The national debt could still be May’s Waterloo
If it’s time to end austerity, then at least do it the Conservative way by cutting taxes
Never mind the dancing queen; Philip Hammond, the Chancellor, had another reason for swallowing hard at this week’s Conservative Party conference – the Prime Minister’s promise of an end to austerity next year. Even with the bills piling up – more money for the NHS, more money for defence, and so on – that had not been the plan. Rather it had been a continued penny pinching squeeze until the deficit is properly closed and the national debt brought back under control.
On top of everything else, there is now the PM’S promise of a further freeze in fuel duty, which by the Government’s own admission would deprive the Treasury of £38 billion if continued for three years, as well as the unquantified cost of allowing local authorities freedom to borrow for housebuilding. This is again anathema to the Treasury, which with good reason fears that, once off the leash, councils will be impossible to control.
The public finances have been looking a bit better than expected of late, but it seems most unlikely that all the promises now being lavished on voters can be fulfilled while meeting the fiscal goals the Chancellor has set himself. These have admittedly been repeatedly eased, but remain a large part of the Government’s message – that unlike the fiscally incontinent Labour Party, the Tories can be trusted with the public finances. The claim was once thought an electoral and economic selling point. Apparently no longer; after eight long years of slow burn consolidation, people are judged to have had enough. Just about everyone else, from America’s Donald Trump to Italy’s Matteo Salvini, has abandoned the quest. Is this a sound strategy for the UK Government too, politically and economically?
Let’s first address the myth at the heart of Theresa May’s pledge. What she was essentially saying is “job done”, that after all the sacrifices of the past decade, the heavy lifting is now complete. It’s time for citizens to enjoy some payback. Would that this were true.
Analysis by the Institute for Fiscal Studies finds that even on a minimalist definition of what an end to austerity actually means – meeting government commitments that have already been made on health, defence, aid and capital spending, and holding the day-to-day spending of other departments constant in real terms – it would entail an extra £21 billion of spending a year by 2022/23 relative to current plans, and would be inconsistent with the Government’s target of eliminating the deficit by the mid-2020s.
Targets, it might be said, are there to be broken. The Government could almost certainly get away with a breach of this sort without undue punishment by the financial markets. In this sense, May is correct. Years of self-flagellating penance have earned the Government the right to loosen somewhat. But to many, this bare minimum wouldn’t feel much like an end to austerity, and it would also leave the fiscally hawkish Hammond with a further worry; it would embed ongoing deficits that would mean little or no further erosion in the size of the national debt.
More than 10 years into the recovery, the national debt would still be 50 percentage points higher as a share of GDP than it was before the crisis, with little sign of it falling; that’s not a good place to be. When the next downturn comes, there would be a further, substantial ratcheting up.
Perceived need to compete with Labour’s impossible promises has fuelled the assumption that ending austerity means reversing the squeeze on public spending. But there is of course another way of doing it; the Government could cut taxes instead, consistent with the threat made by both May and Hammond in their negotiations with the EU to make post-brexit Britain into a low-tax economy.
By boosting growth, tax cuts may or may not generate stronger revenues over the long term; the evidence is mixed. But what they do fuel is a phenomenon known in US Republican circles as “starving the beast”. Cutting taxes automatically puts a brake on government spending, if only because the revenue is no longer there to support it.
If we are to end austerity, this would be the natural “conservative” way of doing it, much as Trump has in the US. There are still areas of spending rich for trimming, in particular the obese size of the “in work” benefits bill, which with an increasingly tight labour market looks ever harder to justify. It is a matter of shame for the wider business community that it continues to rely so heavily on the Government to subsidise a scandalously low-wage economy.
Labour’s plans to end austerity are so extreme and ridiculous that capital controls would immediately have to be imposed if ever there was the remotest chance of them being implemented, such would be the flight of international money. But the Tories might credibly be able to get away with some limited reversal of the squeeze in the context of a bold, tax-cutting agenda. Unfortunately, I rather doubt that this is what Mrs May has in mind.