Parties shift from prudence to profligacy in pitch for votes
For the first time in more than half a century, the main political parties are all promising large increases in public spending and government borrowing, raising fears that the coming election might go down in history as one of the most fiscally irresponsible in UK history.
Since 2010, the Conservatives, Labour and the Liberal Democrats have all shifted from a message of prudence to profligacy, with the main distinguishing feature between the parties being the level of taxes they want to levy.
Andrew Sentance, senior adviser to Cambridge Econometrics and a former Monetary Policy Committee member, said: “It’s very rare in an election that the political parties are competing with each other to spend more money . . . you probably have to go back to the mid 1960s to find the last time that happened.”
Then, prime minister Harold Wilson talked about investing in the “white heat” of technology, much as Sajid Javid, chancellor, now talks about settling for “nothing less than an infrastructure revolution” and his Labour counterpart, John McDonnell, pledges spending for a “green industrial revolution”.
Although the main parties’ exact spending pledges will not be known until they unveil their election manifestos in the next few weeks, Paul Johnson, director of the Institute for Fiscal Studies, said the idea of balancing the budget has been “well and truly ditched”.
“It looks like being the first election for many decades where both main parties are promising large increases in spending and don’t appear to care very much about the impact on the deficit,” he added.
Mr Javid is already on course to break the Conservatives’ current budget deficit rule, restricting it to 2 per cent of national income in 2020-21. Even with no deterioration in the public finances, the increases in spending for next year he announced in September, alongside more realistic accounting for the cost of student finance, will push borrowing well above that limit.
According to the Resolution Foundation, a think-tank, spending would rise under a Tory government from current levels of 40.6 per cent of gross domestic product to 41.3 per cent by 2023-24, while Labour’s plans would see spending grow to 43.3 per cent.
Partly, politicians are responding to the public’s dislike of a decade of austerity. The UK’s level of public spending is in the middle of the international pack and, even after debt doubling over the past decade, the burden of paying interest on it has not risen.
They are also taking note of a shift in academic thinking on deficits. The intellectual backing for higher borrowing came at the start of this year from professor Olivier Blanchard in his presidential address to the American Economics Association. There, the former IMF chief economist, outlined the case that if growth rates were likely to be higher than interest rates for some time, “public debt may have no fiscal cost”.
He was not necessarily advocating borrowing to invest, but said that, if economies expand sufficiently, each time the debt has to be refinanced in a world of rock bottom interest rates it presents less of a burden on society.
But outside the theoretical world, policymakers are rather more nervous about politicians putting these ideas into practice.
Jagjit Chadha, director of the National Institute of Economic and Social Research, said: “With the economy close to full employment, we should be running something close to a balanced budget.” He added that political parties should at least frame any spending commitments within a budgetary framework of sensible rules and guidelines to avoid storing up troubles for the future.
Charlie Bean, a board member at the Office for Budget Responsibility, which is tasked with commenting on fiscal sustainability, went further at a Resolution Foundation conference last week.
“Governments are in danger of conning themselves when they say ‘borrowing to invest is all right’ because they may be building up assets, which if there are financing difficulties [in the future] can’t be sold,” he warned.
If the similarity between the parties is a desire to borrow to invest, the differences are generally on the tax side.
When it comes to revenues, the Conservatives are most profligate, continuing ahead of their manifesto launch to hint about cuts in national insurance for the low paid, income tax for higher rate payers, inheritance tax and fuel duties. The Treasury has tried to rein in Number 10, but its success will only be known when the manifesto is launched.
Labour has pledged to raise taxes on companies and rich individuals to fund the day-to-day increases in the public spending it will propose at this election. In 2017, these taxes amounted to £48bn a year, 2.5 per cent of national income. It will borrow for its proposed £250bn “national transformation fund” and nationalisation of industries such as water and rail.
The Lib Dems’ current policy is also to seek “a responsible and realistic £100bn package of additional infrastructure investment” while maintaining a balance in the non-investment budget from 2020.
It is clear that the big spending pledges will come with the promise of better economic performance but at a time of persistently weak productivity growth and fears that Brexit might harm underlying economic performance further, this makes some uneasy.
Recalling his experience as deputy governor of the Bank of England, Sir Charlie warned that new rules which said “it’s fine to borrow lots and lots” because interest rates were low could create the conditions for a future government financing crisis.
“As somebody who sat through the financial crisis and the eurozone debt crisis, that fills me with horror,” he said.