Former cabinet secretary Gus O’Donnell: use fiscal policy to get Brexit economy moving

Britain's former top civil servant argues that we must “push back” deadline for achieving budget surplus in light of post-referendum economic uncertainty

Former cabinet secretary and Treasury permanent secretary Lord Gus O’Donnell has called on the government to move away from a reliance on monetary policy and increase infrastructure investment in response to economic uncertainty after the EU referendum.

Chancellor Philip Hammond has already hinted that the forthcoming autumn statement – the first set-piece budgetary event in the UK since Britain voted for Brexit – could be used to "reset" economic policy, while new prime minister Theresa May has said the government will no longer seek to reach a budget surplus by 2020.

The Bank of England has meanwhile slashed interest rates to an historic low of 0.25%.

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Speaking as he presented a new BBC documentary about the role of civil service in delivering Brexit, O’Donnell – who served as head of the civil service under Tony Blair, Gordon Brown and David Cameron – called for a broader shift in economic strategy.

“I believe we need to rethink our macro-economic policy, move away from a reliance on monetary policy – tinkering with interest rates – and start looking at fiscal solutions: our tax regime and government spending," O'Donnell said.

The former cabinet secretary spoke to Royal Bank of Scotland chairman Howard Davies, a member of the financial sector’s Brexit taskforce, who argued that the UK had reached the limits of a monetary policy and said a “reformulation of fiscal policy is needed".

"I hope the Treasury is working on that as we speak, in order to create a more flexible framework to complement monetary policy," Davies said.

O’Donnell added: “Personally, because of all the economic uncertainty around the Brexit process, I think we need to be pushing back the date at which we finally get to a surplus in our public finances.

“In the meantime, given that private sector investment may be very weak, there is a very strong case for more public sector infrastructure investment to raise our productivity.”

O’Donnell said he believed that many civil servants instinctively supported remaining in the EU “if only because they knew what a bureaucratic nightmare exiting the EU would be”.

But he predicted that the workforce would now “take pride in making Brexit work as skilfully as possible”.

The documentary also included interviews with former head of the Government Legal Service, Sir Paul Jenkins, who suggested Brexit could take up almost all of the government, parliament and the civil service’s time in the next few years.

O’Donnell acknowledged that some commentators felt that "the complications involved in exiting Europe" were being "overstated by people like me – career civil servants exaggerating their own importance”.

But he challenged the suggestion from eurosceptic John Redwood that Britain's withdrawal would require only a repealing the 1972 European Communities Act, activating Article 50 and a “short series of meetings” with EU member states.

O Donnell said that there would need to be some sort of negotiation over issues such as Spain’s concerns about Gibraltar.

But the MP maintained that there was no point negotiating about free movement of people since taking control of the UK’s borders was a given.

The former cabinet secretary concluded that “John Redwood believes that we must have control of our borders, so no free movement of labour, but thinks that we can maintain access to markets,” through sector-by-sector deals.

“I think he’s being over optimistic about the kind of deals we could reach,” O’Donnell added.

O'Donnell's comments were broadcast as prime minister May convened a meeting of her cabinet, with ministers asked to bring ideas on the "opportunities" available to the UK outside of the European Union.

The prime minister told those gathered that the UK would not attempt to stay in the bloc through a second referendum on the precise terms of exit as some public figures, including Labour leadership challenger Owen Smith, have called for.

“This really is a very significant moment for the country, as we look ahead to the next steps that we need to take,” May said. “We have the opportunity to forge a new positive role for the UK in the world; to make sure that we are that government and country that works for everyone – that everyone can share in the country’s prosperity.

“So there are challenges ahead but it’s an important and significant moment for us and I think we have real opportunities to develop the United Kingdom and ensure that it does work for everyone in the UK.”

She added: “We must continue to be very clear that ‘Brexit means Brexit’, that we’re going to make a success of it. That means there’s no second referendum; no attempts to sort of stay in the EU by the back door; that we’re actually going to deliver on this.”

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