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A tip for the Treasury
In the weeks when it had become obvious that Andy Burnham was going to become Prime Minister, economic advisers sympathetic to him began to lay the groundwork for a change in the fiscal rules. That groundwork lasted about a day before the bond markets reminded everyone who’s in hock to whom and the fiscal rules were firmly recommitted to. Once in office, John Healey’s team even started telling people he was a continuity Rachel Reeves.
Nevertheless, I was still briefed by a source with Treasury experience that the commitment to the fiscal rules – as they stand – was all about getting through Budget number one. After that, there was room for a rewrite of the rule book.
Since then, because of global events, yields have surged even more and Britain has never been more in hock to the bond markets. I think that means any change to the rules, even at future Budgets, is a lot less likely. If the rules ever do come up for an edit, might I suggest a change that I’m pretty sure would make certain other government departments rather happy.
Instead of measuring public sector net financial liabilities as a share of GDP (the PSNFL rule), why not strip out the boost from population growth and use a rule based on GDP per head?
As things stand, the fiscal rules let the occupant of No. 11 borrow more if the population grows – regardless of who the newcomers are. Tie debt to GDP per head and more headroom for borrowing only arises if living standards improve too.
That would bake in an incentive, not to reduce immigration entirely, but to encourage the government to make more of an effort to guarantee those migrants who do make a home in Britain are high earners. Every new arrival would have a dual impact on the rule. If they contribute more than they cost the state, then debt should be lower. Plus, if their economic output is above average, then they’d pull up average living standards and give the Chancellor more room for manoeuvre. Come in on low-paid work or as a dependant and the debt rule becomes hard to meet. More simply: every new high earner would make the Chancellor’s sums easier while every low-wage arrival would make them harder. HMT’s addiction to cheap labour would be broken overnight.
The Treasury would obviously hate this given, right now, pretty much every new arrival, regardless of whether they are high or low-skilled, can be a boost to nominal GDP. But the Home Office, and electorate, just might. Oh, and one more bonus: it’s tighter than the previous rule, so the gilt market will probably like it too.
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