Johnson faces an economic maelstrom regardless of whether he can sort Brexit
Sound public finances has been the Tory mantra for the last decade. It looks as if that’s getting binned even if Boris Johnson jettisons the more grandiose spending promises he made during his lovefest with the ageing bigots that make up the majority of the party’s membership.
This morning the Centre for Economics & Business Research’s (CEBR) “Forecasting Eye” will declare that
“Britain could again become a low tax environment under Boris”, predicting a “watershed” in policymaking after the austerity economics of the last three Tory or Tory-led governments.
It also takes a stab at predicting what the man who will almost certainly become our new prime minister, and his new chancellor, might do.
There are many who would welcome a move away from the austerity economics that have dominated that last decade. Austerity has exacted a cruel toll on the most vulnerable in society and badly damaged Britain’s public services. Trouble is, public services and the poor don’t appear to be among Johnson’s priorities. Instead it’s tax cuts for the rich! And maybe a bit for the less fortunate to keep the critics quiet (good luck with that).
The CEBR thinks Johnson’s menu of tax cuts will boost the economy, although it says the cost of ideas such as raising the top rate threshold to £80,000 means some of them will have to be phased in. “Boris understands the impact of taxes better than most in public life.” The latter is open to debate.
Johnson is a devotee of Arthur Laffer, a right-wing American economist whom he quotes a lot. There’s a textbook example of what happens when you put the latter’s tax-cutting theories into practice courtesy of Kansas, the American “red state”, so named because of its solid Republicanism. In 2012, its governor Sam Brownback signed into law one of the largest tax cuts in the state’s history. It didn’t end well. Kansan finances were left in a parlous state, forcing brutal spending cuts (sound familiar?) as the projected increase in revenues failed to materialise. Economic growth was below average throughout the period of the experiment.
Let’s say Johnson pulls off a miracle and manages to find a way out of the Brexit hole. He won’t, but let’s say he does...
The state legislature eventually forced a change in course after overcoming Brownback’s veto. As for Laffer, well he was paid $75,000 for his advice and went on to pick up a Presidential Medal of Freedom from Donald Trump, a big fan like Johnson.
Here’s what The Kansas City Star had to say about that: “Kansas knows Arthur Laffer’s supply-side voodoo economics [are] unworthy of [the] Medal of Freedom.”
What about the idea of cutting stamp duty on housing? Sure he could do that. The CEBR thinks it’d ultimately be tax neutral through easing the logjam in the market by encouraging people to move. There is some evidence that stamp duty acts as a brake on this, so reforming it could help.
Spending on infrastructure is another predication the CEBR makes. Borrowing to do that is a fine idea if the result is that your projects boost the economy. But if you spend the money on white elephants like bridges (what is it with Johnson and bridges?) no one wants, or horribly expensive airports in the Thames Estuary? Not so much.
Let’s say Johnson pulls off a miracle and manages to find a way out of the Brexit hole. He won’t, but let’s say he does, sparing the public finances the £30bn hit in terms of extra borrowing the independent Office for Budgetary Responsibility (OBR) says will be the result of a no-deal Brexit (and which the CEBR thinks is accurate).
The trouble is he, and his new chancellor, will still have to face two problems. The world’s economy is going through a tough patch, exacerbated by trade tensions. Even if there is a Brexit “deal dividend”, something that has been repeatedly called into question (including by the OBR), the conditions are such that economic
growth might not pick up by as much as people hope.
Theresa May and her chancellor Philip Hammond might just have left their successors with a poison pill. It comes in the form of the promise of an unfunded £2bn public sector pay rise
The other is that the public finances have started to deteriorate, as they often do when the economy is grotty (as it is now). The most recent figures, on Friday, showed borrowing in June was at its highest level since the same month in 2015. In the three months to the end of June, it was 33 per cent higher it was during the same period in 2018.
Consultant PwC talked of “an emerging theme of the government borrowing more money in the current 2019-20 fiscal year than in 2018-19”. The OBR expects the government to tap lenders for a total of £29.3bn this year, around £6bn more than last year. While one has to be cautious about monthly, and even quarterly, borrowing figures which tend to be lumpy, it’s currently on track to overshoot that.
Fortunately, debt repayments are cheap, because of low interest rates, and borrowing as a percentage of GDP, at a shade over 80 per cent, is more or less under control. So there is some room to turn the taps, again assuming no deal is avoided.
But austerity has left multiple government departments under severe pressure. Tax cuts are much less needed than is investment. Plus Theresa May and her chancellor Philip Hammond might just have left their successors with a poison pill. It comes in the form of the promise of an unfunded £2bn public sector pay rise. A 2 per cent increase is hardly generous, but without extra money, the organisations charged with doling it out are probably going to have to sack people to make the numbers add up. That won’t go down well.
But who cares about numbers, and detail, like this? The BoZo says he’s going to make it fun! He’ll sort Brexit, unite the country, and host a huge party on a new Royal yacht Britannia under a shiny new bridge.
You know what the trouble is with big parties? The hangover. It’s usually brutal.