The UK needs a “more modern and imaginative” set of fiscal rules to drag it out of stagnation and boost growth, said Jim O’Neill, a prominent economist and veteran of Goldman Sachs.
(Bloomberg) — The UK needs a “more modern and imaginative” set of fiscal rules to drag it out of stagnation and boost growth, said Jim O’Neill, a prominent economist and veteran of Goldman Sachs.
O’Neill, who served as an adviser to previous chancellors George Osborne and Philip Hammond from 2015 to 2016, said the UK was being constrained by Chancellor of the Exchequer Jeremy Hunt’s “nonsensical fiscal rules” for the public finances.
Currently, the key goal which Hunt is struggling to meet is to get debt falling as a share of GDP in five years’ time. That meant in last month’s budget, Hunt was limited in the amount of spending he could commit to problems like tackling backlogs in the National Health Service, easing staffing issues in child care, or improving transport links across the country.
O’Neill, now a cross-bench peer in the House of Lords, said Hunt needed to ditch his fiscal rules to allow for more borrowing to fund capital investment and encourage input from private sector investors. His comments prod Prime Minister Rishi Sunak’s government to rethink its handling of the economy ahead of an election that must be held by early 2025.
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“If you don’t ever get any growth, you’re never going to get low debt,” O’Neill said in an interview. “I think the time has come for what I’d call a more imaginative, modern Gordon Brown ‘golden rule.’”
Brown, during his time as Labour chancellor between 1997 and 2007, vowed to borrow only for investment purposes and not for capital spending. O’Neill said that if the government’s budget watchdog, the Office for Budget Responsibility, formulated a similar rule, this could boost Britain’s potential.
“They way to do it and maintain credibility is to ask the OBR,” he said. “Having a body like the OBR is sensible but what is really stupid is to have their lives dominated by their forecast of GDP over the next two years.
“What they should be asked to do, along with the UK Infrastructure Bank or other credible independent bodies, is devise a fiscal rule that would allow for investment in those areas that you independently identify will have clear positive multiplier effects.”
The government should “embrace that,” O’Neill added, “because how else do we get more investment spend?”
As of the fourth quarter of 2022, the UK was the only member of the Group of Seven developed economies which had not recovered to pre-pandemic levels of output. Even before Covid hit, real GDP was growing more slowly than the likes of Canada, the US, France and Germany.
For the last six years, O’Neill said, the government has been “intellectually dead, partly because of the characters but also it’s just been frozen by Brexit.”
While he admired some of the measures introduced by Hunt in his budget, including the “full expensing” regime which allows businesses to offset machine and plant investment against their taxable profits, O’Neill said Hunt was operating with his hands tied due to his fiscal rules.
“If you came down from Planet Z and were trained in the dismal science and saw that what was constraining a government’s policy, you’d be like, what is the matter with these idiots?” he said.
Investment in the UK, and the part it can play in spreading wealth beyond London, is a matter close to the heart of Manchester-born O’Neill. He currently chairs an investment firm called Northern Gritstone, which plows money into university spin-outs in the north of England.
But he says too little is being done to encourage other investors, including infrastructure specialists and pension funds, to focus on the UK. While a lack of government funding has held back development outside London, O’Neill also blames local authorities for failing to find ways to cultivate sufficient expertise.
“One my specific jobs under Osborne was to send out a request to every English region asking what they’d want out of devolution,” he said. “We got 41 back. Only seven of them were worth giving time. All the others were saying, ‘We want money but we don’t know what we want it for.’”
Without a clear strategy, he said, regions will fail to attract any private capital.
O’Neill does have solutions, some of which he suggested in a review completed for the Labour Party on how to make the UK more attractive to startups.
Top of the list was a reform of the taxpayer-backed British Business Bank. Under O’Neill’s plan it would launch three “funds-of-funds” — pots of money run by experienced investors which would put cash into private funds focused respectively on university spin-outs, alternative energies and social inequalities.
O’Neill hopes both major political parties will listen to his recommendations. He thinks business leaders are rightly sanguine about the possibility of a Labour victory, as shadow chancellor Rachel Reeves has set out “a framework for a real economic strategy” and realizes the importance of a strong economy.
“But if Rishi and Jeremy carry on like this, the polls have already started tightening a bit and anything can happen in another 18 months,” O’Neill said.
Read more:
- Hunt Would Have Failed Every Fiscal Rule Set by His Predecessors
- UK Tories Hail Hunt’s Budget Offer But Some Fear Spin Unraveling
- Sunak Thinks Timing UK Tax Cuts Just Right Can Save the Tories
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