Rachel Reeves’s ‘fiscal rules’ are pointless and unsustainable – says Rachel Reeves

‘Clueless’ Chancellor’s self-imposed rules don’t work and she knows it

Rachel Reeves’s speech at Labour’s conference has been rightly derided as drab, smug and devoid of ideas – as it was always going to be. But Reeves is intelligent enough – or was, a couple of decades ago, to know that she is talking complete hogwash now.

Reeves – and her boss Keir Starmer – have excused all their appalling decisions so far, as well as the further cuts she’ll be announcing in November’s budget, on the (basically invented) ‘black hole’ in the national finances and the need to adhere to the (arbitrary) ‘fiscal rules’ she has set for how the national finances basically need to be run.

But the very idea of fiscal ‘rules’ is a nonsense – national finances do not work remotely like a household budget, however keen the red and blue Tories are of referring to them as one – and when Reeves worked for the Bank of England’s ‘Structural Economic Analysis’ unit, she co-wrote a discussion paper in which she discussed the pointlessness of central banks announcing set rules, because either no one would believe they would stick to them, or if they did believe them they would stop listening to anything the banks said about them, so banks might give lip service to rules but don’t follow them. Crucially, Reeves went as far as to point out that then-governor of the Bank of England said that ‘mechanical policy rules are not credible‘:

Monetary policymakers may say they are committed to low inflation, but agents would expect them to renege – so central bank communication could be just ‘cheap talk‘. On the other hand, if agents know that the central bank is following a rule rigidly then there is nothing they can learn about the course of monetary policy from communication, and hence are unlikely to react to it.

However, central banks – the Bank of England included – typically do not follow simple rules. Although the mandate of the Bank of England is clear, the MPC has discretion in terms of their use of the policy rate to meet the symmetric inflation target set by the Chancellor of the Exchequer.5 As King (1997) points out: ‘Mechanical policy rules are not credible – in the literal sense that no-one will believe that a central bank will adhere rigidly to such a rule irrespective of circumstances. No rule could be written down that describes how policy would be set in all possible outcomes. Some discretion is inevitable.’

‘No rule could be written down that describes how policy would be set in all possible outcomes’ – hard and fast rules are known to be nonsense because circumstances change.

Reeves used fiscal ‘rules’ and the ‘black hole’ that relies on them as an excuse to tell government departments to get ready for even deeper cuts than the Tories already made, and to tell voters that she would have to make ‘tough decisions’ – a message expected to be repeated (again) by Keir Starmer in his conference speech today:

But she is already considering changing the rules on the fly – which means they’re not really rules – though she has no intention of reversing her plan to kill 4,000 pensioners each winter or to continue starving children through the costs-more-than-it-saves two child benefit cap, even though the Bank of England has told her she’s got at least £10bn more than she claims to have thought, because of government ‘gilts’ maturing.

And she’s being encouraged to change them further still, by some very not-left-wing financiers, because the rules she has made are, well, pointless and counterproductive, basically. Prof Iain Begg wrote for the London School of Economics that she should ‘rethink the fiscal rules’, basically because they don’t make sense:

Begg was reiterating what he wrote in March after she gave the ‘Mais Lecture’:

Just like Tories from Cameron and Osborne in 2010 onwards, to justify a clearly ideological set of cuts and austerity, Reeves and Starmer using a claim that the outgoing government left a ‘hole’ in the public finances combined with a claim that her ‘rules’ are the only way to ‘fill’ the fictional hole. But – again, just like them, she knows full well that such rules are themselves a fiction and one that Chancellors and central banks will change or throw out entirely if it ever suits them.

And, just like the Tories from 2010 onwards, this fiction is lethal for ordinary people. Even the parliamentary library refers to the link between austerity under the Conservatives and at least 300,000 excess deaths that ensued, along with an explosion in poor physical and mental health. And Labour knows Reeves’s policies will kill people – starting with 4,000 pensioners a year – blight the lives of millions of people, including the at least 1.5m children already living in poverty, and put patients in danger through Labour’s NHS rationing plans and the use of non-doctors to replace actual doctors.

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