An age of fiscal populism dawns as Johnson sweeps into No 10
Goodbye “fiscal conservatism”, hello a potentially irresponsible plethora of tax cuts and spending pledges. In some sense, the pivot we are about to see in UK economic policy is an inevitable consequence of the challenges of Brexit.
The abrupt, no-deal exit now being contemplated is likely to require a degree of fiscal and monetary support not seen since the immediate aftermath of the financial crisis.
If Boris Johnson, the new Prime Minister, is serious in his “do or die” call to arms, he and whoever he chooses as chancellor must break free of the self-imposed fiscal constraints of the past 10 years. The disciplinarian rules that have governed the public finances will have to be thrown out of the door.
Mr Johnson will also need an ultra-dove at the Bank of England, willing, at least temporarily, to abandon money orthodoxies and bend to the immediate purpose of keeping the economy afloat. To carry this off will require someone with established international clout and authority; opposed to Brexit though he undoubtedly is, Mark Carney is in this regard a far more worthy occupant of the role than any on the somewhat underwhelming shortlist of possible replacements.
An attempt should be made to have him stay on for at least a further year.
Conservatives are normally fiscal and monetary traditionalists, whose mission it is to correct the profligacies of Leftish predecessors. But the times have given licence to a different approach and, for now, Johnson has been anointed as the man to deliver it.
This is more than just a Brexitrelated change. In Britain, many seem to have undergone a kind of
Damascene conversion since the referendum; some of the fiercest one-time fiscal hawks have been turned into magic money-tree spendthrifts. Yet their change of heart is very much part of a global movement. Brexit provides the excuse for conservatives to adopt a new form of economic populism that promises to sweep all before it.
Led from the front by Donald Trump’s fiscally incontinent America, the age of belt-tightening, fiscal austerity is fast giving way to let-rip expansionism. In part, this is merely cyclical. Voters are weary of the thin gruel of recent years; they demand a period of feasting. Whether of the Left or the Right, the politicians dare not deny them.
Out goes Rogoff and Reinhart’s “Growth in a time of debt”, one of the most influential polemics of its time arguing that growth prospects decline dramatically when public debt reaches 90pc of GDP; in comes a growing body of research to argue that at a time of persistently low inflation and interest rates, debt no longer matters. The idea that we can run big deficits for longer is becoming as much part of Rightwing as Left-wing thinking.
In this sense, it seems finally to be true; we are all Keynesians now. There is an emerging political consensus around the idea that something radical must be done about the sub-par growth of Western economies. Nothing else is working; time, then, to take risks by firing up the fiscal cannon anew.
The one notable exception to this change is Germany, which has legally bound itself in with balanced budget rules, both at local and federal level. One can only admire Germans for their self discipline, but in so behaving they
‘The idea that we can run big deficits is becoming as much part of Right-wing as Left-wing thinking’
have created a rod for both their own and the rest of the eurozone’s back.
An old joke about the dismal science has it that economics is not rocket science; if it was, the Germans would be much better at it.
The Bundestag seems to have learnt nothing from the traumas of the eurozone debt crisis. Sustainable monetary union requires that those with the fiscal space for stimulus should provide it so as to support those without it. As long as Germany continues to resist this obligation, break-up of the single currency remains an all too likely prospect.
In any case, those unbound by such constraints are taking matters into their own hands. Historical parallels can be misleading, but here’s one worth noting – Japan’s experiment in the interwar years with “Takahashi zaisei” (Takahashi economics), after the veteran Japanese finance minister Korekiyo Takahashi. A three-pronged raft of macroeconomic stimulus measures was introduced to help Japan escape the ravages of depression, including devaluation, deficit spending and outright monetisation by the Bank of Japan of public debt. It worked, but its success is as much a warning as an inspiration.
High growth re-established itself with none of the hyperinflation that might have been a consequence of the Bank of Japan’s undisguised money printing. Unfortunately, the only constraint on fiscal expansionism came to be the authority of Takahashi himself, and after a while, even he could not control it. Pressure for ever-greater military spending, which he tried to resist, eventually resulted in his own assassination.
I don’t want to stretch the parallels too far, but we see some of the same pressures today. Defence spending in the US is strongly on the rise, and is very much part of Donald Trump’s “America First” plan for economic regeneration. The US Federal Reserve is meanwhile under relentless pressure to do Trump’s bidding. Boris Johnson will similarly want to open the fiscal spigots. The debacle in the Gulf has of itself made the case for much higher military spending.
The idea that the welter of spending and tax promises Boris Johnson has made in recent weeks can be accommodated within existing fiscal rules should be seen for what it is – “an inverted pyramid of piffle”, to use one of the expressions that made the new PM famous. The supposed £26.6bn of headroom in the public finances identified by the Office for Budget Responsibility is little more than an illusion that would disappear like snow in summer in the event of a downturn.
“This agreement is a total abdication of fiscal responsibility by Congress and the president,” said Maya Macguineas, the president of the committee for a responsible federal budget, a Washington advocacy group, in response to the agreement this week to lift the US debt ceiling to accommodate Trump’s deficit financing. She’s probably right, but does anyone care? Voters are in no mood for further medicine; it’s time to play.