On The Trajectory Of Public Spending In The Next Five Years
David Cameron — against the grain of the polls — won a spectacular electoral victory last week.
It's almost like 1992 again, except without Kurt Cobain and Mr. Blobby.
In the wake of Cameron's victory I felt pretty despondent. Not as a Labour partisan, but as an adherent of Keynesian macroeconomics. In a weak economy, spending cuts tend to be very bad for growth. I don't believe that second order confidence effects that may or may not materialize trump the first order effect of the spending cuts themselves. Contraction tends to be contractionary. And the Tories ran on a manifesto of 7 percent total cuts per annum, which equates to 15 percent cuts to government departments outside ring-fencing the NHS, international development and parts of the education budget. That includes cuts of 10 percent of the welfare budget — or £12 billion per annum — that is so far unspecified.
Yet the last government were not full-time austerians. As Frances Coppola pointed out in 2013, Cameron and Osborne left austerity on hold that year, seemingly to grease up the economy and improve the Tories' electoral chances, as at that time they were way behind Labour in the (possibly wrong?) polls. As Paul Krugman summarizes: "Cameron and company imposed austerity for a couple of years, then paused, and the economy picked up enough during the lull to give them a chance to make the same mistakes all over again."
This — crucially — suggests that Cameron and Osborne understand that contraction is contractionary. All that stuff about the so-called confidence fairy? It's seeming more like ideological window dressing.
And, whoosh! As soon as Cameron stopped slashing spending — and beating the country's head against a proverbial wall that he could conveniently blame on the last Labour government — the economy began to recover pretty juicily, with Britain achieving the much-vaunted "fastest growth in the G7!" and Cameron and Osborne immediately declaring "austerity success!" when in reality it was precisely the opposite. Ending the austerity secured a recovery, albeit the slowest one for 300 years.
Not just that but, after Cameron stopped the austerity the deficit started falling pretty rapidly after being elevated for years. Win, and win.
So after a bit of thought I give a lot of credence to Simon Jenkins' suggestion that Cameron and Osborne will ease off the austerity altogether: "While the austerity of 2010-12 was over-tight, it was redeemed by an abrupt fiscal loosening that wrecked Osborne’s targets but was concealed amid blood-curdling, market-soothing but implausible rhetoric of more austerity ahead. Osborne cannot sustain that deception. We shall probably hear less of deficit and debt and more of growth and jobs. As the recession passes into history, the feasibility of the austerity strategy will wear thin."
Krugman doesn't agree. Neither — in private conversation — does my colleague Frances Coppola. Neither did I in the night after the election. "The economy" might have been one of the top reasons why the English streamed out to vote Tory, but Cameron is threatening a recession by promising further and deeper and faster spending cuts on top of the cuts of the last five years.
But as Jenkins points out, Cameron already has an awful lot on his plate without wanting to cause a recession with the austerity hair shirts. Rebellious hardline Tory backbenchers, a reduced effective majority, and an E.U. referendum spell a bumpy ride in the coming years.
Let's remember how Thatcher handled this. For all of The Economist's talk of Thatcher "smashing the Keynesian consensus", well, she was hardly an austerian. As George Eaton notes in The New Statesman: "Despite the rhetoric of "rolling back the state", Margaret Thatcher was less successful in cutting public spending than many of her supporters (and opponents) like to believe… On average, it increased by 1.1 per cent a year. Under the coalition, by contrast, it is forecast to fall by an average of 0.4 percent a year in real terms (departmental spending is being cut by 11 percent but debt interest and high unemployment mean the total reduction is far smaller)."
The choice is pretty clear. Ease off the austerity, keep growth up, keep the tax revenues up, keep the deficit falling, and — much to the chagrin of commentators like myself — still be able to claim in a superficially plausible way that the austerity worked and that the Tories are the party of growth, prosperity and fiscal responsibility. Or slash away, suck money and demand out of the economy, and risk triggering a new recession that would be much harder to blame on the last Labour government than the weak economy of 2010-2013.
I suppose it all comes down to whether Cameron really believes in the growth-boosting virtues of austerity, or whether austerity was just an excuse to roll back the state a bit and achieve some Tory ideological imperatives.
The Tories could conceivably do the same thing they did in the Coalition — three years of slashing, followed by two years of easing off the slashing in the hope of winning Boris or George or Teresa the 2020 election. But Cameron has already indicated he wants to retire midway through this parliament. Would he really want to go with the economy in trouble?
So my bet is that even if the bulk of the cuts go ahead, they will at least be offset to a strong degree by extra tax cuts or handouts to juice the economy and keep growth going and keep unemployment relatively low.
Of course, spending cuts offset by tax cuts would likely still represent a redistribution of wealth away from the neediest, and toward the rich, which I strongly disagree with. But it would — from a fiscal standpoint — be better than just slashing and hoping for the confidence fairy to show up.
It was Milton Friedman and not Richard Nixon who said that "we're all Keynesians now". That was not for lack of trying. Countercylical fiscal policy is counterintuitive, and hard to understand. Cameron and Osborne — like Hoover and Brüning before them — tried to defy Keynes with a very tight austerity program during the early years of the last parliament, and got their fingers burned. They managed to switch course just in time to win the election. This time — like Major and Thatcher and Nixon and Reagan before them — I bet they are smarter.
If not, well. Recession is looming.
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