Charter for Budget Responsibility

Roger Mullin Excerpts

Wednesday 20th July 2016 Commons Chamber

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

Given the huge amount of interest in this debate—[Laughter]— I shall try to be as brief as possible.

Let me begin by welcoming the Chief Secretary to his new post. I have always found him very courteous, extremely helpful, and irrepressibly optimistic about Government policy.

During his very interesting opening speech, the hon. Member for Hayes and Harlington (John McDonnell) made a number of references to fiscal rules, and that brought into my mind what I consider to be part of the problem with this whole debate. It is not so much about, “What are your rules?” It is a matter of, “Do you have an understanding of the nature of the economy that underpins any rules you may wish to set?” That is part of the problem.

I was also interested when the hon. Gentleman mentioned Andy Haldane of the Bank of England. I was at a speech Andy Haldane gave a few weeks ago, at which he pointed out that one of the things that had not been taken into account nearly enough was the nature of culture and behaviour in the financial area, and I would say in the economy as a whole.

I have a bee in my bonnet about the fact that much of the debate that happens in all parts of this House makes a fundamental assumption about the nature of economics today. It is broadly accepting of what many people would call neoclassical economics. That, to me, is a fundamental problem, and I will try briefly to explain why.

My critique of neoclassical economics is also based on what Andy Haldane talked about: an understanding of behaviour. Behaviour is fundamental to understanding economics. That has largely been lost in many of the analyses of the economy today.

As recently as 1 May this year, the distinguished Professor David Simpson wrote:

“Discontent with neoclassical economics has finally boiled over with the failure of Treasury civil servants and central bankers along with almost all academic economists to anticipate the largest recession since the 1930s, and the powerlessness of these policymakers in the face of the subsequent stagnation of output.”

There, for me, is the rub: current dominant thinking has taken economics down a mechanistic cul-de-sac, where it is no longer the purpose of economics to say, “How are you going to ultimately affect people in our society?” Instead it is about some surrogate technical measures that can be conveniently measured by the mathematicians among the Treasury, but fundamentally classical economics was about people and the effect behaviour had on people through markets.

Economics should involve qualitative at least as much as quantitative change measures. A market economy needs to be understood as an evolutionary—a change—process. Its changing nature inspires innovation and change and thereby creates complexity. That essential feature of innovation, according to the late Tom Burns—which he called the application of novelty—finds however absolutely no place whatsoever within the current dominant tradition. We cannot accommodate these types of behavioural variance that do not lend themselves to linear algebra. Therefore, factors that are not easily measured are left out by Treasury economic models.

Indeed, as Mervyn King pointed out in his recent book, “The End of Alchemy”, things like the political decision to go ahead with monetary union in Europe in 1999 had profound effects on output and growth in the western world, yet found no place whatsoever in the economic forecasting models used by central bank policymakers. I would add therefore that Government models of the economy are singularly ill-equipped to model the impact of Brexit. Hence, all the uncertainty we face today.

Sometimes it is intelligent to recognise when models are broken. It is little wonder therefore that Government forecasts have in recent years always been wrong, because they cannot take account of the type of behavioural change I have hinted at. Indeed, it would be utterly astonishing if by some fluke they were regularly accurate given the current model of the economy.

Let me give a couple of examples of why behaviour is important. I mentioned one in this House a few days ago in a debate about EU nationals. It involves a constituent of mine, Dougie Grant, who arranges mortgages for people. As a result of the Brexit vote, a deal he was about to close for two of my constituents was called off at the last minute because they were EU nationals who did not want to take the risk of investing here when their future was so uncertain. That could not be modelled by any linear algebra.

When I was on the Finance Bill Committee with the new Chief Secretary to the Treasury, I tabled a few amendments relating to subjects such as the effect of dividend tax on corporations. I am sure he remembers that debate well. When I asked whether the impact of certain measures on micro-businesses and small businesses had been modelled, I was told that HMRC does not model the size of businesses. Following a subsequent question that I sent to the Treasury about another aspect of the economy, I have received a written response in the past few days saying that the model of the Treasury’s economy does not take account of the size of businesses. Yet there is not a businessman in this House who does not recognise the profound difference in behaviour between someone leading an international corporation and someone running a small family business. We need to return to the human element, the behavioural element, of economics to enable us to understand more. That is my plea to the Government, and I will be supporting the Opposition motion today.