Dennis Leech sees the partial ditching of austerity as the sign of a new type of Tory government and an indication Labour needs to change tack
Jeremy Corbyn was ridiculed when he claimed that, although it lost the election, Labour had won the argument. Rishi Sunak’s budget however – the biggest boost to government spending since Norman Lamont’s 1992 pre-election giveaway – proves he had a point.
The chancellor has abandoned the austerity strategy pursued by the Conservative-led governments of the past ten years and seemingly returned to the high spending policies of the last century. His budget signifies a radical change of direction, something that would not have happened under Sajid Javid.
Much of the extra spending was due to coronavirus but there was much more besides aimed at boosting the economy. In total there is £30bn per year extra government spending, amounting to about 1.5% of national income. Of that, £12bn is to combat the immediate coronavirus pandemic, including £5bn for the NHS, plus a further £18bn to boost the economy more generally. It is likely that a lot more will be needed to fight the pandemic and Sunak has promised to spend whatever it takes.
Significantly, he has ripped up the Treasury’s strict fiscal rules, intended to limit government borrowing, that were a major priority of the Cameron and May governments, saying he will replace them with new ones yet to be announced. The previous aim of reducing the deficit year by year towards the ultimate goal of a balanced budget will be scrapped: borrowing will increase from 1.8% of GDP to 2.2%.
Likewise the previous policy of reducing the public debt as a share of GDP will be ended. Government debt is forecast to fall from its peak of 80.6% of GDP in 2018-19 to 75% in 2021-22, then remain there. The burden of this debt is eased by record low interest rates.
The budget promises to end austerity. How far does it go in restoring the austerity cuts of the past ten years? The answer is only to some extent. Real inflation-adjusted spending on social services per person will return to the level of 2010-11 only by the end of the parliament. On the other hand, expressed as a share of national income, only a third of austerity will be reversed.
This will mean very little improvement for the poor and low-paid who still have to rely on the appallingly unfair Universal Credit. The coronavirus measures will do little to help the people most affected: gig workers and the self-employed who are likely to suffer real hardship if they have to self-isolate without adequate compensation. Sick pay in the UK is anyway the lowest in Europe at £94 per week, which is totally inadequate, and will be counterproductive in dealing with the pandemic, as infected workers will find themselves having no alternative but to continue working.
On the other hand, scandalously, there is a massive cash bonanza for the highest paid. The chancellor has addressed the pressing issue of the tax treatment of doctors’ pensions that has been hurting the NHS. The rules have meant it’s not worth their going to work: effectively they have had to pay to work because they lost more in pension entitlement than they earned. Rather than address the particular problem for NHS doctors, he has simply changed the HMRC rules, raising the salary that can be earned while still getting full income tax relief on pension payments to £200k, which includes thousands of the high paid outside the NHS. This windfall for the rich costs £2.2bn.
Sunak has abandoned the long standing Tory ambition of shrinking the state. Instead of cutting taxes and spending, the Office of Budget Responsibility estimates that total government spending will rise to 40.7% in 2024-25, and taxes to 38.5% of GDP.
So this is a new type of Tory government.
While welcome in implementing the kind of economic stimulus it advocates, the budget nevertheless poses a big question for the Labour Party. Shadow Chancellor John McDonnell made a manifesto commitment to a package of measures that was fully costed against carefully designed fiscal rules deemed prudent in terms of neoliberal economics. But it failed to gain traction with voters. Meanwhile a Tory chancellor simply sets aside such rules and goes for Keynesian deficit spending when it is politically expedient, something that Labour would not dare attempt. The lesson is that Labour does not get very far by trying to appear to be more fiscally conservative than the Conservatives.
Apart from being a fiscal boost, promoting growth and jobs, and addressing the pandemic crisis, the budget contained little or nothing to reduce inequality, or achieving a zero-carbon economy – and remarkably nothing on Brexit. It promised to increase government borrowing – by almost £100bn – to pay for investment in infrastructure, including many road schemes. Some commentators have expressed doubts as to whether many of these capital schemes will come to fruition.
The big unknown is how far the budget will help Johnson’s policy of ‘levelling up’ the north. Some of the proposals (for example, moving civil servants out of London, infrastructure, devolution to the West Riding) are aimed directly at that.
But these are comparatively small measures that will do little to reduce the structural imbalances in the UK economy due to the so called ‘finance curse’: the enormous dominance of the London financial sector continuing to blight economic development in traditional manufacturing areas in the north and a major cause of low productivity. This needs an holistic and proactive economic policy rather than just relying on unregulated markets.