We need an Office for Budgetary Radicalism

We really are in a world of trouble. The new Labour government has received some justified criticism for the deliberately despondent narrative it is trying to establish ahead of the Budget. Business requires confidence and politics needs light and shade. A bit more optimism is clearly needed. But then again, the outlook really is bleak.

Yesterday's latest fiscal risk report from the Office for Budgetary Responsibility (OBR) makes for painful reading. Deficits have averaged just under five per cent of GDP since the start of the century. Debt has more than tripled as a share of GDP to 98.1 per cent, the highest level since the early 1960s. Public spending is at nearly 45 per cent of GDP - its highest level since the mid-1970s. The tax take as a percentage of GDP is approaching its highest level since the late 1940s. There is a £22bn budget hole, whatever the Conservatives try to say to the contrary. If anything, Rachel Reeves should be even angrier at the mess she's been left.

The problem is this may not be rock bottom. The report assesses three long term trends that based on current policies "would eventually put the public finances on an unsustainable path". A path that is unsustainable will not be sustained. This is civil servant speak for financial collapse.

The trends in question are obvious and unavoidable. The population is ageing, which means higher health costs and a smaller working population to generate tax revenues. The world is becoming more dangerous, which is making increased defence spending something of a non-negotiable. And the climate is changing, which means ever more costly climate impacts and instability, as well as an urgent need to invest in climate resilience and decarbonisation. Yes, these investments would generate returns and reduce long term costs, but there are upfront costs and even if we do reach net zero by 2050, climate impacts will still intensify for decades to come.

"Over the next 50 years, public spending is projected to rise from 45 to over 60 per cent of GDP, while revenues remain at around 40 per cent of GDP," the report states. "As a result, debt would rise rapidly from the late 2030s to 274 per cent of GDP in our baseline projection." Even fiscal doves start to get nervous at those sort of debt-to-GDP ratios. 

There are no easy answers here, as Reeves and co are finding. But it is increasingly obvious that we have reached a point where the scale of the challenges are so big that it is more risky to persist with tweaks to a status quo that is clearly not working than it is to try something more radical. 

The comparison with the late 1940s is informative. Unlike back then, the UK may not be at war (although one is raging on mainland Europe and another has brought fresh horrors to the Middle East), but we are still recovering from the worst global health crisis since the 1920s, the worst financial crisis of the post war period, the worst energy crunch since the 1970s, and a self-imposed rupture with our largest trading partner. We are trying to recover from all this after decades of chronic underinvestment and with a reliance on infrastructure that was often built in the 19th century.

The case for massive investment and a full spectrum attempt at national renewal is obvious. Keynes was right then, he is right now. The alternative is another decade of decline. I am reminded once again of Boris Johnson's post pandemic talk of a 'Rooseveltian' green stimulus - a promise that went the same way as so much of his baseless bluster. The idea was right, the execution was terrible.

Now a Labour government has been elected in a landslide and with a huge mandate for 'change'. But where is the post-crisis equivalent of the NHS or the promise to harness the 'white heat' of technology? The proposals for planning reform, GB Energy, and a National Wealth Fund are all welcome, but the sums involved remain rounding errors in the national accounts. There appears to be zero appetite for reviving the proposed £28bn a year of green investment that could still make such a difference.      

It is notable that the OBR's hugely sobering report came on the same day that CBI boss Rain Newton-Smith delivered an extremely pointed assessment of the investment climate, warning that businesses are beyond frustrated after months and years of waiting for policy clarity on a net zero transition that was meant to be at the heart of the previous government's economic strategy.  

It is somewhat unfair to criticise a government that has been in office for less than three months for this uncertainty, but it is equally true that the current situation cannot continue. Urgent and important policy decisions are awaited on planning reform, electricity market reform, grid connection reform, building standards, CCS and hydrogen subsidy frameworks, green steel projects, gigafactories, and a lot more besides. All of these decisions come with cost implications and political challenges, but deferring and diluting the bold choices that need to be made will simply serve to make a terrible fiscal outlook even worse. The Treasury needs to back a maximalist approach and if it can't generate the taxes needed to fund catalysing investment it needs to borrow to invest and back reforms that can unlock higher levels of private investment. 

The risk is that underpowered investment in the net zero transition may fractionally trim the deficit in the near term, but in the longer term it will just lock in higher costs that result in a debt spiral. Something has got to break the cycle. The tacit message from the Office for Budgetary Responsibility is that maybe what we really need is an Office for Budgetary Radicalism. The alternative does not really bear thinking about.