The UK isn’t going broke. More public spending – such as cheaper public transport and writing off student loans – can help counter price shocks. However, imaginative government action is unlikely to feature in a Tory leadership race dominated by austerity and trickle-down messages. Rishi Sunak is the torch-bearer for fiscal conservatism, with a message not to believe in his rivals’ “fairy tales”. They in turn cast the former chancellor as the Scrooge of British politics, insisting on lean budgets with tax increases to balance them. Britain seems caught between obsessive frugalists and reckless opportunists.
The Office for Budget Responsibility made headlines with claims last week that Britain faces an “unsustainable” debt burden. Yet this forecast is based on projections 50 years from now. It seems a little unrealistic to think future governments will not be able to head off such a scenario and restart economic growth. The OBR is in thrall to orthodox economics, which perhaps explains why it persists in an analysis that can cause needless alarm. The watchdog sets itself an arbitrary target of keeping national debt to 75% of GDP – the level it reached in March 2020 – by 2072. To achieve this, the OBR suggests spending cuts or tax rises worth £37bn every decade.
With such a recipe book, austerity becomes baked into economic management – echoing the Treasury view. The OBR adopts a self-imposed limitation that effectively treats nation states, fallaciously, like households that have to pay back their debts. But countries like Britain don’t set national budgets like ordinary families. The last budget surplus in the UK was in 2001. Since 1970, the average annual budget deficit has been 3.6% of GDP. To paraphrase John Maynard Keynes, Britain’s policymakers appear “slaves of some defunct economist”.
The OBR is independent, but its roots lie in George Osborne’s tendentious argument that Labour’s excessive spending was behind the financial crash. Since Britain faces fraying public services, new thinking is needed so that activist fiscal policy can be implemented. The cost of living crisis requires state intervention to prevent widespread immiseration. Between February and his resignation last week, Mr Sunak managed, in an often untimely manner, to do this within Treasury rules – spending more than £30bn on help with cash from freezing income tax thresholds. His opponents within the Tory party are right that the political timing is opportune for something bolder, but wrong to think the highest tax take since the 1950s presents a chance to help the country rather than themselves.
The “supply-siders” in the Tory leadership race are advancing the erroneous idea that tax cuts pay for themselves by ensuring the growth in real GDP makes up for extra tax revenue lost and keeps the budget balanced. This theory has historically been an elaborate ruse to benefit the rich. People and public services risk being overwhelmed by surging costs this year. Cutting taxes instead of using state spending to help is bad economics and worse politics. Look across the Channel, where state intervention in France has ensured that the state-controlled utility EDF capped energy prices to 4% earlier this year, compared with the 54% jump UK households experienced. There is good information buried in OBR forecasts. But the watchdog’s emphasis is on the cost of spending, not the benefits. That mentality should change to allow a proper conversation, especially among politicians, about the necessary role of government rather than a sterile debate about tax cuts.
