{"id":62361,"date":"2025-02-17T13:19:04","date_gmt":"2025-02-17T02:19:04","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=62361"},"modified":"2025-02-19T12:43:59","modified_gmt":"2025-02-19T01:43:59","slug":"britain-and-its-fiscal-rule-death-wish","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=62361","title":{"rendered":"Britain and its fiscal rule death wish"},"content":{"rendered":"

Governments that adhere to the mainstream macroeconomic mantras about fiscal rules and appeasing the amorphous financial markets have a habit of undermining their own political viability. As Australia approaches a federal election (by May 2025), the incumbent Labor government, which slaughtered the Conservative opposition in the last election, is now facing outright loss to a Trump-style Opposition leader if the latest polls are to be believed. That government has shed its political appeal as it pursued fiscal surpluses while the non-government sector, particularly the households, endured cost-of-living pressures, in no small part due to the relentless profit gouging from key corporations (energy, transport, retailing, etc). The government has not been riven with scandals or leadership instability. But its amazingly fast loss of voting support is down to its unwillingness to take on the gouging corporations and also to claim virtue in the fiscal surpluses, while the purchasing power loss among households has been significant. The same sort of death wish is arising now in the UK, although the British Labour government is at the other end of its electoral cycle which gives it some space to learn from its already mounting list of economic mistakes. The British government situation is more restrictive than the case of the Australian Labor government because the former has agreed to voluntarily constrain itself via an arbitrary fiscal rule.
\n<\/p>\n

The latest economic data from Britain<\/h2>\n

The latest National Accounts data from the British Office of National Statistics (ONS) – GDP first quarterly estimate, UK: October to December 2024<\/a> (released February 13, 2025) – shows that the British economy is overall GDP growth was:<\/p>\n

\n… 0.1% in Quarter 4 (Oct to Dec) 2024, following no growth in the previous quarter.\n<\/p><\/blockquote>\n

Overall, real GDP growth was 0.8 per cent in the March-quarter, then 0.4 per cent in the June-quarter, then 0 per cent in the September-quarter, to 0.1 per cent in the December-quarter.<\/p>\n

The production sector recorded negative 0.8 per cent growth for the December-quarter and negative 1.7 per cent for the year.<\/p>\n

This was mostly due to contractions in manufacturing and mining and quarrying.<\/p>\n

Business investment fell by 3.2 per cent in the December-quarter 2024 but inventories rose significantly (particularly in manufacturing).<\/p>\n

The rise in inventories is considered to be unintended investment and reflects the declining outlook in sales – a negative signal. <\/p>\n

Household consumption expenditure did not grow at all in the December-quarter.<\/p>\n

Exports (volumes) fell by 2.5 per cent (all down to goods)<\/p>\n

Taxes less subsidies fell by 0.8 per cent mainly due to a decline in VAT reflecting the stagnant activity levels.<\/p>\n

Real GDP per capita fell by 0.1 per cent and 0.1 per cent over the course of 2024.<\/p>\n

This measure has fallen 7 out of the last 9 quarters.<\/p>\n

I thought this table from the special ONS article – Trends in UK real GDP per head: 2022 to 2024<\/a> – summed up the folly of the neoliberal period quite succinctly.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

Interestingly, the ONS indicates that “long-term sickness” is one of the reasons for the decline in productivity growth, which has been part of the reason that GDP per capita has fallen and trailed behind overall GDP growth.<\/p>\n

I have been following the COVID-related damage to the viability of the British labour force since 2020 and now we are starting to see some of the longer-term negative consequences of the lack of attention to this disease.<\/p>\n

The next graph shows the government contributions to GDP growth in Britain since the September-quarter 2023.<\/p>\n

The Government contribution is the sum of government consumption expenditure and government capital formation.<\/p>\n

The ‘GDP net government’ line is just the overall GDP growth rate minus the contribution of government, which is an approximation because if we really set the government contribution to zero, then it is likely that non-government expenditure components would change (probably for the worse) and the overall GDP growth would be lower than what is shown in this graph.<\/p>\n

But it is clear – since the Labour Party won office in Britain on July 4, 2024 – the overall GDP growth rate has been propped up by government expenditure.<\/p>\n

In the December-quarter 2024, the government growth contribution was 0.29 per cent, and without it, the economy would have recorded negative growth.<\/p>\n

Indeed, Britain would have been in recession in the second half of 2024 had the government contribution not been 0.13 percentage points in the September-quarter and 0.29 percentage points in the December-quarter.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

The fiscal rule plank<\/h2>\n

The UK media are now claiming that the British government is now caught in a bind.<\/p>\n

The UK Guardian article (February 15, 2025) – Rachel Reeves has three options to dodge an economic crisis and all are unthinkable<\/a> – which followed the release of the latest National Accounts data in Britain suggests that all the options available to the Labour government carry massive political damage.<\/p>\n

The hope expressed by the Chancellor when she took office in July last year was that her fiscal plans would be ratified by accelerating GDP growth now appears to be misplaced.<\/p>\n

GDP growth is not accelerating as noted above.<\/p>\n

Further, the next graph shows that government bond yields have been rising since September 2024 although that trend has reversed since the onset of the New Year.<\/p>\n

But it remains that the 10-year bond yield has risen from a recent low of 3.762 on September 11, 2024 to its current level of 4.499 per cent on February 14, 2025.<\/p>\n

That sort of shift in apparent across the suite of gilt yields.<\/p>\n

What that means is that the British government is spending more on servicing its outstanding debt than previously.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

Also with GDP growth stalling, tax revenue has declined below what was expected.<\/p>\n

The Chancellor was reported as saying she retained an “iron grip” on government spending (Source<\/a>).<\/p>\n

In the – Autumn Budget 2024<\/a> (released on October 30, 2024) – the H.M. Treasury claimed that:<\/p>\n

\nThe government is announcing robust fiscal rules, which the independent Office for Budget Responsibility (OBR) confirms the government is on track to meet:<\/p>\n

– Stability rule: to move the current budget into balance so that day-to-day spending is met by revenues.<\/p>\n

– Investment rule: to reduce net financial debt as a share of the economy.\n<\/p><\/blockquote>\n

It said the current fiscal balance is in “surplus by \u00a39.9 billion in the target year, 2029-30”.<\/p>\n

The forward estimates were predicated on estimated GDP growth of 1.1 per cent in 2024, 2 per cent in 2025, 1.8 per cent in 2026, 1.5 per cent in 2027 and 2028 and 1.6 per cent in 2029.<\/p>\n

It also estimated that household consumption growth would be 1.7 per cent in 2025 and export growth would accelerate.<\/p>\n

The \u00a39.9 billion estimated fiscal surplus by the end of the current term of office (2029-30) is being touted by the media as the ‘fiscal headroom’ that the Government has – the leeway for slippage without compromising their fiscal rule pledge under the debt component.<\/p>\n

The current trends noted above suggest that the growth forecasts will prove to be overly optimistic, which then compromises the fiscal outcome estimates.<\/p>\n

In its most recent – Monetary Policy Report – February 2025<\/a> (released February 6, 2025) – the Bank of England has already downgraded their GDP growth forecasts and are predicting just 0.1 per cent in the first-quarter of 2025.<\/p>\n

If that turns out to be accurate then it will be very difficult for Britain to achieve an overall 2 per cent rate of growth for 2025 as is assumed in the Autumn 2024 statement.<\/p>\n

This UK Guardian article (February 15, 2025) – Rachel Reeves has three options to dodge an economic crisis and all are unthinkable<\/a> – claims that the readers should understand the \u00a39.9 billion projected fiscal surplus in 2029-30 as:<\/p>\n

\n… spare money …\n<\/p><\/blockquote>\n

Implying that there is some limit on the sterling that the UK government has at its disposable.<\/p>\n

The ‘limit’ is, in fact, totally artificial because it depends on a voluntary restriction on outcomes defined by the fiscal rules – as an absolute.<\/p>\n

The current trends suggest that even if the ‘investment rule’ is not yet compromised, the ‘stability rule’ – that recurrent spending must be matched by taxation revenue – will struggle to be met.<\/p>\n

The Guardian claims that this means in the context of the Spring Statement (at the end of March 2025):<\/p>\n

\nSomething has to give and soon.\n<\/p><\/blockquote>\n

And all of this is in the context of major upheavals in the global economy with the tariff uncertainty, the shifts in US support for Ukraine, and the proposed ‘real estate development’ on the sovereign Palestinian territory.<\/p>\n

The three options that commentators are listing are:<\/p>\n

1. Cut government spending “by more than planned already in real terms towards the end of this parliament”.<\/p>\n

2. Increase tax rates “again”.<\/p>\n

3. Abandon the artificial fiscal rules.<\/p>\n

According to the Guardian, the Labour parliamentarians know:<\/p>\n

\n… that all of them would be hugely damaging politically.\n<\/p><\/blockquote>\n

Of course, Options 1 and 2 are only listed because of the fiscal rules.<\/p>\n

The British Treasury released a statement on January 8, 2025 claiming that despite these trends:<\/p>\n

\nNo one should be under any doubt that meeting the fiscal rules is non-negotiable and the government will have an iron grip on the public finances.\n<\/p><\/blockquote>\n

Already the financial markets are issuing threats of an “adverse market reaction” if Option 3 was chosen and that if a combination of Options 1 and 2 were not chosen then the Government “would risk a loss of confidence in financial markets”.<\/p>\n

The same old.<\/p>\n

Britain now has a classic case of a government that has tried to satisfy the mainstream economists and in doing so has constrained itself politically to the point that it only faces a very dangerous walk out on a very short plank.<\/p>\n

The Chancellor has made too many guarantees – no further tax increases, no further austerity, and an ‘iron grip on the fiscal rules’.<\/p>\n

And those guarantees were in the context of unrealistic growth forecasts.<\/p>\n

Taking Option 1 and\/or 2 would likely drive the economy into a deep recession, which would make it nigh on impossible to satisfy the fiscal rules.<\/p>\n

A bind.<\/p>\n

As I noted when Labour was in Opposition adherence to their fiscal rules would not be possible under a wide range of possible economic outcomes.<\/p>\n

Those outcomes are present now which means the only way forward, if the Government really wants to avoid an austerity-driven recession is to abandon the fiscal rules and admit they were a folly in the first place.<\/p>\n

The problem is that the Government has itself to blame for the situation it now faces.<\/p>\n

By making these artificial and largely meaningless fiscal rules central to the public perception of ‘credibility’ and ‘fiscal responsibility’, the Government has conditioned the debate such that it can only fail.<\/p>\n

There is no basis in economic theory for these rules.<\/p>\n

They are arbitrary and place unnecessary constraints on government fiscal policy.<\/p>\n

Why should recurrent spending be matched with tax revenue?<\/p>\n

What is recurrent spending anyway?<\/p>\n

For example, a lot of spending on education is classified as recurrent when it delivers long-term (beyond 12 months) benefits.<\/p>\n

Salaries for nurses are recurrent but their work delivers long-term health benefits.<\/p>\n

And so on.<\/p>\n

Why should government debt ratios be lower after 5 years?<\/p>\n

Why not 2 or 3 or 10 years?<\/p>\n

Why is the current debt ratio too high, such that it must be lower in 5 years?<\/p>\n

And so on.<\/p>\n

Further, the financial markets are hawks.<\/p>\n

The participants are motivated only by greed and are continually appraising the strength of government commitment to a course of action.<\/p>\n

They know that the British government has cornered itself with the public and will fold if the financial markets put pressure on the currency with short-selling.<\/p>\n

The markets thus know that they can bluff Reeves because she has bestowed such importance on the fiscal rules.<\/p>\n

Conversely, the Japanese government (including the Bank of Japan) always resist these pressures and so the financial markets make losses on attempts to destabilise policy settings.<\/p>\n

The Japanese government does not profess these hard and fast fiscal rules and thus doesn’t ‘box’ itself in to unsustainable positions.<\/p>\n

The reality is that the financial markets have no real leverage over government if the government plays them out of the game, as happens in Japan.<\/p>\n

The British government could just instruct the DMO (Debt Management Office) to stop issuing gilts if the yields at the auction process rose as the financial markets tried to flex their muscle.<\/p>\n

They could force the Bank of England to purchase sufficient debt in secondary markets to drive yields to zero.<\/p>\n

Conclusion<\/h2>\n

All of this mess that the Labour government is now finding itself rises because it has tried to be clever by holding out these artificial fiscal rules as a sacrosanct barrier beyond which civilisation ends.<\/p>\n

They then have to reap the political failure that follows.<\/p>\n

Another Labour government committing \u5207\u8179 (harakiri).<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2025 William Mitchell. All Rights Reserved. <\/p>\n","protected":false},"excerpt":{"rendered":"

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