While Rachel Reeves, the Chancellor, agonises over whether to change the UK’s fiscal rules so as to give herself more wriggle room on tax and spend, the European Union is attempting to do precisely the opposite by re-imposing strict fiscal limits on member states that were suspended during the pandemic.
You can read this apparent juxtaposition both ways. Either as vindication of the UK’s decision to leave the EU, which means that subject to the disciplines of markets, it is free to do exactly what it wants on fiscal matters.
Or as evidence of a country which is dangerously off the leash with potentially worrying implications for debt accumulation and sustainability.
Even as a member of the EU, Britain enjoyed considerably more leeway than those who had opted to join the euro. For what it is worth, the last time Brussels took a look, Britain was found to be seriously non-compliant with EU rules on excessive deficits.
But given that the UK had in the past always studiously ignored such strictures, and had by then already left the bloc, the EU’s findings were of academic interest only.
In any case, since adopting its own fiscal framework in the mid-1990s, the UK has changed the rules no fewer than nine times, and in most cases it has been to ease the fiscal constraints, rather than to toughen them up.
The last time was under Jeremy Hunt as chancellor, when the rule requiring debt to be falling as a proportion of GDP was extended from three to five years.
All these loosenings have been achieved without any noticeable effect in bond markets. Reportedly, Reeves is considering a further change – this time in the way the public finances account for losses incurred by the Bank of England on its quantitative easing programme.
Potentially, this could give her a bit more fiscal headroom to do the things she wants. The proposal has already been much criticised as accounting “jiggery pokery”, but even so I imagine it could be pushed through without unduly disturbing the markets.
Up and up goes the national debt, but still there seems to be no shortage of investor appetite for UK gilts. It is only when debt is obviously about to be put on an unsustainable footing that markets react, as they did in the wake of the Liz Truss mini-Budget.
With members of the euro, it’s both more complicated and exacting. The rules on excessive deficits were suspended during Covid but are now being re-imposed, having undergone a bit of a rejig which allows for a little more flexibility.
Member states are meant to have credible plans for reducing the deficit to 3pc or less of GDP and to show a clear pathway for getting overall debt down to 60pc of GDP.
Late last month, the European Council launched excessive deficit proceedings against a further seven EU member states, bringing to eight the number of governments under such a procedure. Romania had already been made subject some years ago.
Corrective budgetary measures are expected to be imposed on the miscreants, five of which are members of the euro, towards the end of the year. It’s already shaping up to be quite a bun fight.
Particularly awkward is France, which even before the last government fell, had no credible plan for the required deficit reduction. Proposals put forward by the current caretaker government are also widely considered to fall well short.
If the Left-wing Nouveau Front Populaire alliance, which won the largest number of seats in recent French elections, manages to form a government, there is even less chance. France has in the past repeatedly broken deficit rules, but has so far faced no sanction.
Theoretically, nations subject to proceedings could be fined up to 0.05pc of GDP – which in France’s case would amount to around $135bn (£106bn) – but no state has so far suffered this penalty.
European Central Bank (ECB) threats to cut offending governments out of its bond-buying programmes similarly look entirely hollow. What is the ECB going to do? Sit idly by and watch the single currency ripped apart anew while markets test its resolve to destruction?
Yet it scarcely needs saying that if France, Europe’s second-largest economy, is let off the hook, nobody else is going to comply either.
Once again, the uniquely unstable nature of Europe’s currency union is plain for all to see. Member states refuse to comply with the degree of fiscal restraint that is meant to underpin monetary unity.
Is the German cheque book forever to underwrite the fiscal profligacy of Germany’s eurozone bedfellows?
At some point, Berlin’s patience will break. The euro has already survived a number of near death experiences, so it would be foolish to depict the crisis now looming as the one that finally breaks the camel’s back.
No doubt the single currency’s high command will find some way of glossing things over anew and staggering on regardless.
Here in Britain we are these days sublimely beyond the reach of Europe’s fiscal thumbscrew. At most, the Council’s procedures are no more than a handy yardstick against which to measure our own fiscal freedoms.
What we choose to make of them is of course another matter entirely. You can only bend the rules so far before they snap.
