Professor John Weeks on why he believes the new Chancellor should choose to end the austerity dogma now.
First published in March 2020.
Last week I forecast that the March budget would substantially increase spending, especially on flood infrastructure and health. In effect, that will suspend Tory commitment to austerity, which I define as making balanced budgets the central goal of fiscal policy (The Debt Delusion, chapter 1).
It appears that events will prove my forecast correct, overall and in detail. As I anticipated, the Chancellor Rishi Sunak committed the government substantially increased NHS spending in an effort to control the coronavirus. These forecasts required no great insight or insider knowledge, merely the willingness to think outside the austerity dogma that dominates the mainstream media.
Notwithstanding the obvious need for suspending austerity, the mainstream media across the political spectrum reports the policy change begrudgingly and with alarm for its implications for “sound finances”. With even the Guardian concerned about the Chancellor’s “hasty” policy shift, the media remains in the grip of the austerity ideology.
This alleged imperative to balance the budget, to be suspended only under dire circumstances such as war and plague, has no analytical justification. It is pure ideology. Rational budget policy uses public spending and revenue to balance the economy – keep it near its potential. Whether that results in a deficit or surplus depends on the vigorousness of private sector investment and export demand.
When the private sector and external demand are robust, national governments tend to run surpluses, then deficits when they are weak. That pattern is known as ‘counter-cyclical budgeting’. With a growing consensus that a global recession looms, the case for counter-cyclical intervention is strong. We should not view increased spending as a choice of desperation but as the rational policy response to depressed private economic activity.
In addition to the analytical justification for fiscal intervention in times of private sector weakness, UK public finances have shown a steady trend toward lower borrowing for the ten years of Tory government. Had the Cameron-Osborne governments not indulged in expenditure cuts, the deficit would have declined even faster. Greater expenditure would have stimulated faster economic expansion, generating more revenue growth.
Even the unprecedentedly low expansion rate during the last ten years brought a continuous fall in borrowing as the chart below shows. At the end of the first twelve months of the centre-right coalition government (through April 2011) public expenditure was about £700 billion and revenue below 600 billion, for a negative balance of about £140 billion. Through January of this year accumulated twelve-month expenditure reached almost £850 billion and borrowing less than £40 billion. Borrowing has remained almost stable, under £40 billion, for over a year.
Notes: The value for each month is the 12 month total to that date, also called the 12-month moving total. Expenditure and revenue on left vertical axis, fiscal deficit on the right. / Source: Office of National Statistics
An imminent UK recession provides the technical basis for a purposeful fiscal intervention, and the low level of borrowing (about 1.5% of GDP, ONS Table psa5a) makes any negative effect quite unlikely. Indicators of a UK recession pre-date the possible effects of the Coronavirus. The eurozone has faced recessionary dangers for months, largely due to the depressing effects of the EU fiscal rules. In addition, the slowdown of the Chinese economy preceded the virus pandemic, and the latter may convert the slowing into decline.
In the UK media, the Financial Times comes closest to explicit support for an active fiscal policy. While the centre-left Guardian worries about whether “the chancellor’s sums add up and [will] win credibility with the financial markets”, and the ‘highly regarded’ Institute for Fiscal Studies frets over not meeting budgetary targets. The business-oriented FT recognises where priority lies. Now more than ever is the moment that “fiscal policy should support growth”.
However one wishes to cliché it – “splash the cash”, “spend recklessly”, “create a budget black hole” – the moment to end the austerity dogma is now.🔷
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🗳️ Rishi Sunak