Financial Times - Now is not the time to fall out of love with austerity
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June 16, 2017. Nicholas Macpherson.
Like it or not, we cannot wish away our public finance problems.
Amid the uncertainty of last week’s general election, a new consensus has emerged uniting recent political foes. When Nick Timothy said that “many are tired of austerity” on his resignation as Theresa May’s joint chief of staff, he was echoing Jeremy Corbyn’s victory speech the previous morning in Islington North in which he said that people “have had quite enough of austerity politics”. But what is austerity? And is it axiomatic that it should end?
The British people have always had a soft spot for austerity. Given the opportunity to vote for David Lloyd George’s innovative Keynesian programme in 1929, they opted instead for the austere budget balancing of the Labour chancellor, Philip Snowden. They embraced the equally austere certainties of Sir Stafford Cripps in the late 1940s. And so it shouldn’t be a surprise that they preferred (just) George Osborne’s proposed fiscal medicine in 2010.
Looking back on it, the modern “age of austerity” had begun the previous year. That was the year David Cameron coined the phrase as he set out the plans for a future Tory government. It was the year when real wages across the economy began to fall in earnest. It was also the year Alistair Darling, then the Labour chancellor, began the painful programme of fiscal consolidation necessitated by the financial crisis. The Darling plan was to halve the deficit over four years. It remains relevant because it is pretty much in fiscal terms what Mr Osborne implemented.
His great trick was to talk tough while putting into practice a programme which was admirably pragmatic and flexible. In his defence, he had to satisfy his Liberal Democrat coalition partners and deal with the consequences of the eurozone crisis. But whereas Ireland managed to reduce its gross public debt from 86 per cent to 75 per cent of national income between 2010 and 2016, Britain’s public debt carried on rising: from 76 per cent to 89 per cent.
In short, Britain never experienced austerity.
That is not to say Mr Osborne and the coalition did not take some courageous decisions. No other British government has implemented such sustained cuts in public sector wages and working-age benefits, or such an increase in public sector pension contributions, in exchange for less-generous pensions. There were big cuts in police numbers, and to local authority budgets. And there were sizeable tax increases, in particular the 2.5 per cent increase in VAT to 20 per cent. But many of the savings were recycled in higher spending elsewhere: the “triple lock” on the state pension, and the protections for programmes covering health, schools, defence equipment and overseas aid. And all the coalition’s early tax increases were recycled in the form of tax cuts, not least the higher personal allowance for income tax and the lower rate of corporation tax.
With hindsight, there was a case for going further faster. The British people may like a dose of austerity. But the lesson of the Cripps era is that in the end they begin to tire. They voted out the Labour government in 1951, and it fell to a Tory chancellor, Rab Butler, to usher in the end of rationing.
The irony is that the electorate is falling out of love with fiscal consolidation just at the moment that a rigorous approach to public spending is likely to become more necessary. The long-term fiscal projections of the independent Office for Budget Responsibility suggest that spending pressures are set to build up in the next decade. This is partly the consequence of an ageing population; spending on pensions and long-term care is projected to rise. But it is also to do with long-term cost pressures on the National Health Service; technological developments and rising expectations are resulting in more expensive drugs and medical equipment.
If the Treasury is right that Brexit will reduce the growth rate of Britain’s productive potential, then these pressures are going to have to be financed at a time when taxable capacity will be growing more slowly than it has in recent years.
Some can delude themselves that higher borrowing can make up the difference. With interest rates at a historic low, a case can be made to borrow to invest more in infrastructure and housing. However the pressures that are now upon us are not about investment, but public consumption. We are already running one of the biggest structural deficits in Europe, and Britain’s debt is at its highest level in relation to national income since 1964. With an independent Bank of England, we cannot rely on inflation to wipe out debt as it did in the 1970s.
The truth is we cannot wish our public finance problems away. If public spending is to rise, we need a proper debate about how to pay for it. Higher taxes have a role to play. But some realism is necessary. The OBR is already projecting that the tax take will rise to 34.3 per cent next year. But no government has made such a tax take stick since 1981-82, when North Sea oil revenues were near their peak. So even if the age of austerity is dead, there will still need to be tough decisions around spending priorities.
Governments with small majorities can take tough decisions. Kenneth Clarke and John Major showed that in the mid-1990s when they managed to reduce the deficit year by year, despite having a small and shrinking majority. Of course, the Democratic Unionist party will want to extract more money from Westminster. But if the will is there it should still be possible to make progress on deficit reduction. As the French socialist politician Pierre Mendès France once said, to govern is to choose.
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