With a gloomy economic outlook, Rishi Sunak will need to learn the lessons of the past to impress voters

The replacement of Sajid Javid as chancellor may owe more to the exercise of political control, or even to misunderstanding, than to real differences in fiscal policy. But the change does challenge the authority of the treasury, writes Vince Cable

The new chancellor has been criticised for his lack of experience (Getty)

It was Gordon Brown who coined the phrase “prudence with a purpose” to describe those long-forgotten days when an incoming Labour government was trying to impress its new, previously Conservative, voters and the markets. It put on a display of fiscal rectitude based on what – at the time – seemed draconian controls on public spending. The Treasury was never happier or more powerful.

From New Labour to the new Conservatives, there is the opposite problem: how to satisfy a previously Labour constituency of the voting public, who have been promised an end to austerity and a Brexit dividend. The replacement of Sajid Javid as chancellor by the untested Rishi Sunak may owe more to the exercise of political control, or even to misunderstanding, than to real differences in fiscal policy. But the change does challenge the authority of the treasury.

Gordon Brown’s more enduring legacy was a set of fiscal rules to provide a macroeconomic framework within which the treasury should set its tax and spending commitments. The coalition’s establishment of an independent Office of Budget Responsibility (OBR) went on to reinforce his rules. The OBR was charged with marking the government’s exam papers, to stop the budgetary cheating of which Labour was accused in its later years.

In recent months, Sajid Javid had already signed up – without acknowledging the source – to Gordon Brown’s Golden Rule, namely that the government must match its current spending with revenue, over the economic cycle. And any government borrowing must be reserved for public investment, subject to a second rule that the public debt should be sustainable. This has meant, in practice, a commitment to a falling share of net debt in GDP. Under Philip Hammond, and earlier George Osborne, there was a more severe fiscal rule: that public borrowing for all purposes should fall to zero, reaching an overall government surplus by 2022-23. The current government was on track to fail that test, and will therefore welcome the opportunity to redefine the rules and reset the dial.

The likely fiscal position at the end of March looks worrying. Instead of forecast net borrowing of £29bn over the financial year, the actual figure is expected by the OBR to be nearer to £47bn. Data revisions (not least the treatment of student debt) have added to spending, and many government departments are known to have overspent in recent months – £12bn was promised for the NHS particularly in December, even before any handouts in this year’s budget. These factors had already wiped out the headroom which had been allowed for to cushion a no-deal Brexit.

The economic outlook is not good. If growth remains anaemic, or disappears, there will be a knock-on effect, diminishing government revenue and creating a bigger budget deficit. Over and above continuing domestic uncertainties around Brexit – and the likelihood of a minimal deal or no deal at the end of the transition year – the EU itself is teetering on the edge of a recession. Meanwhile, the world economy is set to be damaged by the coronavirus epidemic, and by continuing trade policy conflicts.

If these factors led to no more than a temporary blip in fiscal performance – in the form of a surge in government borrowing – it could be dealt with by redefining the beginning of the next economic cycle (a trick which discredited Labour’s fiscal rules in 2005), or by redefining the baseline from which performance is judged. The OBR will tut-tut but so long as markets don’t react badly, by pushing long-term interest rates up or sterling down, the public will not notice.

The bigger problem is that there is very little scope to splash out on more public spending without raising taxes. The rumours of very un-Conservative tax raids on pension contributions and mansions may just be part of the power play between No 10 and No 11. But they highlight the dilemma of a government which has promised not to increase business, income and value-added taxes – indeed which has promised tax cuts – but nonetheless needs to raise more revenue if it wants to spend more.

My expectation is that the promised spending increases on health, schools, police and social care will be offset by cuts elsewhere. In coalition, we saw time and again the Conservative reflex for cutting working-age benefits. With a large majority in parliament, there is every reason to think they will return to the list of ideas junked as unacceptable during that period. And there is not likely to be much relief for the unfashionable bits of the public sector: prisons, overseas aid, post-16 education and local government. The 5 per cent across-the-board government spending cut ordered by Sajid Javid will, in all probability, persist and will be painful. The magic money tree may prove to be rather bereft of leaves, after a short-lived spring blossom.

The promise of lots more capital spending may also prove disappointing. The treasury has an institutional dislike of capital spending. Officials there are highly sceptical that there are many good projects to invest in, and does its best to throttle those that are available. The treasury machine suspects that instead of finding productive, income-generating investment, ministers will squander money on shiny new schools and hospitals for loyal MPs to show off to their constituents. Or that they will invest in eye-wateringly expensive grands projets like aircraft carriers and HS2, simply adding to debt.

Even under as powerful a chancellor as Gordon Brown, the treasury’s ingrained dislike of government borrowing to finance investment led to the disastrous, costly private finance initiative, designed to get borrowing off the balance sheet. And during the Conservative and Liberal Democrat government which followed, the golden rule embodied in the coalition agreement was quietly buried, and capital investment axed. Transport and housing projects were jettisoned to keep government borrowing down.

Those who expect Mr Sunak to be a free-spending, populist chancellor are almost certainly mistaken. As a creature of the city, his instincts are Conservative. Meanwhile, he is virtually unsackable since Johnson cannot credibly lose another chancellor. And whatever happens with shared special advisor teams, the treasury has all the heavy weapons.

It has on its side a mastery of baffling public accounting complexity; an extensive Whitehall network of departmental supplicants; and the crucial political armoury of time and patience. Mr Cummings will almost certainly have given up in despair, and gone to California, long before Whitehall habits change.

Sir John Vincent Cable is a British politician who was leader of the Liberal Democrats from 2017 to 2019