The proverbial Martian, taking a quick look at Wednesday’s Budget, might well conclude that at the general election in December the British people had chucked the old lot out and elected a very different party to run our government. The fresh, new Chancellor, Rishi Sunak, provided the biggest spending spree the Treasury has allowed since 1992. Yet this was from the ‘austerity’ party that has been in government for nearly ten years. So what’s going on? And is it wise or reckless?
The foreground of the Budget was inevitably going to be something wholly unplanned: the coronavirus outbreak, now officially, a pandemic that is sweeping the world. Whatever the medical tally in terms of numbers infected and people killed turns out to be, the impact on the economy is certain to be considerable, at least in the short to medium term. You can’t have a fifth of the workforce off sick, and people fearful of going out to restaurants, theatres, football grounds and even the shops, leaving businesses with no business, for it not to be. But that’s as far as certainty goes. Budget forecasts always need to be taken with a pinch of salt, but this time neither the Chancellor nor anyone else really has the slightest idea how bad things may get economically.
All Mr Sunak could do (and he did) was refrain the words of Mario Draghi, the boss of the European Central Bank, after the 2008 financial crisis and say he would do ‘whatever it takes’ to protect the economy from the effects of the virus. For the time being he bunged an extra £12bn at the problem, providing relief for cash-strapped businesses, easing the ability of self-employed workers in the gig economy to get sick pay when following government advice to ‘self-isolate’ for a couple of weeks if they think they’re going down with the bug, and prop up the NHS. He said the NHS would get whatever it needed – ‘millions or billions’ – to deal with the crisis. Critics said this was a bit rich coming from the ‘austerity’ party which, they claimed, had for a decade denied the NHS the resources it needed back then to equip it for just such an emergency as we face now. But, overall, Mr Sunak seems to have been judged to have done all he could at this stage to deal with a pandemic that could well virtually shut the economy down in the coming weeks.
It’s what he had to say about the longer term that left many with their jaws dropped. His Budget upset both political orthodoxy and the economic thinking of the Tory Party for at least the last ten years. Conventional political strategy says a government elected with a big majority gets all the bad stuff (including being tight with public spending) out of the way early so that the party can present a more cheery demeanour at the following election. And Conservative economic thinking of the last decade focused primarily on getting the deficit in public finances down and with it, in due course, the overall size of the national debt.
Mr Sunak trashed both. He authorised an immediate spending spree. There will be an extra £50bn of public spending annually by 2024-25, split between £22bn on capital investment on things like roads, house-building and the like, and £28bn extra on day-to-day spending. That means government spending will grow by 2.8% more than twice the rate at which the economy as a whole is forecast to grow.
‘Austere’ chancellors proposing such spending would normally be expected to pay for it by raising taxes. But not Mr Sunak. He’s going to borrow most of the money. There will be £100bn more borrowing than planned by his very recent predecessor, Sajid Javid. The effect will be to raise the government deficit from roughly £30bn a year to more like £60bn. Overall government debt, far from coming down, will rise to £2tn by 2024, double what it was just a decade ago.
Supporters of the Chancellor say this is justified both politically and economically. It may still be the Conservative Party running the country but it’s now a different Conservative Party, they argue: one dependent on a very different electoral base from the one on which it used to rely. Now many of its key supporters are from the former Labour heartlands of the Midlands and the North, ‘lost’ places in that they benefitted little from the growing prosperity of London and the south east during the nineties and the noughties. ‘Levelling up’ is the new government’s principle political priority.
As for the economics, Mr Sunak’s supporters say, it may have been necessary for the previous incarnation of a Tory government to be ‘austere’ about day-to-day spending in order to reduce the deficit after the financial crisis, but it was always mad to cut investment spending so much at a time when that financial crisis had produced historically super-low interest rates that made it cheap for a government to borrow to build. Those low rates are still with us (indeed coronavirus has pushed them back to their lowest) so now is the time to catch up.
Others, however, are not so sure. In the first place, ‘splurging’ on investment (as they see it) doesn’t have a great track record: the urgent need to find projects to spend the money on often leads both to profligate overspends and wasting money on projects that don’t produce value for money. And they don’t need to go back to the notorious example of the Humber Bridge to make their point: they now do it more succinctly in the simple acronym, HS2.
But it’s the risk to the public finances that most exercises the sceptics. Unusually for such a party loyalist, the former prime minister, Theresa May (remember her?) remarked: ‘While spending a lot of money may be popular and may seem the natural thing to do, there must be a realistic assessment of the longer-term impact of those decision’. She rather implied that there hadn’t been. And Mr Javid, chancellor in the ‘new’ government until a month ago, warned that interest rates were volatile things and could not be relied upon to stay low forever. Nor could inflation be depended on to stay dormant: much government debt is index-linked, meaning the government has to fork out more to those who hold it as inflation rises. Servicing a £2tn national debt in such newly adverse circumstances would be no picnic.
That’s why Robert Chope, the retiring chairman of the independent Office for Budget Responsibility, remarked not only that the Chancellor’s stimulus was ‘a bit of a sugar rush’ but also that whilst it was ‘sustainable’ so long as nothing went wrong, ‘the public finances are much more vulnerable to inflation and interest rate surprises than they were’. He went on to compare Mr Sunak to his long-serving Labour predecessor, Gordon Brown, who gained a reputation for assuming that things would always turn out for the best. Mr Brown even famously claimed that he had abolished the cycle of boom and bust, only for the boom over which he presided to end up in an almighty bust, albeit not one wholly of his making.
So will this proposed boom end in bust? No one can yet know but what we do know is that when booms bust and governments have to start cutting their spending it’s always investment spending that gets the hit first. Big projects are stopped in their tracks. That’s the risk the government’s ‘levelling up’ strategy faces and if it does all end in tears it will be just at the time when the Tories will be asking those ex-Labour voters in the Midlands and the North whether they will ‘lend’ them their votes a second time.
So is the government’s gamble on opening the spending taps and boosting borrowing to pay for it wise or reckless? And in the context of all the extra uncertainty created by the coronavirus pandemic, how confident are you about our economic future?
Let us know what you think.