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Reeves’ Fiscal Technocracy Will Lock in Austerity

Labour's new 'fiscal lock' means enhancing the power of unelected bureaucrats in the Office for Budget Responsibility. But handing more power to a body that has downplayed the impact of cuts on the economy will only lock in hardship, writes Grace Blakeley.

(Photo by Leon Neal/Getty Images)

Rachel Reeves is once again attempting to strengthen her credentials as a ‘sensible’ manager of the UK’s finances. She announced today that Labour would introduce a new ‘fiscal lock’, under which any new changes to government spending require a forecast from the Office for Budget Responsibility.

The Labour Party has already committed to tie its own hands when it comes to fiscal policy. The fiscal rule commits the party to balancing the books over the course of its first five-year term, and Reeves has also pledged not to raise taxes on big businesses or the wealthy.

Together, this means that Labour will not be able to increase public spending when it enters office. Barring a dramatic increase in economic growth an extraordinarily unlikely scenario given the global economic context and Labour’s refusal to increase public investment this means there will be no more money for public services without cuts to other areas of spending.

Even the arch fiscal hawks at the IFS have questioned Reeves’ approach. The IFS has warned both parties that balancing the books by the end of the next parliament is likely to require an astonishing £20 billion worth of cuts per year. It called on both parties to ‘level with’ voters about the trade-offs that would come alongside a commitment to balancing the books.

In other words, we are not getting the whole truth from the Labour Party. If they abide by their existing fiscal rules, then the next government will have to commit to re-imposing austerity. 

Reeves’ recent announcement strengthens the argument that the Labour Party will seek to abide by their fiscal rules. If Reeves proposes a tax cut or a spending increase, then the Office for Budgetary Responsibility would have to report back on the likely impact of this move on the public finances.

But how will the OBR make these calculations? Historically, according to the New Economics Foundation, the OBR has ‘dramatically underestimated the impact of austerity on growth which ultimately led to higher national debt’. In other words, it has overemphasised the positive impact of cuts on the public finances in the short-term without accounting for the long-term impacts of these cuts on economic growth.

Over the long-term, austerity has undermined the foundations of our economy by increasing poverty, exacerbating disability and chronic ill-health, and constraining public sector investment.

When it comes to poverty, the failure of incomes to keep pace with wages is not just the result of the cost of living crisis it’s also due to cuts to welfare payments and caps on public sector wages that were a central part of the cuts made since 2010.

Even before 2020, the UK had experienced the longest stagnation in wages since the Napoleonic Wars. Rising inflation exacerbated this challenge by eroding incomes further. We now have the highest rates of absolute poverty in 30 years, including a quarter of children living in absolute poverty.

Despite cuts to welfare payments, the increase in poverty means lower tax revenues and higher expenditure on income support. Greater levels of poverty also constrain demand and, in an economy dominated by consumption, this equates to lower investment over the long-run.

What’s more, higher rates of poverty have combined with greater levels of mental and physical ill-health to keep millions of people out of the workforce. Poverty is, in itself, in part to blame for worse physical and mental health outcomes but so is the steady collapse in our health and social care services due in part to inadequate funding.

Fewer people in work means lower tax revenues and higher expenditure on income support not to mention constraining growth over the long-term by making it harder for businesses to attract and retain employees.

None of these factors make it into the OBR’s calculations. Why? Because the institution has chosen to adopt a particular approach to economic forecasting one that overemphasises the positive short-term impact of cuts on the public finances, and underemphasises their long-term impact on growth. This is a political choice even as it is presented as a neutral and technical one.

In fact, as Wendy Brown observes in her book Undoing the Demos, the depoliticisation of policymaking has been a longstanding trend among neoliberal governments for the last forty years.

The mathematisation of academic economics has involved attempts to impose the ‘right’ answers to critical policy questions, such as the rate at which to levy corporation tax. The economist’s model might spit out a number say 17 percent which, they claim, will maximise corporation tax revenues. But they won’t tell you the assumptions upon which that figure rests.

They might, for example, have assumed a certain percentage of revenues is lost to tax avoidance and evasion each year, which makes the ‘optimal’ rate of tax lower than what you would expect with a more effective tax enforcement system. But this assumption is not something we must take for granted. We could use our limited resources to build a more effective tax enforcement system rather than cutting corporation tax.

When these assumptions are not revealed, democracy suffers. The public is presented with a statement from an apparently objective economist that appears to have the status of fact: ‘the optimal rate of corporation tax is 17 percent’. There is no way to challenge this ‘fact’, because the political assumptions upon which the calculation was based are shrouded in secrecy.

Over the long-run, the space for public engagement in policymaking shrinks. Political debates taking place between different social groups are replaced with technical debates taking place among policymakers.

Reeves’ decision to hand more power to the OBR exacerbates this problem. Rather than active, democratic debate about taxation and spending, the public will instead receive pronouncements from on high as to whether a particular policy choice is ‘fiscally responsible’.

There will be no way for the average person to challenge these pronouncements, because these statements will be presented as facts, rather than the results of a particular organisation’s calculations calculations that are, as we have seen, inherently political.

In place of democracy, we end up with technocratic autocracy.