussed yesterday – Australian fiscal statement – rising unemployment amidst a moderate fiscal contraction (March 26, 2025). Then yesterday in the UK, the Labour Chancellor delivered the British Government’s – Spring Statement 2025. Both statements come at a time when the mainstream economics consensus is shifting with the US pushing protection and defunding many global initiatives. And, one of the statements was in the context of an impending federal election (Australia) and from a government that is in danger of losing that election to a bunch of populist Trump-copiers. And the content reflected that. The UK Statement was from a Government currently in no danger of losing office but which is progressively entrapping itself in its hubris and fiscal rules. An interesting juxtaposition. Anyway, the British Chancellor has lost all understanding of what the purpose of fiscal policy is. What is the purpose of fiscal policy? Don’t ask Rachel Reeves!

In the Chancellor’s – Spring Statement 2025 speech – Rachel Reeves demonstrated how far locked into absurdity she and the Labour Party have become.

In the face of significant shifts in British economic fortunes both domestically and also from the international chaos that is unfolding the Chancellor was resolute:

In the autumn, I set out new fiscal rules that would guide this government.

These fiscal rules are non-negotiable …

The two fiscal rules that I set out at the Budget were…

First, our “Stability Rule”, which ensures that public spending is under control …

… balancing the current budget by 2029-30 …

… so that day-to-day spending is met by tax receipts.

Second, our “Investment Rule” to drive growth in the economy …

… ensuring that net financial debt falls by the end of the forecast period …

Non-negotiable – as in hard and fast in the concrete of failure.

I did a podcast earlier this week where the conversation turned towards a query about the purpose of fiscal policy.

What is the purpose of fiscal policy?

The Chancellor’s non-negotiability of the fiscal rules tells us that the purpose is to achieve those rules.

And in that context we can duly ask what the purpose of “balancing the current budget by 2029-30” and “ensuring that net financial debt falls by the end of the forecast period” actually serves.

What does it achieve?

I will return to that.

She went on to say that the Spring Statement would deliver outcomes that will deliver:

… a surplus of £6.0bn in 2027-28, £7.1bn in 2028-29 and a surplus of £9.9bn in 2029-39 …

That means that are we continuing to meet the Stability Rule two years early …

… building resilience to shocks in this, a more uncertain world.

… The OBR forecast that the “investment rule” is also met two years early …

so that we can spend more on the priorities of working people.

So rushing to meet the fiscal rule parameters is virtuous.

Context free virtuosity it seems.

And the usual story that by moving to fiscal surplus and reducing the scale of public debt relative to GDP will provide the British government, which issues its own currency, with more of that currency to spend “on the priorities of working people”.

What is the context?

First, there is virtually no GDP growth in Britain (Source).

Labour have been in government since July 4, 2024 and despite their constant talk about promoting growth the situation has worsened since they were elected.

In the March-quarter 2024 GDP growth was 0.8 per cent, followed by 0.4 per cent in the June-quarter.

Then Labour take over and growth declines to zero percent in the September-quarter and 0.1 per cent in the December-quarter.

The stagnation is on them not the Conservatives.

Labour have been in long enough to have successfully stimulated growth and have failed by design to do that.

Moreover, GDP per capita growth has declined from 0.6 per cent in the March-quarter 2024 to -0.3 per cent and -0.1 per cent in the September- and December-quarters, respectively.

So, on average, material prosperity has declined.

But, of course, given how unequal the income distribution is in Britain, a negative growth in GDP per capita, means the bottom end of the income distribution are much worse off under Labour than they were at the start of 2024.

Match that against Labour’s rhetoric about caring for the working families.

Dissonance.

And the analogue of the decline in GDP is to be found in the labour market.

Some facts (Source):

1. Job Vacancies – in the second-quarter 2024, job vacancies were estimated by ONS to be 899 thousand.

In the 3-months from December they are now recorded at 816 thousand.

Half a million vacancies have disappeared.

The number of unemployed people per vacancy is rising signalling a deteriorating labour market.

2. Unemployment – in the second-quarter 2024, the official unemployment rate was estimated by ONS to be 4.1 per cent.

By January 2025, it had risen to 4.4 per cent.

ONS report that the “number of people reporting redundancy … increased in the latest quarter to 4.2 per thousand employees in November 2024 to January 2025.”

So the economy is slowing and unemployment is rising and there are more unemployed chasing jobs relative to the unfilled job vacancies.

All under Labour’s watch.

In its – Economic and fiscal outlook – March 2025 (published March 26, 2025) – the British Office of Budget Responsibility (OBR) noted that:

1. “Since the October forecast, developments in outturn data and indicators of business, consumer and market sentiment have, on balance, been negative for the economic outlook.”

2. “In our central forecast, real GDP is now projected to grow by 1.0 per cent in 2025, half the 2.0 per cent assumed in October.”

3. “Annual CPI inflation is forecast to rise from 2.5 per cent in 2024 to 3.2 per cent in 2025, 0.6 percentage points higher than forecast in October.”

4. “We expect the unemployment rate to peak at 4.5 per cent (1.6 million people) in 2025 as spare capacity opens up”.

5. “This is 0.4 percentage points (160,000 people) higher in 2025 than assumed in our October forecast, due to a larger negative output gap (greater excess supply)”.

6. And in case you thought that was bad, the OBR say “While our fiscal forecast takes account of the direct fiscal costs of some of the welfare policies in the Government’s Pathways to Work Green Paper and their indirect effects on aggregate demand, we have not incorporated most of their supply-side impacts on the labour market” due to “insufficient information”.

So it is going to be worse.

All under Labour’s watch.

And on matters fiscal, OBR note:

1. “… borrowing is projected to be £13.1 billion higher in 2029-30 than in the October forecast.”

2. “Receipts in 2024-25 are expected to be £7.6 billion below the October forecast” as the economy slows more quickly than previously forecast.

So what does the ‘non-negotiable’ Chancellor do?

Guarantee that things will get even worse by significantly cutting spending on welfare recipients.

£4.8 billion of it which the OBR note “constitute the largest package of welfare savings since July 2015”.

Don’t hack around the edges, go deep.

Meaning?

OBR says “3 million families” will lose household income – on average £1,720 per year in real terms.

The UK Guardian article (March 26, 2025) – Spring statement 2025: key points at a glance – says this amounts to an “extra 250,000 people falling into relative poverty by 2029-30”.

So they meet their non-negotiable rules by driving “an extra 250,000 people falling into relative poverty”.

That the British Labour government in a nutshell.

Their justification?

The Chancellor claimed that she “will always put working people first” and “if you can work, you should work”.

So the party of ‘work’ is turning on those without work.

Interestingly, this sort of rhetoric has long standing.

From the mid-1970s in Australia, successive governments vilified those who were not in work while failing to mention that their own fiscal austerity policies were the actual reason that the people who were being called pariahs were unemployed in the first place.

Australians repeatedly were being told that it was better for people to be in work than jobless while the Government penalised the latter who were just a product of the Government’s deliberate policy choices.

The British Labour Chancellor is just rehearsing the same old line – there are welfare cheats, if they can work then they should, and we will not provide adequate income support if they don’t.

The only problem with that scenario is that, on the one hand, the probability of getting a job is declining under Labour (as above) and a growing number on welfare support are there because Covid has rendered then disabled.

If the Government really wanted people who can work to work then the most effective policy intervention would be to offer a guaranteed job to anyone who wanted to work.

That would quickly sort the situation out.

But instead, the neoliberal Labour government thinks forcing people into poverty and making them desperate is a more effective solution.

That is the logic of sociopaths.

Overall, are Labour sticking to their promise not to impose fiscal austerity?

Well it is difficult to say.

Spending is rising but that is in the area of defence notably and at the expense of poorer citizens abroad and the public servants that will be sacked.

If you analyse the ‘total effect of Government decisions on current budget deficit’ in the OBR analysis, we see that in each of the forward estimate years from 2025-26 to 2029-30, there is an increasing contractionary policy impact.

2025-26 -£0.4 billion
2026-27 -£1.8 billion
2027-28 -£5.7 billion
2028-29 -£9.9 billion
2029-30 -£14.0 billion

That is austerity.

The OBR say that the “profile of the fiscal tightening at this event is backloaded” – which means things get worse in the latter years of this term of government.

We can thus see the conflict between context and the non-negotiability of the fiscal rules.

The fiscal rules rule and everything else has to fit in to that.

Clearly, the only way that the Government could pretend to be staying within their so-called ‘headroom’ was to cut spending.

And the politically easy way to do that is to isolate a group in the society, vilify them, and impoverish them.

Divide and conquer.

Same old tactic we have seen used over and over in Australia during this neoliberal epoch.

The problems are many but as the Government is now experiencing the ‘headroom’ (a meaningless concept) shrinks because the austerity cuts kill growth which reduces revenue.

It becomes a doom cycle.

The harder the government cuts, the less likely it is that the fiscal rules can be met.

And so they go harder, and so it goes.

This mentality and the whole ‘non-negotiable’ narrative makes a mockery of the purpose of fiscal policy.

In general, we don’t want governments telling us what to do and creating chaos in our lives.

Imagine how people are feeling in the ‘land of the free’ right now as an authoritarian President wreaks havoc on their lives and opportunities, while his tech-bro mates pull the strings?

But – Abba Lerner – provided a very clear perspective on the ‘purpose’ of fiscal policy when he articulated his idea of – Functional finance.

I wrote about that in this blog post among others – Functional finance and modern monetary theory (November 1, 2009).

We want governments to use their policy capacity to advance our well-being.

We want secure health systems that can resist pandemics.

We want our children educated and/or trained to maximise their respective propensities and capacities.

We want people who fall behind to be kept on the ‘train’ with income support.

We want people to have work at reasonable pay and conditions.

We want to live in a natural environment that is regenerative.

We want … think of your wish list.

How does the government help us get that?

Through its use of fiscal capacity.

That is the purpose of fiscal policy rather than to fit within some contrived, arbitrary financial rules that can only be achieved by undermining all those ‘we want’ aspirations.

Conclusion

I am glad I don’t live in Britain at present.

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.