First, let me say I welcome the general thrust of the Budget. As the OBR says it represents the “largest fiscal loosening” since 2010.

But we are not here to discuss the Budget, over which we have no control in this House, but “the state of the economy in light of the Budget statement” – that is, how will the Budget affect the economy?

The answer is: very little. The “loosening” of which the OBR speaks is much too small to repair the damage caused by the eight years of austerity policy since 2010. An adequate loosening would have required an admission of error beyond the economic understanding or moral compass of this government.

The Conservative Party’s narrative has been unchanged for ten years. The Great Recession was caused by the Labour government: Mr Hammond twice called it “Labour’s Great Recession”.  The austerity policy, he said, had nothing to with ideology; it was “necessary” to clear up the mess Labour left. Now, with the public finances in more or less decent shape, the Chancellor can afford to reward the “hard-working British people” with a few goodies.

Let me put it as bluntly as I can: this narrative is economically illiterate and morally fraudulent.

Let’s start with the myth of ‘Labour’s Great Recession’. The idea that Labour was somehow responsible for the Great Recession is ludicrous. It was the banks which caused it, and governments which were left to clean up the mess.  The Chancellor would have been more honest had he talked of the Bankers’ Recession, but no Conservative chancellor can talk that way about his friends.

A slightly more reasonable version of Mr Hammond’s story is that the Labour government left a fiscal mess for its successor to clean up. This doesn’t run either. The macroeconomist Simon Wren-Lewis of Oxford University has made a detailed, and far from uncritical, analysis of Labour’s fiscal policy between 1997 and 2010. I quote just two sentences:  “any claim that the UK fiscal position was dire before the onset of the Great Recession is not tenable” and “the line that the Labour government was responsible for leaving a disastrous fiscal position is pure spin”.[1]

What I want to emphasise is that though Professor Wren-Lewis supports Labour, no competent analysis of Labour’s fiscal record would differ greatly from his summary. In any of its forms, the story of Labour’s Great Recession is a lie.

But let’s exclude the lie, and ask: was austerity a necessary policy in 2010, as the Chancellor claims?

The answer is no. The economics of the matter is straightforward. If the private sector reduces its own spending, government has to increase its spending to plug the gap. If it cuts its own spending as well, it deepens and prolongs the recession. The only counter-argument is that austerity was needed to give confidence to ‘the markets’. But the evidence is clear that any confidence-boosting effect of cutting spending on the poor was overwhelmed by its depressive effect on total spending.

No competent economic authority now disputes that this is what happened. Martin Wolf of the FT called austerity a “large unforced error”.  That well-known left-wing extremist Mark Carney, governor of the Bank of England, estimated at the end of 2016 that austerity “has, on average, subtracted around one percentage point from demand each year” – that is, cumulatively, it has left the British economy about 6% smaller than it would have been, or in round numbers knocked £125 billion off the economy.

I don’t want to claim that the last eight years has been a tragedy like the First World War, or even the Great Depression.  What I would claim is that the Coalition government inflicted quite unnecessary harm on the British people, which it has never acknowledged or apologised for.

My Lords,

This Budget has to be judged by the extent to which it sets about repairing that damage. It is not enough to say “austerity is coming to an end”. Austerity has to be reversed sufficiently to make up for the harm of the last eight years. And this can’t happen unless that harm is acknowledged.

The damage is most clearly seen in the low growth figures. Far from bouncing back vigorously as is usual after a deep collapse, the British economy has been growing at less than 2% a year since 2010, well below its historic trend. And things are expected to get worse. The OBR forecasts growth to be 1.5% on average over the next 5 years.

These are dreadful figures. Britain is near the bottom of the G7 countries. If we take into account the growth and ageing of the population, and the large inequality of the income distribution, there is little room here for improvement in the real living standards of most people.

The reason for low economic growth is the collapse in productivity growth. British workers work longer hours than workers in Germany, the Netherlands, France, and Denmark. But they produce less output in those hours. Annual growth in productivity has plummeted from average annual rates of about 2.3 per cent before the Great Recession to 0.4 per cent in the past decade. “Had the pre-crisis growth trend continued, then productivity would be more than 25 per cent higher today” says the Resolution Foundation.

I agree with Andy Haldane of the Bank of England when he says: “We have a long tail problem.” But our tail has become a lot longer than it was in the past, because our path back to headline full employment – in itself very welcome – has largely consisted in multiplying the number of low productivity jobs at the expense of high skill services and manufacturing. Look at the cuts in investment, housing, further education, and public services since 2010, and you have a pretty good explanation of the collapse in productivity.

The Budget should at least have begun to reverse this appalling trajectory. Instead we are promised a bagatelle for the British Business Bank, ‘a little extra’ for schools, public toilets and potholes, a little relief here and there, and yet another enquiry into the productivity puzzle.

Over everything hangs the fear of the deficit. Some commentators even fear that the Chancellor has given away ‘too much away’ to balance his books. But balancing the books should never have been the object of policy. Balancing the economy should have been the objective, with a balanced budget as the by-product of strong economic growth.

My Lords,

The hard-working British people, whose praises the Chancellor never ceases to sing, deserve better than this Chancellor is prepared to give.

[1] Wren-Lewis, S. (2013) “Aggregate fiscal policy under the Labour government, 1997-2010”. Oxford Review of Economic Policy 29(1), pp. 25-46.

Photo credit from previous page: HM Treasury / Flickr

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Guy Standing: “Universal Credit is cruelty in action”

There are many aspects of this budget that should cause disquiet. I want here to concentrate on two – the freezing of fuel duty and the sprinkling of extra money on the wildly misnamed Universal Credit, the means-tested (i.e. non-universal) social assistance flagship of the Tories and Liberal Democrats.

What Hammond has done is provide about £2.7 billion more to prop up Universal Credit, mainly putting the money at the wrong end of the policy, increasing the amount of money a claimant can earn from a job before losing the benefit. What he should have done is tend to the truly disastrous top end of the policy, and the government should have put a halt to the roll-out, whereby up to seven million people will be enmeshed in the system. It is probably the worst social policy since the workhouse.

The disgrace starts with the fact that claimants have to wait five weeks before they can claim the benefit, and because of well-established delays many have to wait for three months. Iain Duncan Smith, the architect of the policy, said repeatedly that he wanted Universal Credit to be as close to being in a job as possible, which is why all sorts of arbitrary practices are imposed on claimants, such as reporting for numerous interviews, proving they are spending virtually all their time looking for jobs and so on. Well, I am sure Mr. Duncan Smith would never take a job that did not pay him from day one. He would regard it as ridiculous and unfair if told he would not be paid for the first two months. That is what the scheme imposes. And surprise, surprise, huge numbers of people are falling into free-fall debt and worse. Where Universal Credit has been rolled out, homelessness has increased more than elsewhere, resort to food banks has soared, and suicides have gone up. Mr Hammond in a pre-budget TV interview smugly said: “There are no unemployed in Britain.” It was nonsense, of course, but one reason for unemployment being low is that thousands of people have either become too sick to be counted or have drifted into the streets and out of the labour force altogether.

Universal Credit should be stopped, and a full-scale independent enquiry into its inequities should be launched. The heavy-handed use of sanctions is denying huge numbers of people benefits to which they are legally entitled. There is no respect at all for basic principles of due process; arbitrary denials of livelihoods are rife. A high percentage of those denied who appeal are eventually shown to have been falsely denied benefits. But the appeal process takes many months, leaving them drifting into destitution in the interim. If they do obtain a measly ‘loan’ from the Department of Work and Pensions, that is then deducted from any benefits they start to receive. It is cruelty in action.

The other policy I wish to highlight is the freezing of fuel duty for the ninth year in a row. The Chancellor crowed that he was continuing to protect the car driver. Well, his action came just weeks after the Inter-governmental Panel on Climate Change (IPCC) delivered a devastating report warning that we are drifting into ecological disaster due, in large part, to carbon emissions. Unless drastic action is taken to curb use of fossil fuels, primarily in transport, that disaster will come closer. There is no social or environmental excuse for freezing fuel duty. Our children and grandchildren will be those who mainly pay the price.

Stephany Griffith-Jones: “The Chancellor offers a small plaster for large wounds”

Levels of investment in UK are one of the lowest amongst the OECD countries, which worsens prospects of future increases in productivity and expansion of economic activity.

It is therefore a source of concern that the Chancellor has offered peanuts to compensate for the loss of finance for investment, which leaving the European Investment Bank (EIB) will mean. The EIB lent £ 5.5 billion to UK in 2016. The Chancellor offered only £200 million via the British Business Bank to compensate for that! UK will lose almost 30 times that by leaving the EIB. Typical of this Chancellor to offer a small plaster for large wounds – that is clearly insufficient!

Sue Konzelmann: DoPYE… Don’t Pay If You Earn

Philip Hammond’s budget demonstrates a very strange approach to taxation: Tax arrangements become more favourable, the more you earn.

His £3bn budget giveaway offered those earning £12,500 a windfall of around a tenner a month. If that amount does, as claimed, make a critical difference, it strongly suggests that many of us are far closer to the edge than we should be. For higher rate tax payers though, the benefit is more noticeable – something approximating to the cost of a nice weekend away, perhaps. Even though this will include quite a few of his MPs, it’s probably still unlikely to help unite a fractious party – or indeed to make him any more popular with lower income earners.

It should come as no surprise, then, that the “groundbreaking” Tech Platform tax isn’t quite all it might seem, either. It’s predicted to raise some £400m annually, which is certainly not a bad thing from the perspective of other British retailers. But what about corporation tax?

According to the BBC’s Simon Gompertz, Google declared a turnover of just over £1bn in the UK for the last financial year to the HMRC. However, the latest accounts filed in the US by Alphabet, Google’s parent company, “show UK sales of more than £6bn”. This discrepancy is made possible by the complex accounting and tax options available to multinationals: In this case, according to Bloomberg, the rather unappetising sounding duo of the “Double Irish” and the “Dutch Sandwich”, which involves shuttling funds between the Irish Republic and Holland – and then back again. It is also worth noting that all three economies – Ireland, Holland and the UK – are (for now, at least) EU members; so it is apparently not only the UK that has failed to act so far.

At least, though, Philip Hammond can take comfort from the even more questionable approach taken by his predecessor, George Osborne. Osborne’s much vaunted “victory” over Google’s unpaid taxes between 2005 and 2014 was meant to net the HMRC £130m, although corporate accounts show that they actually had to settle for less than £100m. However, it was made to look rather less convincing by an analysis by Reuters news agency. This concluded that, based on Google’s US filings over that period – of £24bn – its tax bill should actually have been around £2bn (rather than £130m). Now that really is a tax giveaway!

That one corporate tax giveaway amounted to almost two thirds of the cost of yesterday’s tax cuts for UK residents – and it probably wasn’t the only one, either. There can be few better demonstrations as to how wrong the priorities of the last two governments have been – and apparently remain. DoPYE indeed.

Geoff Tily: “The Chancellor wants you to think that the Budget was good for working people. It wasn’t.”

The Chancellor claimed that his extra spending was down to the success of austerity. In fact it was an admission of its failure, because the logic of his argument was that spending strengthens the economy and boosts the public sector finances – the very opposite of austerity.

That’s why austerity is a false economy. Over the last eight years, the policies of austerity have vandalised public services, damaged growth and reduced the deficit at a snail’s pace.

That’s why reversing austerity is the right policy. Spending when the economy is weak would have repaired the public finances quicker. And the strength of public services goes hand in hand with the strength of the economy.

For workers this is all far too little far too late. According to the OBR, any improved outlook for growth will lead to more jobs, but do nothing for real wages. The Chancellor attempted to soften the blow on wages with changes to tax thresholds amounting to £130 a year for most workers, but this hardly compensates for wages in 2018, which are down £26 a week or £1350 a year on the pre-crisis peak.

On public services, cuts across the public sector remain firmly in place outside the NHS, as the OBR’s chart on real departmental spending (‘RDEL’) per head shows:

While health spending is set to rise, severe cuts to all other public sector spending will remain in place. This is very far from ending austerity – and the 2015 starting point in the chart above omits the brutality of the cuts imposed by Hammond’s predecessor in the previous five years. Analysis by the New Economics Foundation suggests that there will still be cuts of almost £3.5bn (5.2%) to unprotected budgets after 2020. Even in departments with excepted protections there will be cuts per head, for example on schools – assuming protection is maintained in real terms the schools funding announced at the budget yesterday will still amount to a 2.6% cut per pupil.

It’s clear that both workers and public services will continue to be pummelled by austerity policies for years to come. But it doesn’t have to be this way.

The OBR continues to apply the logic of the household budget, keeping improvements in the economy separate from changes in the public finances. But managing national finances is not the same as managing a household Budget. It’s about time that the OBR and the government acknowledged this and increased public spending accordingly to set the economy on the right track.

In the meantime, austerity continues. How much longer must workers wait for it to end?

This comment is an adaption of a longer post. For the full analysis, see Geoff’s post on the TUC website.

John Weeks: “Forecast growth for 2019-2022 would be the slowest four year average since 2008”

For Mr Hammond, Brexit provides an excuse that keeps on excusing, but he now has dropped it, at least temporarily.  A week ago he “cautioned” that not reaching an EU agreement would undermine his budget plans. Yesterday the caution turned to a warning.  Whether by convenience or intelligence he now drops that lame excuse. He kept it in his back pocket, though, by basing his budget on the prospect of a favoured agreement, which would produce a “double Brexit dividend”

Down-playing the Brexit excuse provided the vehicle for the Chancellor to repeat his prime minster’s claim of austerity “coming to an end”, which neither linguistically nor practically implies an imminent termination of the disastrous policy.

Mr Hammond went into his Budget with the lowest annual public sector borrowing for any fiscal year since 2001, only £26 billion or 1.3% of GDP for the 12 months through this September (ONS Public Sector Finances, Tables 2 and 5b).  In response to these numbers, Mr Hammond betrayed his ingrained ideology with a list of true-blue austerity qualifications:

1. additional NHS spending is conditional on “reforms”, a Tory code word for staff reductions and privatisation; and
2. funding increases for local councils, schools, social care and mental health barely exceed expected inflation.

Perhaps the most revealing moment of Mr Hammond’s underlying ideology came with his attack on the Labour Party, accusing it of being prone to “reckless spending”, which he assured his listeners caused the global crash of 2008 (“Labour’s recession”).

In that context his austere predilections came clearest in his passing reference to OBR projections for economic growth.  His party has held government for over eight years.  OBR growth projections for 2019-2022 average below 1.5%, which if realized would be the slowest four year average since the global collapse of 2008.  The Chancellor does not mention that this dismal growth performance will be the direct result of austerity policies.

That forecast of near economic stagnation under the Tory government prompts a paraphrase of Cassius in Julius Caesar (Act 1, scene 2, lines 140-141), “The fault, dear Hammond, lies not in your Brexit but in yourself, for you are an austerian”.  Drop the obsession with balancing the overall budget and you clear the way to end austerity.  The Tory chancellor will not do that.  His counterpart on the opposition benches will.

Simon Wren-Lewis: “The Conservatives are trying to reduce the level of debt to GDP by too much prematurely – that does not make sense”

A few things you probably won’t read about what the Chancellor announced yesterday. You will have read that the budget measures as a whole amount to a significant fiscal giveaway. In which case the following chart may appear surprising.

Negative numbers represent a current budget surplus, and growing surpluses are a fiscal tightening. You can see that with the exception of this fiscal year, when policy is tighter, the current balance profile of rising surpluses has not changed very much. The reason for this apparent contradiction is simple enough. If nothing had been done, the higher taxes than forecast represents a significant fiscal tightening compared to previous expectations, albeit a tightening that represents forecast error rather than policy decisions.[1] What the Chancellor did yesterday from next year onwards is restore the policy stance to what it was before the forecast error was discovered.

What this means is that the Chancellor has kept his path of modest fiscal tightening over the next five years, As I have said many times, this is simply not appropriate in a situation where interest rates are close to their lower bound and the immediate outlook is highly uncertain. But then this government has never understood about monetary and fiscal coordination.

Labour’s fiscal credibility rule (FCR) allows us to see how differently a Labour government would run the non-investment part of fiscal policy. The FCR requires the government to aim for current balance in 5 years’ time. That, of course, is zero on this chart. That tells you that, if this is indeed the path the current balance follows, Labour will have extra spending or lower taxes than the Conservatives worth over 1% of GDP. That covers the gap the IFS suggested in their costings from the 2017 manifesto with plenty left over.

As I have already suggested, Labour’s overall fiscal stance if they stick to the FCR makes a lot more sense. The Conservatives are trying to reduce the level of debt to GDP by too much prematurely. That does not make sense from a precautionary Keynesian point of view, or from a simple tax/consumption smoothing point of view. But macroeconomics remains an excluded consideration from Conservative/Treasury budgets, and ‘mediamacro’ pretends the government is just like a household that needs to pay off its debts within its lifetime.

This comment is cross-posted from Simon’s blog ‘mainly macro’.

[1] Suppose the forecast error was X. Then imagine that error had not occurred, but the Chancellor had raised taxes by X. The latter would clearly be a fiscal tightening by the Chancellor. But in macroeconomic terms taxes rise by X in each case, so the two are equivalent.

Photo credit from previous page: Blogtrepreneur/Flickr

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Since the introduction of austerity in 2010, the focus of each Budget has been on reducing the deficit and debt – much to the detriment of the wider economy. Despite promises to “end austerity”, the Conservatives remain wedded to this ideological approach. But it doesn’t have to be this way.

This podcast series, hosted by Michael Davies, explores a number of different progressive perspectives on the Budget. Each episode is an interview with one of our PEF Council members on their area of expertise, and offers an alternative lens through which we can understand and analyse the Budget and wider economic policy making:

• Unpacking ‘deficit fetishism’, with John Weeks
• “Where will the money come from?”, with Ann Pettifor
• Gender and the Budget, with Susan Himmelweit
• A Keynesian perspective on the Budget, with Robert Skidelsky
• How to fix the tax system, with Richard Murphy

Together, they show how a progressive government ought to approach the Budget upon election. Listen now on our Soundcloud page.

Photo credit: Flickr / James Stringer.

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In his speech today, the Shadow Chancellor listed examples of the egregious harm inflicted on people in this country by eight years of austerity. Perhaps most shocking has been the impact on children in Britain – rising poverty, contracting resources to educate them and maintain their health, even the closing of playgrounds, a litany of parsimony to make Ebenezer Scrooge blush. (For more on the impacts of austerity, see the PEF publication 10 Years Since the Crash).

Photo credit from previous page: IBTimes

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Austerity has severely damaged Britain’s physical and social infrastructure. Coupled with a fall in real wages, austerity has shrunk Britain’s social wage. No wonder British voters are angry and disillusioned. Theresa May, aware of the imminence of a general election, is worried by public anger, and has called for an end to austerity. The Treasury will defy her – successfully, just as they have defied earlier governments, and just as they will attempt to defy any future Labour government. For the ‘Treasury View’ is unchanged from that which worsened the Great Depression of the 1930s.  It can be summed up as follows: “Any increase in government spending necessarily crowds out an equal amount of private spending or investment, and thus has no net impact on economic activity.” 

Let’s examine the case for a £50 billion spend.

Britain’s total income (nominal GDP) in 2018/19 is set to be about £2.1 trillion. If we think of Britain’s GDP as the size of the economic ‘cake’, then the ‘cake’ has shrunk – largely as a result of the double whammy of the Global Financial Crisis worsened by austerity. As the IFS explains “the economy is 16%, or £300 billion, smaller than it would have been had it followed the pre-crisis trend.”.

Given the shrivelled state of Britain’s economic ‘cake’, an increase in spending by government of £21 billion would represent just 1% of the nation’s income. An increase of 2.4% of GDP would imply a spend of £50 billion overall. Before discussing both the spending and its financing it is important to understand that government spending, at a time when the economic ‘cake’ has shrunk, will increase the nation’s income. In other words, the ‘cake’ will expand, and the ‘slice’ that is the government’s share of the cake, will shrink.

What will be the impact of £50 billion spending?

According to the OBR total public spending (TME), including capital spending, in the current year is about 38.4% of GDP, and due to fall to 38.3% in 2019/20 (before the Budget of course). A spend of at least £50 billion would increase public spending to 40.7% of GDP next year. Even so, spending would be lower than it was for five years from 2008 at the height of the crisis. More significantly, it would be lower than for much of Mrs Thatcher’s period as Prime Minister.

During Thatcher’s premiership total spending in 1979-80 was 41% of GDP. In 1980-81 it rose to 42.9% of GDP. By 1982-3 total public spending hit 43.3% of GDP. In fact, public spending was over 40% of GDP throughout the first seven years of her premiership. And an increase of spending of this would simply put the UK as same level (as percentage of GDP) as the Netherlands.

£50 billion added to the 2019/20 Budget would add £13 billion to the NHS; £12 billion to the social security budget and £12 billion to local government services. £13 billion would be added to other government departmental services.

Part of these increases would just compensate for presently planned further cuts. Local government urgently needs further support, while the Justice Department budget, which includes legal aid, has been cut from £8.6 billion outturn 2013/14 to £6.4 billion in 2019/20 in real terms – roughly 25%!

The multiplier effect

An increase in planned government spending of 2.4% of GDP will have a multiplier effect – because despite high nominal employment, incomes are low, and the economy still well below its full capacity, despite denials by the OBR and the Treasury. (See the Bank of England: “In terms of output gaps, the OECD, IMF, OBR and EC all judge that slack has now been used up, and the economy is now operating slightly above potential.” ) We disagree.

£50 billion injected into the economy could raise national income. It would do so, because government spending – on both physical and social infrastructure – multiplies its impact. More people would be employed, and would pay more pay taxes (PAYE or self-employed taxes). Just as importantly, the increased income generated by government spending filters through to firms including those selling housing, energy, food and services. Increased spending by the newly employed, or by those whose wages rise, generates income for firms, and VAT revenues for government. And as those firms become more profitable, so they pay more corporation tax to HMRC. So an injection of £50 billion could generate another £25billion of income – thereby expanding the economic ‘cake’. At the same time, and over time, £50billion of spending will generate tax revenues for HMRC – to pay for the initial investment. 

How to pay for £50 billion now?

Government would pay for the increase spend in exactly the same way it finances its £56 billion expenditure on HS2.  It would do so by issuing gilts or bonds – in great demand by pension funds and insurance companies, amongst others.

The government is already intending to borrow the equivalent of 1.6% of GDP in the next financial year. This is below the level of planned public investment, and it is widely agreed that borrowing for positive investment is appropriate.  Moreover, tax and national insurance payments have been rising faster than the OBR anticipated back in March, by around £13 billion or 0.6% of GDP, and the multiplier effect of the extra spending will strengthen this further.   

In essence, therefore, around 1% of the additional spending of 2.4% of GDP would come from this increase in tax and NI payments. The remaining 1.4% of GDP would be raised either via further gilt/bond issuance, or by a mixture of this and increased tax take on corporate profits – noting that the UK is now well below OECD and G7 averages in such tax rates  – and increases in taxation on the very rich.  If none was raised by additional taxation, the total deficit would be of the order of 3% of GDP (so below that achieved in 9 of the 18 years of the Thatcher/Major governments).

None of this is rocket science. Nor is it beyond the levels of expenditure considered acceptable during the Thatcher era. All it takes is political will – and the overturning of the ‘Treasury View’.

Photo credit: HM Treasury / Flickr

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At the Conservative Party Conference, Prime Minister Theresa May pledged to “end” austerity; more recently, Chancellor Philip Hammond announced that a “good” Brexit deal would “pave the way” for this. But he is also committed to “cutting public borrowing to zero” and “balancing the books” – both code for more austerity.

So let’s get rid of any lingering suspense right away: austerity isn’t over yet – and it’s unlikely that the Budget Statement on the 29th of October will change that. Indeed, Mr Hammond is getting his excuses for continued austerity in early, such as the possibility of a poor Brexit agreement.

But why persist with austerity? It’s clearly not working. And if the need for immediate cuts in 2010 was as urgent as George Osborne assured us it was, we might have expected to see at least some sign of a positive effect in the space of nearly a decade. Since we haven’t – with the deficit remaining a deficit and national debt continuing to be largely unaffected – what’s the point of continuing with austerity?

A cursory look at economic history soon reveals that opting for austerity in a recession will, as we have been reminded since 2010, actually make things worse. Even the feeding frenzy of market panic, predicted by Osborne if there was no credible plan for reducing debt, has failed to materialise – in spite of his plan turning out not to be credible.

Don’t make promises you won’t keep

So could Hammond really bring an end to austerity on the 29th? Whilst tax increases are widely expected in the budget, the mere mention of higher taxes could be enough to further destabilise an already fragile government – highlighting the sharply political (rather than economic) basis of austerity. May’s attempts to undermine Labour’s campaign in the run-up to the 2017 general election – by apparently embracing more progressive policies – also clearly demonstrates the influence of politics on policy; mere weeks after the election, May was making a speech in praise of free market capitalism.

This “U” turn may provide a clue as to the real meaning of “ending austerity”, which may well just mean “not calling it austerity anymore”. If we take this and the failure to address Osborne’s cuts (some of which are yet been implemented) at face value, it’s hard to see how Hammond can change the game in one budget speech – or half a dozen, for that matter. More of the same, in terms of policy, will simply mean more of the same in terms of economic and social outcomes. So we clearly need something better.

Growing out of debt 

As it happens, there is a much better way to deal with public debt – and for that matter, a questionable “Brexit” arrangement, if any at all. It’s called economic growth. A quick look at the various policy responses to the Great Recession reveals that countries which delayed austerity until the economy was in a sustainable recovery – like Iceland, Ireland and the US – were all able to afford a modest reduction in spending without damaging growth. In the cases of Iceland and Ireland, the brunt of austerity was borne by those who could best afford it. Society was prioritized over finance, and the social and political unrest experienced elsewhere was avoided. Contrasting this with the humanitarian crisis in Greece, the rise of “populism” across Europe, and the all too familiar effects of prolonged austerity in the UK, demonstrates the stark difference between austerity in a growing economy, and austerity in a fragile one.

Following Labour’s initial response to the 2008 crisis, the UK was actually experiencing the beginnings of a recovery. But the following Chancellor, Mr. Osborne, decided to go all Tony Blair – “tough on growth, tough on the causes of growth” – a strategy that predictably brought no positive results (but plenty of undesirable ones) for almost a decade.

Economic growth has very obvious benefits. For a start, it’s the only way out of a recession – a recession being defined as two or more successive quarters of negative growth. A growing economy will drastically reduce social welfare costs, and will also significantly increase the government’s tax receipts. Both these things will rapidly improve the deficit, and hence, public debt. This has been the case ever since governments committed themselves to income tax and welfare spending at the beginning of the last century – which is why, if Hammond continues with existing policy after the 29th, he (like Osborne) will be flying in the face of a century or so of economic reality.

Austerity: past its sell-by date

The popular arguments for austerity have been out of date for at least a hundred years. No longer can a nation’s budget be convincingly compared to that of a family or business – nor can state borrowing “crowd out” private investment. Before the 2008 financial crisis there was, after all, enough credit left over to fund yet another bubble of prodigious size. The economic equivalent of the unicorn – the dream of “expansionary fiscal consolidation” – has also been laid to rest by the two most recent UK chancellors. And unless you happen to be a member of the Eurozone, situations like that in which Greece found herself are extremely unlikely.

None of this, of course, means that we won’t still be hearing these arguments for many years to come. But whilst they might have made a degree of economic sense when the likes of Adam Smith and David Ricardo were writing, since that time the world – and economics – have changed out of all recognition. Thus, during the 1930s, when John Maynard Keynes was writing, he didn’t in fact come up with a new theory of the economy – rather, he produced a theory of the new economy. His conclusion was clear, too: “austerity is the policy for the boom, not the slump”.

Our economy needs a gardener

So where does all this leave us? It strongly suggests that what we need is a Prime Minister who knows all about growth. So whilst Jeremy Corbyn has taken a certain amount of stick from the media for tending his allotment, he will be acutely aware that with his tomatoes and potato beds, cutting back on feed and “expansionary” fertiliser before the crop is well established will have disastrous results. He will also appreciate the utmost importance of the environment, and the need to both invest in its protection and ensure that growth is ‘sustainable’ in the fullest sense of the word.

Without growth, it’s hard to see how either our economy or society can improve. But the last eight years of austerity have been driven more by political than economic considerations. Pandering to the ideas of a fragmented Conservative Party, rather than the needs of Britain as a whole, makes as much sense as managing an allotment entirely for the benefit of the whiteflies, red spider mites and caterpillars.

It’s conceivable that Mr. Hammond will talk about expansionary policies on the 29th and actually mean what he says; but given the political rhetoric of the past eight years, it seems unlikely. What we really need now, is a government that is serious about progressive policies for the many – and that means actually ending austerity.

Photo credit from previous page: Flickr / kas d

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The Chancellor of the Exchequer, Philip Hammond, has decided to move this year’s Budget a month forward to October 29 in order to avoid clashes with the final stage of Brexit negotiations. He will be also making his announcement on a Monday, rather than the traditional Wednesday, most likely because Wednesday 31 October is Halloween. Fair enough; the comparisons write themselves.

Given the severe uncertainty around the form – if any – that Brexit will take, there is concern that the Chancellor’s announcements risk being made out of date by the outcome of next month’s talks. The perfunctory economic forecasts, at any rate, are likely to be even less accurate than they have been in budgets past.[1] Brexit uncertainty should not be used an excuse for more austerity, as argued elsewhere on this blog by John Weeks; if anything, the opposite approach should be taken. Still, Brexit may necessitate an emergency budget to replace this one before the year is out.

Still, the Chancellor will be making one announcement of lasting importance. He will tell Parliament the size of the spending envelope – roughly speaking, the total amount the Government plans to spend in future years. This is the first step in a longer process through which the Treasury exerts control over the rest of government, and the Chancellor’s decision will have a profound impact on the UK economy.

The long arm of the Treasury: how does it work?

The department Hammond runs, HM Treasury, is arguably the most powerful across government: it controls how much money the others have at their disposal. It does this in part by setting budgets for departments at semi-regular intervals through Spending Reviews.

More specifically, government spending falls under two categories. The first, Annually Managed Expenditure (AME), covers spending that has to be managed on a year-by-year basis because of its unpredictable nature – social security payments, for instance. Spending that can be effectively planned years in advance falls under Departmental Expenditure Limits (DELs), and these are intended as hard limits on expenditure. Together, these two categories make up Total Managed Expenditure (TME). Spending Reviews focus on setting DELs.

Resource versus capital spending: a feminist issue

Departmental Expenditure Limits themselves are split up into Resource DELs and Capital DELs. These roughly correspond to current or day-to-day spending (RDELs) and investment (CDELs) respectively. Notably, money can be reallocated from resource to capital budgets once these limits have been set, but not vice versa, suggesting a sort of hierarchy between the different kinds of spending.^[2]

The prioritisation of investment is understandable. The issue is that the government definition of investment covers physical infrastructure, but not social infrastructure – the health, care and education systems that our economy needs to function, just as much as it does bridges and roads.

Excluding spending on these systems from the implicitly more ‘worthwhile’ category of capital expenditure leads to neglect of social infrastructure, especially during a recession. Furthermore, since women are over-represented in social infrastructure industries and men in e.g. construction, this division reinforces a gender bias in economic policy-making.

How long a period will the Spending Review cover?

The last Spending Review was in 2015 and set DELs for the fiscal years up to 2019/2020, but nothing has been finalised for 2020/21 onward.^[3] These will be set in next year’s Spending Review, as announced by the Chancellor at the Spring Statement earlier this year. The spending envelope announced later this month sets the funding boundaries within which 2019’s review will take place.^[4]

In the run-up to the Spending Review, ministers will compete with each other and negotiate with the Treasury to secure funding for their respective departments. From their perspective, the envelope represents the total amount of money up for grabs, and marks the start of a ministerial race for prominence.

Spending Reviews are meant to be an exercise in planning for the future. But the uncertainty around Brexit means that the Chancellor might opt for only finalising departmental budgets for 2020/21, and then undertake another review when more information comes to light.

There is precedent for this in 2013’s ‘mini-Spending Review’, which only set spending for the 2015/16 fiscal year – the Liberal Democrats and the Conservatives, then in coalition with each other, knew they wouldn’t agree on plans extending far beyond the 2015 General Election.

Of course, the Conservatives may no longer be in power by this point. If a Labour government were elected during the period covered by the 2019 Spending Review, one would expect they would carry out their own review to radically change the path of government spending.

Why does this matter?

The size of the spending envelope tells us how much funding the Chancellor plans to make available for public spending, possibly for up to 2023/24. As such, it will give us some indication of whether austerity is really over, as the Prime Minister claimed in her conference speech, or whether this was all just hot air. The New Economics Foundation have published an excellent report on the different paths the Chancellor could take with his upcoming Review.

Furthermore, departments are not allowed to overspend the expenditure limits (DELs) set in the Review. Though DELs are occasionally revised, often the government will announce a new programme or new area of spending without making any changes to the limits already imposed on departments by the Spending Review. As such, the money for these announced changes must be taken from existing programmes.

For example, in a report I worked on for the Centre for Labour and Social Studies (CLASS) and the Public and Commercial Services union (PCS), we showed how the government’s grand announcements to lift the public sector pay gap could only come at the expense of public services or reduced public sector employment. This is a prime example of how Spending Reviews constrain departments years down the line. Progressives should thus pay close attention to the size of the Chancellor’s envelope when he unveils it in a week’s time.

[1] (That being said, it will be hard to beat the Office for Budget Responsibility’s 2010 forecasts on this front, in which they massively underestimated the damage austerity would inflict on the UK economy – see p. 18 of their Oct 2016 Forecast Evaluation Report.)

[2] HM Treasury, Consolidated Budget Guidance 2016 to 2017, p. 9

[3] Except for 2020-21 RDEL budgets for the NHS, Ministry of Defence and the Security Intelligence Agencies – these were set by the 2015 Spending Review. Source: OBR March 2018 Economic and Fiscal Outlook, p. 129.

[4] The Spending Review itself will focus on setting Departmental Expenditure Limits (DELs) but the envelope is sometimes framed in terms of Total Managed Expenditure (TME).

Photo credit from previous page: Anthony Easton / Flickr

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This blog is part of a PEF series of informative pieces by our Council members on what the budget is, its probable impact on our economy and what it implies for the common citizen – a progressive “what the budget means to you”.

The Treasury, via the Chancellor, announces its annual budget in the autumn, usually in November.  This year the Chancellor brought the date forward because in November the Commons agenda might be clogged with issues related to Brexit.  The last annual budget statement, on 22 November 2017, projected 2018-19 expenditure of £809 billion and revenue at £769 billion.  The coming budget will have quite similar numbers.

Closely following international convention, our government divides its expenditures into “current” and “capital” categories.  The current category includes wages and salaries, NHS drugs and other materials consumed within the budget year (which goes from 1 April to 31 March).  Capital spending refers with few exceptions to construction projects and expenditures on equipment with a life longer than the budget year plus depreciation of fixed assets.

More recent statistics (see Tables PSA6c_2 and _3) show total annual central government expenditure (September 2017 through August 2018) as £778 billion, of which £718 billion was the current account and £60 billion the capital account.  Total central government spending calculated at 36.8% of gross domestic product (GDP), with current expenditure by far the larger part: 34.6% of GDP for current spending and 2.9% for capital.[1]

This somewhat overstates the government’s commitment to investment, though. Once local government[2] and depreciation – roughly speaking, the loss of value in existing assets due to wear and tear –  are taken into account, net investment across the public sector[3] is even lower, around 1.8% of GDP.

To better understand the budget statement, it is useful to divide current spending into three sub-categories: interest payments on the public debt, recurring expenditures, and expenditures sensitive to economic fluctuations.  The size of and interest rates on outstanding public debt determine interest payments. These expenditures involve long term, contracted payments that cannot be reduced without flirting with debt default.

Recurring expenditures, funding for schools, the NHS, pensions, transfers to local government, defence and other government departments are relatively fixed and predictable (explained further in Michael Davies’ blog on the spending envelope).

Least predictable are expenditures that are sensitive to the health of the economy.  The most obvious of these are payments to the unemployed, which rise during recessions and fall during expansionary periods.  These expenditures, approximated by the “social assistance” category, represented about 14% of current expenditure and 4.8% of GDP in the year up to August 2018.  If actual expenditures differ from what is planned, this is usually because social support proves larger or smaller than expected, due to unanticipated fluctuations of the economy as a whole.  On the tax side economic fluctuations also undermine predictability; revenue grows more slowly or falls in recessions and expands during recovery.

Over the eight years of austerity the major cuts in spending have fallen on public investment and transfers to local government.  The annual budget of 2006/2007, just before the financial crisis, allocated over 22% of current spending to local government grants.  In the 2017/2018 budget that share fell to less than 17% (Table PSA6e_2).

One of the least important issues in the Autumn Statement will be the fiscal balance, though it is certain to capture headlines with such dubious metaphors as “budget black hole” and “living beyond our means”.  As explained in blog #6 of PEF’s 100 Policies to End Austerity series, a balanced fiscal budget is a political target, not an economic one.  Over the 12 months through to this July, total expenditures exceeded revenue by a modest £32 billion, just over 1.5% of GDP.

To make sense of the coming budget statement the first step is to ignore the media obsession with whether the Chancellor has or has not reduced borrowing.  Whatever happens to that number (called “public sector net borrowing” or PSNB) will be the consequence of unpredictable factors impacting on both expenditure and revenue.

Because our economy has expanded quite slowly over the last year, revenue may well fall below Treasury projections.  Any difference from projections is likely to be trivial, no more than a random variation.  The important issue is whether the 2018/2019 budget will enhance or further undermine the well being of the population.  The PEF blog series on the 2018 Budget focuses on that issue – will the next budget bring further austerity or, at long last, a step towards enhanced well-being?

[1] GDP figure used for this period is 12 month centred moving total for August 2018 inferred from Table PSA1.

[2] Capital grants (grants ear-marked for investment) from central government to local government contribute to central government net investment but detract from local government net investment, to avoid double-counting. Once intragovernmental capital grants and depreciation are taken into account, net local government investment is negative.

[3] Excluding public sector banks, i.e. RBS.

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Willie McBride, captain of the famous 1974 British Lions rugby team, famously told his team mates before a match with South Africa, to “get your retaliation in first”.  Operating on the same principle, the Chancellor busily gets his excuses in first in the run-up to his budget on 29 October.

Recently, Mr Hammond promised to “pave the way” for the end of austerity should there be a good Brexit deal.  This good deal, he maintained, might bring a double bonus. The first bonus in question would come from improved growth following the good deal, with increased growth generating increased revenue.

The second bonus will arise from something Mr Hammond calls a “fiscal buffer”.  To quote the Chancellor himself on this unfamiliar concept (which the Guardian identifies as £15 billion), “As uncertainty is unwound and we’re in more favourable circumstances, logically, one would need less of a fiscal buffer and some of that could be released for to support [sic] the spending envelope or to deliver tax cuts”.  This term, which the Chancellor may have created for the occasion, seems to mean little more that not spending.

If my interpretation is correct, I can translate his sentence into simple English — “when the Brexit outcome is clear I will authorize more spending or lower taxes”.  From this translation we can derive a clear message.  The budget date is 29 October.  The probability is nil that Brexit “uncertainty is unwound” by 29 October.  Therefore, using Mr Hammond’s logic, the “favourable circumstances” necessary for more spending or less tax will not occur in time for the budget.

Simply put, Mr Hammond has got his excuses in first.  To paraphrase Winston Churchill (Mansion House speech 10 November 1942): “29 October will not be the end of austerity, it will not even be the beginning of the end of austerity; but it will be, perhaps, my excuse for more of the same”.

The Chancellor has no “fiscal buffer”.  No such concept or category exists in the Treasury.  The “savings” that the Guardian credits Mr Hammond as accumulating “this year” do not exist.  This conjectured £15 billion is nothing more than austerity itself – not funding public services.  However, the imaginary Brexit dividend is, indeed, a “double bonus”.

First, it serves as propaganda to support the Prime Minister’s fight for votes on her soon-to-emerge agreement with EU leaders – “vote against the PM’s plan and you undermined public finances”.  Along with this transparently bogus bonus goes the second, Mr Hammond’s ready excuse to continue austerity – “the Brexit uncertainty remains so additional spending will be reckless”.

The putative Brexit uncertainty is an ideological gift that keeps on giving.  In reality, if the May government does not fall, Brexit “uncertainty” will continue far beyond 29 March 2019, providing justification for austerity till end of Tory days.

It is clear that the May government feels that it must hold out the promise of ending austerity.  Theresa May offered that hope in her Conference speech and now her Chancellor repeats it, neither telling the public how it would be achieved.

They do not tell us how because the answer cannot be spoken.  Austerity will end when the Tory government ends and a progressive one replaces it. It’s that simple.

Photo credit: EU2017EE Estonian Presidency / Flickr

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At the Conservative Party Conference the Prime Minister pledged to bring austerity to an end. I applaud that pledge and urge her to act on it. In light of Tory budget commitments through 2020, that pledge must be viewed with considerable scepticism.

If we take her at her word, what might delivering on her pledge involve?

To assess whether austerity ends, we need a generally accepted definition of austerity.  Spending cuts are not austerity itself, but rather the form it takes.  The driving ideological force of austerity policy is the goal of making public expenditure equal public revenue; to eliminate all public borrowing and thereby achieve the here-to-fore elusive target of “balancing the books”.  Austerity will end when the government treats the fiscal balance, surplus or deficit, as a policy instrument not as a problem.

Once we recognise that austerity is the policy to achieve zero public borrowing, the end of austerity is clearly revealed.  Ending austerity means restoring the expenditure sacrificed in the pursuit of zero borrowing.  A Financial Times article estimates a 14% fall in inflation-adjusted overall public expenditure since 2010.

The end of austerity does not require higher tax rates to prevent greater borrowing.  The assertion that restoring expenditure to its pre-austerity level requires more public revenue is no more than a restatement of the austerity ideology that budgets must balance, the “how to pay for it” cliché.

While many if not all public services have suffered from spending reductions since 1980, restoring local government funding would be the appropriate place to start, for at least three reasons.  First, of major spending categories, local government suffered the most severe cuts.  Second, the services delivered by local governments directly affect households – e.g. education, elderly care and supporting council house tenants.  And third, restoring this funding could be quickly done because salaries account for the overwhelming majority of local budgets.

Restoration of central government grants to local authorities would send a clear signal that the Prime Minister intends to end austerity.  How much expenditure would restoring grants to local government require?  Using the chart below, I start with the simplest calculation, returning grants to their annual level achieved in the first quarter of 2010, the last full quarter with a Labour government.  The quarterly numbers in the chart, all in current prices, are annual totals, each quarter’s grants plus the three previous quarters (“annualized”).  The numbers are not adjusted for inflation because neither the Office of National Statistics nor the Office of Budget Responsibility provides inflation indices at this level of detail.

Through the second quarter of this year Parliament local authorities received an annualized grant total of £112 billion, £15 billion less than for 2010Q1.  If inflation in cost of LG services followed the consumer price index, returning LG grants to where they were eight years ago would require an increase of £18 billion.

Returning to the funding level at the beginning of 2010 would be a very modest gesture.  In early 2010, LG grants represented 28% of other central government current expenditure, falling to 20% in mid-2018.  A serious move to end austerity in LG funding should bring spending back to its 28% share, requiring an increase (unadjusted for inflation) of £46 billion (blue line in chart).

Restoration of LG grants at 28% of other current expenditures does not account for spending losses due to the overall decline in current spending as a share of GDP due to austerity.  At the beginning of 2010 other current expenditures were 30% of GDP, falling to 27% in 2018Q2.  This decline in the share of national output going to public services constitutes the essence of the austerity ideology.  For Theresa May to deliver on “ending austerity”, a return to the early 2010 spending share is essential.  Doing so implies an increase by £60 billion.

Annualized Grants to Local government Compared to Last Quarter With a Labour Government, 2010Q1-2018Q2 (current prices)

Notes:

For each quarter expenditure is annualized, taking the sum of expenditure in that quarter and the previous three.

Actual compared to 2010Q1 – 2010Q1 value subtracted from each quarter.
Actual compared to 2010Q1 share of current spending – In 2010Q1 local government transfers were 28% of current spending. That percentage is applied to all subsequent quarters.
Actual compared to 2010Q1 share of current expenditure in GDP – Previous adjusted for fall in current spending as a share of GDP.
Adjusting for population growth – Previous adjusted for quarterly population growth at 0.2%.

Source: Office of National Statistics.

These calculations ignore an obvious change affecting the demand for LG services.  Our population is now 7% larger than it was in early 2010 (69.9 million compared to 62.5 in early 2010).  An end to austerity would return British residents to the level of local authority grants per person when austerity began.  This requires a pledge of at least £73 billion (“at least” because I have not adjusted for inflation).

“Where will the money come from”? It will come from growing taxation and a bit of borrowing.  A feasible and quite conservative programme to restore the irresponsible LG cuts might be to increase expenditure in each quarter until achieving the additional £73 billion at the end of the current Parliament, which implies an additional £8 billion each quarter.  If nominal GDP grows at the same rate as during 2016Q1-2018Q2 (0.9% per quarter) and public revenue remains at 35.8% of GDP (its average over the ten quarters), quarterly revenue increase would almost equal quarterly increases in LG grants.  Thus, annual public borrowing will be at almost the same in mid-2020 as now (23 billion compared to the present 21 billion).

These simple propositions – nominal growth continues at its present sluggish rate and the Prime Minister introduces no  tax cuts – allows for recovering of local government grants, with a fiscal outcome quite consistent with the dysfunctional obsession with reducing public borrowing.

Photo credit: Hazel Nickelson / Flickr

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