UK could boost growth by radically reshaping the Treasury: Peacock
LONDON, June 20 (Reuters) - UK finance minister Rachel Reeves insists higher economic growth is her top priority, but the government's current plan to address the country's chronically low investment is unlikely to be ambitious enough. What may be needed is a structural rethink of the finance ministry itself.
Reeves has adjusted her fiscal rules to allow for an extra 113 billion pounds of investment over five years, while remaining committed to ensuring debt falls as a proportion of national income within five years.
In the UK government's latest spending plan unveiled last week, she started to allocate the extra capital to areas including defence, housing, transport infrastructure and a new nuclear power plant.
Even so, according to the Office for Budget Responsibility, an independent fiscal watchdog, UK capital spending will climb to a peak of 3.9% of GDP in 2027/2028 but then fall back in the following two years, continuing a limp public investment record stretching back to the global financial crisis.
Reeves is searching for other growth levers, including deregulation and increased UK investment by British pension funds. Additionally, the government is seeking to streamline planning laws and taking steps – albeit small ones – to rebuild trade relations with the European Union.
But the government is fundamentally hamstrung by its fiscal rules. Departments are currently required to go cap in hand to the finance ministry to learn what they can spend and then undergo frequent check-ins to see if the fiscal position has deteriorated, which could lead to spending cuts or tax rises. This is not a system that will produce a viable long-term growth strategy.
The International Monetary Fund – not known for being a fan of unfettered state spending – said last month that the UK should consider taking a more pragmatic approach to avoid having to change policy too often. The IMF suggested minor breaches should not require instant corrective action and that assessment of the rules should be done no more than once a year.
But something more radical is likely required for Britain to break out of the low growth, low productivity loop it has been trapped in for almost two decades. Over this period, debt as a proportion of GDP has almost tripled while the national tax take has held steady, suggesting that part of the problem might be with the way the finance ministry operates.
The machinery of government needs recalibration to focus more systematically on productive investment that can ultimately help to drive debt down over time.
Reeves is trying on this score. She has asked the OBR to assess the long-term impact of capital spending decisions to determine whether they could improve public finances. She is also changing the Treasury's "Green Book" rules that dictate approval of capital projects, shifting from a narrow cost-benefit analysis to an assessment of the impact on broader strategic goals such as lifting poorer regions of the UK.
However, a fundamental issue remains. The Treasury still wields huge influence within the UK government, and when growth falls short, the impulse is typically to tighten the fiscal screws, thereby worsening growth prospects.
The Institute for Government, a UK-based think tank, has argued that the economic heft of the prime minister's team needs strengthening as a counterbalance. EU nations – Germany, Spain and the Netherlands among others – have both a finance ministry and a separate, growth-focused economy ministry at the heart of government.
Calls for a dramatic change in the Finance Ministry are growing. Maurice Glasman, who heads "Blue Labour", a campaign to reverse what it says is the Labour Party's abandonment of working-class communities, advocates abolishing the Treasury, scrapping fiscal rules and pursuing heavy infrastructure investment.
While Glasman's prescription has little chance of being implemented in full, his ideas could gain influence within a government threatened by the rise of Nigel Farage's populist Reform UK party, which is targeting traditional Labour voters. Recent opinion polls have given Reform UK 27%-32% public support compared with 22%-24% for Labour.
Ensuring public finances do not spiral out of control is, of course, critical for any government. And less oversight by the Treasury could result in wasted taxpayer money spent on unproductive investments that appeal to the political base. Moreover, the bond market has not reacted well to perceived UK fiscal imprudence in recent years, as demonstrated by the rapid demise of Liz Truss's premiership of 2022.
But bond investors are apt to respond more positively to a long-term, investment-led approach to reducing public borrowing, even if it involves some upfront spending. It helps that the UK currently faces less political uncertainty than some of its peers and is in the middle of the pack in terms of developed market debt burdens.
Reeves appears to understand that an investment-led structural reset is required to jump-start the UK growth engine. But to make that a reality, the first change may need to be rethinking the relationship between the Treasury and the prime minister's office.
The opinions expressed here are those of Mike Peacock, the former head of communications at the Bank of England and a former senior editor at Reuters.
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