Published:

32 comments

Rishi Sunak insisted yesterday that Wednesday’s Spending Review statement will not announce austerity, because “you will see an increase in Government spending”.

By that measure, as the Chancellor knows well, we have never had austerity at all – or at least not in modern times, and certainly not under David Cameron and George Osborne.

For each year since 2010 has seen a rise in government spending.  What Osborne did as Chancellor was the cut the rate of its growth, which is not at all the same thing.

If that is to define austerity, then the first recent austerity Chancellor was Alistair Darling, not Osborne – who pledged to “cut deeper than Margaret Thatcher” in his 2010 Budget.

And if relaxing any drive to achieve a surplus, or at least balance, or at least ending a “structural deficit” (however defined) signals an end to austerity, what about Osborne’s own Budget of November 2015?

For it was then that the former Chancellor found £27 billion down the back of a sofa, and announced an easing of his deficit reduction plan.

Perhaps Philip Hammond, then Foreign Secretary, wasn’t paying attention – because he pulled off the same trick in his 2018 Budget when, as Chancellor, he chose to prioritise more spending over financial discipline.

Hammond said in terms that “austerity is coming to an end” – an echo of Theresa May’s own statement to that effect in the Conservative Party Conference speech two months earlier.

And maybe Boris Johnson had dozed off for the entire eight year period, since he has said that he told other Conservatives in 2010 that “austerity was just not the right way forward for the UK”.

So this Tory story travels from covertly easing austerity to openly doing so to saying that it should never have happened in the first place – which it didn’t anyway.

There is a point to this history, other than showing up the tergiversations of politicians, as the Spending Review approaches.

Which is that the easing of control on spending, and language about it, over the last five years is no coincidence.  For the effect of Brexit has been to make the future for tax and and spending more uncertain.

That’s inevitable in any decision that has potential upsides and downsides for the economy.  But this uncertainty has been ended, at least for the short-term, by another seismic event: the Coronavirus.

To condense a long story into a single sentence, it is sending both debt and deficit up, up, up – which means tax revenues or spending cuts (that’s to say, reductions in the rate of increase) if we can’t grow our way out.

The Office for Budget Responsibility produced grisly figures for Sunak’s first Budget and will doubtless produce more for his second, too.

But the sum of its view is better expressed in words than figures – those of Robert Chote, its Chairman, in an OBR presentation last March.

“The bottom line is that the current approach looks sustainable over the medium term on current forecasts for growth and borrowing costs,” he said.

“But the public finances are much more vulnerable to inflation and interest rate surprises than they were.”  So much will depend this week on how much risk Sunak is prepared to take.

What is certain that the economy has not been growing at anything like the rate it was before the financial crash – not withstanding the virus.  Since it erupted, we haven’t had growth of more than 2.6 per cent a year.

Before it took place, the lowest rate of growth in roughly 15 years was 2.3 per cent.  So unless that growth comes, we will undoubtedly be spending more than we can afford.

In a nutshell, we are moving from a period during which Chancellors could postpone hard choices to one where they will no longer be able to do so.

Sunak consequently faces at least two big decisions on Wednesday.  First, does he go for growth in the short-term, postpone tough fiscal decisions, cross his fingers, and hope that interest rates and inflation stay low?

And second, if he doesn’t, what mix of tax rises and spending increases should he seek to impose?  Whatever answers he gives will have stark political implications for this Government’s future.

For if he goes for growth, and so takes a risk with those inflation and interest rates, he could find himself seeking to cut taxes and raise spending during the run-up to the next election if the gamble fails.

But if he doesn’t, the pressure will be on him to raise taxes now – thus depressing profit margins and consumer spending at a time when the economy is in the doldrums.

The unpalatable truth is that, as David Gauke wrote on this site last weekend, the political and economic cycles are out of kilter.

Whichever choice the Chancellor makes, it’s worth remembering that the tax take, at 34.4 per cent of national income, the tax take is already at its highest sustained level since the 1940s.

And we simply can’t tax ourselves back to prosperity. So amidst all the talk of tax rises, where’s the spending cuts balance?

We believe that the least bad course for Sunak to take on Wednesday will be to go for growth and cross his fingers – so taking a leaf out of the Ronald Reagan playbook, and “letting the deficit grow big enough to look after itself”.

In particular, the Chancellor should take a leaf out of the Centre for Policy Studies’ book, and once again crank up the engine of supply-side reform.

Such an approach should also run in tandem with a push to join-up cities and towns outside the greater South-East through better transport, skills reform and devolved power – if levelling-up means anything, it’s this.

All that would suit Boris Johnson – who, as we have seen, recoils at spending discipline – very nicely indeed.  Not to mention Conservative MPs, who were elected on a manifesto which promised more of everything (pretty much).

We say all this in the knowledge that such a gambit could go horribly wrong.  We are not at all sure that this fissiparous generation of Tory MPs has the stomach for financial discipline.

Sunak could thus find himself in the horrible position of seeking to cut spending and raise taxes during the immediate run-up to an election…

…With a Prime Minister who, to use the Chancellor’s own figure of speech, clings to his credit card.  And a Parliamentary Party that won’t back the necessary measures in the lobbies.

Throw in a second Scottish independence referendum and No Brexit Trade Deal turmoil (the second seems less likely than the first), and the conclusion is stark.  Come to think of it, it is anyway.

Namely, that Ministers and MPs can run, but they ultimately can’t hide.  If they shirk imposing financial disciple, the market do it for them.  Now that’s austerity.