The standard recipe for economic revival from some of our comrades on the right is more tax cuts and less red tape. We have always raised an eyebrow at it.
Not because there is anything wrong with either less bureaucracy and tax, but because this formula all too often leaves out another vital ingredient in the mix: lower spending – or rather lower rises in the rate of it – to march in step with lower taxes.
Sound money should be the guiding star of economic policy. Since the dismal science is also a social science, and so bound up with what people do, its laws are ultimately about human behaviour. These are made by the Gods of the Copybook Headings, and set out such universal truths as: you will run out of money you haven’t got.
One of the risks of government doing so that it develops a borrowing habit to compensate. Like an alcoholic’s dependency, this ends in ruin – with the economy, and the lives and livelihoods on which it depends, collapsing under the accumulated weight of debt and deficits.
None the less, there is a time to bend laws, if not break them, and one of those times is now – and in the near future when the world, God willing, emerges blinking from the Coronavirus. For the moment, our right-wing friends and comrades are right.
The Government should take its cue from Ronald Reagan, who once said that he wasn’t worried about America’s deficit, because “it’s big enough to take care of itself”. Yes, we need a Reaganesque programme of tax cuts, regulatory reform and infrastructure spending to try to grow rather than cut ourselves out of the hole we are in.
The latest measurement of it comes from the Office for Budget Responsibility. It sets out a three month lockdown scenario in which economic activity gradually return to normal over the next three months. GDP falls by 35 per cent. Unemployment hits ten per cent. Borrowing reaches nearly £100 billion.
Please note that although it gives a rebound figure of a 27 per cent rise in growth in the third quarter of this year it adds a 13 per cent fall in the last. The OBR’s estimate comes on top of a leaked Treasury paper forecasting a £337 billion budget deficit this year. Debt hits 96 per cent of GDP.
It is hard to capture the scale of such a disaster in human terms, let alone that of the world economy of which ours is part, but that unemployment figure offers a hint. It hasn’t reached ten per cent since the post-ERM adjustments of the early 1990s.
Remember: all this is predicated on the quick return to normal which is unlikely to happen. No wonder Rishi Sunak says we face “a significant recession”. The Chancellor is not a man given to overstatement, so for his “significant” we should substitute the “mega” of the Institute for Fiscal Studies.
In crude terms, there are four broad approaches to debts, recession and deficits on this scale. Governments can try to tax, print, borrow or cut their way out of trouble. So, first, tax. Every Budget we can remember contains some new tax or tax rise or both.
Modern government must tax something to raise revenue for public services, and there is a strong case in principle for shifting the burden of taxation – from income to spending, for example. But floating the idea simply illustrates the problems we have. This scarcely the moment to check consumer demand.
And overall, nations can’t tax their way back to prosperity. Especially since tax revenues as a share of national income are at their highest sustained level since the 1940s. Next, printing. Nick Boles believes that Parliament should instruct the Bank of England to provide £400 billion of monetary financing.
The reflex of conservatives old enough to remember it, or well informed enough to have heard of it, is to glance back to the inflationary era of the 1960s or 1970s. Boles argues that the circumstances now are different, precisely because we live in a deflationary era, rather than the reverse.
At the heart of his case is a big moral appeal: namely, that we are passing enough of a debt burden already on to our children and grandchildren. Though he doesn’t quite say so, his argument suggests that this generation should take the risk of a one-off inflation hit. And a bit of it would of course eradicate some of the value of Britain’s debt.
Economists are divided – as they inevitably will be – about whether inflation will be a feature of our post-virus landscape. Some say that it won’t be, because of depressed demand. Others, that it will be, since there will be bottlenecks in production and supply chain disruption.
Since the former looks likely to settle in, like a run of bad weather, and indeed is with us already, the idea of some new monetary stimulus shouldn’t be dismissed out of hand. But the Bank of England is certain to reach instead for the tried and tested: more quantitative easing.
This looks like the least bad option. It may be that for the foreseeable future the Government is able to borrow at rock bottom rates. And perhaps we will be able to grow our way out of the crisis. Maybe government will invest more effectively in infrastructure than in the past to join up urban conurbations and give them critical mass.
Perhaps Ministers will make a virtue of necessity, and use the effects of the crisis on higher and further education as a chance to usher in the Augar reforms, or something like them, and make a major switch to training. Maybe the post-virus will offer Boris Johnson a reset moment on housing reform.
Brooding on the future in Downing Street, perhaps he will send for Liz Truss, and giving her a mandate to further her disruptive ideas about supply side reform in over-regulated occupations, planning law and energy supply. We ought now to have a window for reforming social care. “Maybe this time,” as Liza Minnelli sings in Cabaret.
Taking a chance on all this looks a lot more palatable, and politically attractive, than cutting the rate of spending as a first resort. Johnson can thank George Osborne and David Cameron for the chance to booster his way out of recession. They put the changes in motion which brought the deficit down to about one per cent of GDP.
But we are not living happily ever after and Britain has an unhappy recent history of thinking that it can. Capital spending that delivers, industrial policy, a better trained workforce, investing rather than spending: we have our economic strengths, but these are not among them.
On this site, Neil O’Brien has wrestled with the question of whether we will indeed to borrow at those low bargain basement rates – the foundation stone on which a Reaganesque policy would be built. It doesn’t turn out to be this time for Sally Bowles. The Gods of the CopyBook Headings wait in the wings.