Fiscal Rules and the Government’s Ministry of Truth
In today’s political discourse, it seems the only question worth asking the British government is, ‘how will you pay for that?’ Several solutions have been offered to this central question in government fiscal policy, from cutting spending on social services, deregulating the economy to foster growth, issuing gilts, or raising taxes, although never on the most wealthy. In fact, this issue of balancing the books has been central to government fiscal policy since 2010, when Labour overspending was questionably diagnosed as the cause of the 2008 financial crisis in the UK. So great was the panic regarding the Treasury’s fiscal solvency in the early 2010s, that the Office for Budget Responsibility (OBR) would be created as an independent review body to scrutinise the state’s spending plans and avoid any unnecessary extravagance.
This formalisation and institutionalisation of previous (rational) concerns regarding the public debt thus created the ‘fiscal rules’ that now dominate political debate in the UK. In fact, so much importance has been granted to these fiscal rules over the last decade-and-a-half that it is difficult to believe they were arbitrary fabrications.
The language of fiscal rules was first established, in keeping with the Thatcherite fiscal positions before him, by Gordon Brown, whose extravagantly-named ‘Golden Rule’ determined that “over the economic cycle, the government will only borrow to invest and not to fund current spending”. The precise nature of ‘current spending’ and ‘the economic cycle’ were, naturally, left undefined. Brown, as his successors at the Treasury would go on to do, would not waste time breaking, or at least questionably interpreting, the fiscal constraints he had set for himself.
As the Chancellor grew in his reliance on Private Finance Initiatives (PFIs) for funding public programmes in the early 2000s, the accounting methods used in calculating the scale of government expenditure were dubious at best. In order to keep the national budget in order, much of the government borrowing for PFIs was kept off the books; 60% according to the Office for National Statistics in 2005 (Jenkins, Thatcher & Sons, p. 261). According to research carried out by Philippa Roe and Alistair Craig from the Centre for Policy Studies in 2004, this sum totalled £100 billion in government borrowing.
This skirting around the self-imposed arbitrary fiscal rules would not be any less egregious after the financial crash, despite the supposed new checks and balances imposed by the chancellor in 2010. Indeed, all the sets of rules that have existed since 2008 have been abandoned because not all could be met. As it quickly became clear that George Osborne’s spending cuts would not bring the quick recovery he had hoped, he subsequently eased up on the rules he had previously deemed absolutely necessary for stabilising public finances (Freedman, Failed State, p. 49). Similarly, fearing an economic fallout in response to the Brexit referendum, he abandoned his plans to bring the economy to a fiscal surplus by 2020.
This trend of setting ‘absolutely necessary’ fiscal rules to justify spending cuts to public services, and later U-turning when the economy begins to suffer, would become commonplace by the late 2010s and the turn of the decade. During the economic crisis following the government's mismanagement of the COVID pandemic, fiscal rules were reasonably abandoned altogether to support the plummeting economy. Just over a year after, Chancellor Rishi Sunak would again change his party’s 2020 fiscal rules in late 2021, a move criticised by the FT as a ‘retrograde move…undermining credibility’. The flagrancy with which the conservatives gamed the economic projections used to justify sticking to fiscal rules in early 2024 would highlight how little respect there was left in Downing Street for their own metrics. Such justifications for the government’s spending plans were so far removed from reality, that the head of the OBR, Richard Hughes, called them a ‘work of fiction’.
It is clear therefore, that over the history of fiscal rules’ existence in the UK political discourse, many of the government’s most consequential decisions on spending have been predicated upon hot air. Much like in Orwell’s Ministry of Truth, the British government simultaneously believes that each rule it sets is objective, while simultaneously altering them when they become inconvenient.
It is clear in 2025 that the government’s approach to its fiscal rules is suffering from Goodhart’s Law. Where previously fiscal rules were used as a means to preserve the economic stability of the country and avoid a debt crisis, abiding by this arbitrary set of rules, regardless of the state of the economy as a whole, has now become the end of government fiscal policy in itself.
Even the primary goal of fiscal rules, to keep public debt constrained as a percentage of GDP, is ironically threatening to worsen the government’s fiscal position. As Labour keeps cutting spending and flirting with austerity to get the economy back in order and ‘fix the foundations’, investors remain unconvinced, raising the cost of borrowing for government as gilts are sold off en masse. Despite acknowledging the damage Tory austerity did to the economy, Starmer’s inability to rethink the blueprint of fiscal rules that lead to such cuts has left investors sceptical as to whether the UK economy will improve, no matter how many arbitrary fiscal rules he sticks to.
Investors could not be faulted for thinking this way either, given Starmer’s own confusion regarding his position on the current set of fiscal rules. Nowhere was this confusion clearer, than when the prime minister proudly proclaimed he had “an ironclad commitment to the fiscal rules”, only 3 months after his own chancellor Rachel Reeves changed them in the Autumn Budget. I am sure in a few more months Starmer will also be trying to convince the public that we have always been at war with Eurasia, and that 2+2 does, in fact, equal 5.
Without regurgitating arguments about how the government must increase spending on services now to avoid spending greater amounts later, it is becoming evident that its rhetorical balancing act is untenable. No longer can the government pretend to be fiscally sound and follow the fiscal rules, because it is these fiscal rules that are partly responsible for its current economic stagnation. To reassure investors and convince them of the strengths of the UK economy, the government must now find an alternative, compelling narrative, and not waver when the going gets tough. Starmer proclaimed he was ‘ready for government’ after spending years as Leader of the Opposition. He should start acting like it.
Image: Wikimedia Commons/HM Treasury
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