OECD Verdict On Brown's Fiscal Strategy

The OECD has just published its latest Economic Survey of the United Kingdom. And it's a pretty damning verdict on 12 years of Labour government.

To start with, the OECD reminds us exactly where Mr Brown's "economic miracle" came from - a huge government spending splurge, combined with easy credit.

On government spending, the following chart graphically illustrates how spending soared after Brown turned on the taps in 2000 (right hand panel). In the following 8 years, it rose by getting on for 10 percent of GDP, and that at a time when GDP itself was rising strongly:

So from being comfortably below the average of other G7 countries throughout the nineties, the UK's public spending burden overtook the average in 2005, and has not looked back.

And as the chart also shows (left hand panel), a large chunk of that extra spending was funded by increased borrowing. Again, Brown moved from borrowing roughly the same, or less, than other governments (as a percent of GDP), to borrowing more than the others - and that is only the official debt, not including off-balance sheet Enron items.


Of course, easy credit was not confined to the public sector. The OECD highlights the fact that the UK's private sector credit boom was allowed to become much more extreme than elsewhere, largely through our extraordinary house price/credit spiral:

"Although the credit cycle touched many assets and countries, the UK housing cycle was particularly intense: nominal house prices more than doubled in the ten years to their peak. The asset-price and credit boom was self-perpetuating for a time, as easy availability of credit stoked demand and raised asset prices, which in turn increased the value of collateral and engendered further borrowing. In the end, this proved unsustainable."

The following chart shows how our house prices spiralled way beyond even the excesses in the US, and still look off-track:

It's a right old mess.

So where do we go from here?

The OECD emphasises the vital importance of clear fiscal rules, setting out a defined path back to sanity. However, crucially - and unlike Brown's now-abandoned 1997 rules - the new rules must deal with spending as well as borrowing, they must encompass Enron debt, and they must be honest about so-called fiscal drag:

"The original fiscal rules could be amended in a number of ways, rather than being reinstated. The reformulated rules should be forward looking, ensure medium-term spending discipline and account more explicitly for off balance sheet public liabilities. Finally, income tax thresholds and national insurance thresholds should be linked to wage, rather than price inflation so that fiscal drag is handled more transparently."


Which is spot on.

We have long called for such rules, and in current circumstances, they are more vital than ever.

Given our dire fiscal straights, we simply cannot leave things to unfettered political discretion. Not only would that consign us and our grandchildren to a life of low growth, high debt, and high taxes, but more immediately, it would expose us to a collapse of market confidence, even worse than we saw in the sixties and seventies (eg see this blog). And trust me - we really don't want to go there.

So let's have one more go.

Mr Osborne, if you're listening, please tell us you misspoke yourself in Birmingham last October when you rejected fiscal rules (see this blog). Please tell us you do agree with the OECD, and that Britain does needs clear rules, including a spending rule. And please tell us what those rules are going to be.

Because you should understand this: if you don't set out a medium term fiscal strategy - backed up by clearly stated rules - you are going to have an even tougher time as Chancellor than everyone is now saying.

You are going to be making swingeing public spending cuts, but they will not be embedded in a bankable strategy, the kind of strategy the markets will demand. You are going to be facing down the howls of anguish all around you, without even getting the market credit you will need.

Indeed, the louder the howls, the more the markets will worry about a Heathite U-turn. You will stand in real danger of repeating the experience of the Wilson government - a whole series of hand-to-mouth emergency budgets, all of which cut spending (and raise taxes), but none of which get you on the front-foot with the markets.

Is that what you want?

Because that's what you're going to get.

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