When Theresa May addressed the Conservative party conference earlier this month, her audience were primed for what she had to say about Brexit. But the most interesting part of the speech was when she pledged to “end austerity”. The British public are fed up with the idea that after the financial crash the country could cut itself to growth. But the state has been deliberately rolled back, reducing aggregate demand when the economy would have benefited from it. The result has been an immiseration of ordinary people and the forced decay of the public realm. Austerity failed as it turned a nascent recovery into stagnation.
The problem for Mrs May’s Treasury is that it has to square two conflicting aims: that of ending austerity and that of meeting self-imposed fiscal targets. By borrowing more, and with stronger than expected tax receipts, there’s a possibility that the chancellor, Philip Hammond, could in Monday’s budget ensure that no government department need face any drop in its real-terms spending per person after 2020. That might be construed as ending austerity. Getting to that point depends largely on whether Mrs May is capable of successfully navigating the intellectual and political minefield that is Brexit.
Suppose she does, and remains prime minister, Mrs May will probably be able to say that the Tory target to lower debt as a share of GDP can be reached if we define the end of austerity in these terms. But the current Conservative policy of reaching overall fiscal balance over the medium term could not be met – it would still require further cuts or tax rises. That is why without a radical shift in policy the prime minister’s rhetoric of ending austerity is fundamentally disingenuous.
The country faces a serious political choice in this budget and next year’s spending review. There is no clear case for continuing to pursue Tory fiscal targets. To fill the gap of a budget deficit, one can either raise taxes or cut spending, and Conservative chancellors have favoured the latter. As a result, British government debt has gone up, not down, despite the cuts, from 52.3% of GDP in 2009 to 85.6% this year. This is hardly a surprise: cuts lead to more debt as the underlying economy shrinks.
Governments are not like households, which are unable to continually spend more than their income for fear of becoming insolvent. Yet Conservatives have falsely claimed for a decade that bankruptcy was a possibility. Whether or not it is a good time to increase deficit spending is a question of how much slack there is in the economy. In the UK there is a good case for fiscal expansion. Politicians need to start relating public spending to the size of the economy. The deficit on current spending has been eliminated.
The Tory party has a chance to take a leaf out of Labour’s book and dump its pointless fiscal commitments and instead borrow to invest with a view of lifting the growth rate of the economy. The Organisation for Economic Co-operation and Development believes that a rise in public investment of 0.5% of GDP would see GDP expand by 3.5%. Advanced economies can achieve sustainable public debt while running deficits.
There are genuine sharp political choices to be made about economic direction. Tories might favour tax cuts. But a fairer economy requires broad-based tax rises. Public attitudes are shifting towards accepting higher taxes and spending. Whether the chancellor can meet the nation’s mood will be crucial in deciding if the Tory party can defuse the economic crisis – or intensify it.
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