This is an approximate transcript of the inaugural meeting in Parliament on 20 October 2025 of the Working Group on Progressive Economics, chaired by Neil Duncan-Jordan on the subject of static fiscal rules. It was attended by MPs and members of the House of Lords and their staff, and by invited guests.

Welcome from Neil Duncan-Jordan

Good afternoon and thank you for coming to today’s event: the first meeting of a new Working Group on Progressive Economics and the launch of its first Working Paper: Are Static Fiscal Rules Compatible with National Renewal?

I wanted us to have this group because, of course, if we do not deliver economic renewal, we will not see any of the national renewal we were elected to deliver. And right now, it looks as if we are not on track to turbo-charge the economy in the way that is needed.

Today we will focus on the fiscal rules; future sessions will cover wider aspects of what it will take to produce a strong economy that works for the benefit of UK citizens – our voters.

These are big and complex subjects, and they can seem extremely technical, so I felt we needed to give MPs and Peers a regular opportunity to explore these issues in a round-table setting with experts who have worked in and researched the field and who can help parliamentarians with the difficult challenge of distinguishing fact from rhetoric in discussions about the economy.

The Chancellor claims that the key to economic renewal is to stick rigorously to her ‘iron-clad’ fiscal rules; others say that it is precisely those fiscal rules which are the biggest obstacle in the way of us delivering what we have promised the electorate.

I am delighted that we have such a strong expert panel with us today to help us explore this question.

Many of you will know Ann Pettifor. Ann is Director of PRIME (Policy Research in Macro-Economics) and was one of the few economists who predicted the global financial crisis. Ann is perhaps best known for her work on The Green New Deal. She wrote the book, The Case for the Green New Deal in 2019. And she has written about the dangers of debt and deficit hysteria and the need to reform our financial institutions. Ann is the perfect person to help us get to the bottom of the issues we’re talking about today.

Vince Gomez is a former bond trader and a member of the Bank of England’s citizen forum. Vince had a very successful career in the city—and when the Global Financial Crisis struck, he realised that it was not only economists who had failed to predict it: hardly anyone in the City fully understood what had just happened either. Since then, Vince has been assiduously studying, speaking and writing about the myths we all believed about the economy, and specifically about money. An informed bond-market perspective will be vital for today’s discussion.

Mark E Thomas is the Founder of the 99% Organisation, His background is mathematics and business strategy – for many years he ran the Strategy Practice at PA Consulting Group. His book 99%: Mass Impoverishment and How We Can End It was one of the FT’s Best Books of 2019, and he is also the lead author of the group’s first working paper on fiscal rules.

The bulk of the session will consist of an opportunity for you to ask questions of the expert panel, but before that I will ask Mark to give you a quick summary of the working paper.

Introduction to the Fiscal Rules

Thank you Neil, and thank you everyone for coming.

As Neil said, I am going to quickly set the scene before we have an in-depth discussion with the expert panel.

I’m going very quickly – just to set the context – to summarise the need for national renewal, and then I’m going to focus on the fiscal rules themselves. And finally I’m going to sketch out what we could do if we wanted something that would enable the government to drive national renewal.

But let’s start with the need for economic renewal.

The Need for Economic Renewal

In January 2024, Sir Keir Starmer called for a decade of national renewal. I doubt if any of us would deny the need.

Our economy is weak, real wages have stagnated, one in three children are living in poverty, foodbank usage has exploded, our public services are struggling – and many are at risk of failure. Schools and universities are cutting back. Our national infrastructure is crumbling. And we are not doing enough to protect the environment.

There is plenty to do.

And, as this chart shows, our problems go way back: since the 1980s, we have seen slowing economic growth, and on IMF forecasts, this decade is likely to be the worst since the 1920s. Many of the problems we face are directly or indirectly the result of this poor economic performance.

If we want national renewal, we must have economic renewal; and that is where the fiscal rules are supposed to come in. The fiscal rules are supposed to be the bedrock of this: they’re meant to ensure that the government spends responsibly and brings down the level of debt to GDP; responsible spending is supposed to help kickstart growth.

Because this is so important, we are told, these fiscal rules are fixed; they are iron-clad; they are non-negotiable.

These are very important claims and, if true, they would constitute a strong argument for sticking with the fiscal rules even if it is difficult. So, we should take them seriously and investigate whether there is any truth in the arguments for fiscal rules of the kind we have today.

Perhaps the best test is the practical results we have seen from our fiscal rules. If the rules have worked, we should see it in the data.

Fiscal Rules

The Historical Impact of Fiscal Rules

This chart summarises the UK’s post war economic history, with and without fiscal rules.

The horizontal axis shows gross debt:GDP. Generally speaking we would be happier to see that declining over time. The vertical axis shows real per capita GDP – the size of the economy adjusted for inflation and population growth. We would want to see that growing over time. So, ideally, we would see the line moving diagonally upwards from the bottom right.

The line is colour-coded to show the period before we had fiscal rules and the period since.

As you can see, in the period before we had fiscal rules (1945-97), the line was moving in the right direction: debt to GDP was falling, and real per capita GDP rose from around £6,000 to around £26,000. More than a four-fold increase. Not bad. The first set of fiscal rules also saw acceptable performance up until the global financial crisis. But they would clearly not work now.

And every subsequent set of fiscal rules – and we are now on the 10th set – has corresponded with very poor performance.

The rules have not prevented debt:GDP from rising significantly; they have corresponded with almost zero growth. And they have not been immutable. There is no evidence in our history to support this kind of fiscal rule.

Immutable fiscal rules

But perhaps this set is different: perhaps this Chancellor has found the right set of fiscal rules which will do what we need and will not need to be changed when they are found wanting. That seems extremely unlikely.

A truly robust set of fiscal rules would need to determine an optimal total spending profile for government under all circumstances. It would have to give the right answer whether the economy was growing strongly or in recession; it would have to give the right answer if we were in the middle of a trade war or if we were about to join a major trading bloc; it would have to apply whether we were at peace or at war; it would have to apply whether the health of the population was good or whether we were in the middle of a pandemic, etc. The chart illustrates the challenge.

Even if the fiscal rules took all these factors into account, it is hard to believe that a simple rule could produce an optimal spending profile for the government. And in fact, all the fiscal rules we have had so far – including the current set – have tried to do something even less plausible: they attempt to define budget responsibility based only on economic and financial indicators such as debt and deficit: they simply ignore wars, pandemics and other external factors. It is just not credible.

Fiscal rules are not reliable as a guide to responsible spending, and they never could be. But of course, that is precisely what they are used for.

Fiscal headroom

This brings us on to the concept of fiscal headroom. Before each Budget or financial statement, the media are full of speculation about how much ‘headroom’ the Chancellor has to increase spending.

This headroom is the difference between what the (current set of) fiscal rules say the deficit should be and what the Office for Budget Responsibility (OBR) says it will be, if there are no changes in spending plans.

So we should look at the reliability of those forecasts. Fortunately, we do not have to do that work ourselves: the OBR has done its own analysis of its forecast errors, and this is what it found.

The thick red line is what actually happened – how much the government actually borrowed in each year. All the other lines represent the forecasts made at different dates by the OBR.

The first thing you may notice is how large many of the errors are: in several cases the size of the error is greater than the actual borrowing itself. It’s over 100%.

The second thing you may notice is that under austerity, when the government was reducing its borrowing year on year, the OBR forecasts were consistently over-optimistic. But when, during COVID, government borrowing unexpectedly shot up, the OBR forecast was over-pessimistic. There are reasons to believe this may be a systematic pattern: a result of the way in which the OBR assesses the impact of government spending. If so, this means that the OBR is hard-wired to regard an austerity budget as more responsible than an expansionary budget.

What the OBR’s analysis confirms is that the Chancellor’s headroom is the difference between two unreliable numbers: the amount that the fiscal rules say the government should borrow and the amount that the OBR forecasts it will borrow.

Constraining economic policy according to the amount of ‘headroom’ calculated in this way makes no sense. Even the IMF has commented on this and says that no other country lets its strategy be blown off course by such small movements in public finances.

So, in practice, the fiscal rules have not worked, in principle it is hard to see how they could work, and the forecasts they would need, even if in principle they might work, are completely unreliable. That is already enough to make us extremely sceptical about the idea that the fiscal rules are either responsible or compatible with national renewal.

But there is one final argument for fiscal rules that we should consider: “the fiscal rules may not be perfect, but look what happened to Liz Truss.” So, let’s look closely at what really did happen to Liz Truss.

The Liz Truss effect

The accepted story is simple: Truss ignored the advice she received from HM Treasury, ignored the OBR and the Bank of England and, most importantly, proceeded to borrow too much, too quickly. The credibility of the UK as a borrower was damaged by this and the bond markets took fright and moved against both bonds and sterling – and an inevitable crisis ensued.

If that story were true, there would evidence in the data. We would see that when borrowing rises, bond ratings decline and the cost of borrowing rises. We would see that a very rapid increase in debt causes an immediate crisis in the bond markets. We would see in other words that if British politicians borrow too quickly, they are punished by the markets.

Instead, this is what we see. And it is a picture I doubt if you will see anywhere else.

The red line is the ratio of Debt:GDP – the thing which is supposed to drive the market reaction. It starts to rise sharply after the Global Financial Crisis, so we should expect to see the blue line (the interest rate demanded by the market for holding government bonds) rise with it. We do not see that: we see it fall. Even when the bond rating agencies started to reduce the UK’s rating from triple-A to lower  levels, we saw the yield continue to fall.

And in 2020, when Debt:GDP was already at around 80% and the government suddenly found that it needed to find an additional £70 billion to fund the COVID furlough scheme – money it had previously insisted it did not have – and debt shot up to over 100%, bond rates still did not rise.

This is because the government made good use of its institutions – the UK became the first country in the world to use direct monetary financing to pay for the spending. In this case, the Treasury instructed the Bank of England (BoE) to create the money, and the Debt Management Office turned it into bonds which the BoE then purchased directly without troubling the bond markets at all.

But when Truss launched her Budget, without getting the institutions on board, we were in an inflationary environment. The BoE had already started to raise interest rates. And so when Truss’s inflationary Budget came out, with no institutional support, we finally saw a rapid rise in bond rates. After just a few days, this began to cause dangerous problems in the pensions industry and the Bank of England stepped-in. At that point, bond rates quickly stabilised, and with the BoE now backing gilts, and a reversal of the Budget provisions, the problems started to subside. The lack of BoE backing, not the borrowing, was the fatal flaw in Truss’s approach.

There is a vitally important lesson for the UK government in the Truss debacle, but it is about inflation and coordination of the UK’s institutions, not about the pace and scale of borrowing.

What’s the alternative?

So, if we didn’t want to have static fiscal rules because they don’t promote growth, they don’t contain debt and they don’t protect against the Liz Truss effect, what should we do? We still need some way to define a responsible budget.

The current fiscal rules, based on a combination of debt hysteria, inflation hysteria and fear of capital flight have resulted in the government closing all its avenues for increased spending. And without being able to spend responsibly, the government is forced into hoping that the ‘magic of market forces’ will somehow rescue the UK.

They are the opposite of taking responsibility.

If we don’t want to rely on hope as our strategy, here is one option: we move from static fiscal rules to dynamic fiscal rules, and we define a responsible Budget as one which provides a responsible answer to three questions:

1. How much growth should we stimulate? Given the poor growth over recent decades, it is clear that it is a long time since we had a government that gave a responsible answer to that question;
2. What public services does a civilised society need? Both our own pre-financial crisis history and comparison with other developed countries shows that we have not recently had a responsible answer to that question either;
3. How much risk-free saving does the private sector require? Both Banks and Pension funds need risk-free ways to save – their business models depend on it. And of course savers like the certainty that their bank, NSI will not go under.

In contrast to what we are normally told:

• A government deficit equals stimulus to the economy (spending more money into it than we take out in tax), something which has been inadequate for the last 14 years – a deficit is not something to be eliminated;
• Public services are a critical part of being civilised, not a profligate indulgence;
• The private sector needs risk-free ways to save and this is provided by government borrowing.

And there is really no risk of our government debt becoming unsustainable.

So there are three things we need to do if we want to see national renewal:

1. We need to adopt a genuinely responsible approach to economic management – the current approach denies government responsibility and effectively says it is ‘the markets’ job to get the economy moving again. Dynamic fiscal rules would allow the government to step up to its responsibilities;
2. We need to rewire our institutions to support government initiatives – we have seen how powerful they are when they act: we just need them to be a force for renewal;
3. We need a genuine, and courageous strategy for national renewal – to grow the pie and share the proceeds of growth fairly.

Finally, I would like to ask you join me in a little thought experiment: what would have happened after WWII if Attlee had been constrained by today’s fiscal rules?

Conclusion

There is no question that the UK is in a difficult situation now: more difficult than in 1997. But it’s not as difficult as in 1946. After the Second World War, our debt: GDP stood at around 250%, roughly half of GDP had been diverted to the war effort – we were making things that nobody wanted any more. We had lost around 1 million people. And our infrastructure was in worse shape than today.

National renewal was a priority then as now. But if Attlee had had today’s fiscal rules, he could not have prevented mass unemployment as the troops were demobilised, and he could not have implemented the Beveridge Plan. He would have had to say, “Nobody would like more than I to implement this excellent plan, but I have to be responsible and admit that we simply don’t have the money. My first job therefore is to rebuild our government finances, which I shall do by sticking rigorously to my fiscal rules and then – perhaps in a generation – we can look seriously at this idea of a National Health Service and a Welfare State.”

Thankfully, he did not do that, he listened to Keynes who explained, “Anything we can actually do, we can afford.”. He found the money.

And he ushered in the most successful period in the UK’s economic history.

When governments are determined to succeed, they can find a way.

So we have a lot to do, and we need to do it quickly. Ideally, the process should start today.

Thank you. I’m sure you’ve all got lots of questions and ideas.

Discussion

There followed about one hour of discussion on the conclusions of the Working Paper and what it would take to see the required changes to policy.

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This blog was originally posted by the 99% Organisation.

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