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Hello to a booby-trapped Austerity 2.0

IF I’VE learned one thing from my time in politics, it’s the simple truism that the establishment never leaves a good crisis go to waste, writes Jonathan Edwards MP. The so-called “Trussonomics” experiment’s implosion has paved the way for the fiscal hawks to push their claim that the time has come for another dose of austerity.

After a series of catastrophic economic decisions and some bad luck, the public finances are in a dire state. Having said that, Japan, Italy and the United States have higher debt-to-GDP ratios than the UK.

Basing economic policy on the so-called “golden goose” of the City of London meant that the 2008 financial crash hit the UK economy hard. 

The first dose of austerity by Cameron and Osbourne sucked demand out of the economy resulting in permanently lost output. This was followed by Brexit, which has proven to be a predictable economic disaster. 

To be fair, inhabitants of the Treasury can’t be blamed for Covid, and the current inflation shock is a global phenomenon. However, Brexit and past mistakes mean the UK feels its impact worse.

The finances of a State are not the same as those of a household. There are fine balances to be struck between expenditure, taxation and borrowing. 

As the first dose of austerity proved, cutting expenditure led to stagnation in economic performance. Reduced economic output leads to reduced Treasury revenues via taxation. With all the damage it entails for funding public services, cutting expenditure doesn’t necessarily balance the books as austerity proponents believe.

Suppose the whole point of the Budget was restoring market confidence. In that case, it could quite easily have the opposite impact if speculators take fright at a worsening economic picture. Reducing public investment, coupled with the kamikaze decision of the UK to cut itself adrift from the world’s largest and most lucrative trading bloc, will not help.

Fiscal targets are back in vogue, and the Chancellor used these as an article of faith to justify his Budget. While fiscal targets have a role in setting the general direction of policy, I have always thought it unwise to use targets as set in stone to govern all decisions. 

Small fluctuations in growth which no forecaster can truly predict, could have a huge impact on the fiscal picture.

Indeed, a responsible government would have done two things during the Budget that would have cost nothing.

Firstly, recognising that past mistakes have created a difficult economic environment for the UK and that a long-term and gradual plan is needed to lead to a sustainable fiscal path. To set longer-term fiscal targets seems completely reasonable considering the backdrop. I very much doubt that the so-called ‘”markets” are basing their decisions on the public finances being repaired by a specific date. What worries them is the plan of the right of the Tory party to slash taxes for the rich and increase expenditure simultaneously with no plan of how economic performance will improve apart from wishful thinking.

Secondly, the UK Government should state its intention to realign with European Economic frameworks. As a statement, this would restore credibility amongst international investors more than any fiscal act. The Treasury could then concentrate on increasing revenues from the richest in society to repair the public finances without taking an axe to the budgets of public services.

Outgoing governments always like leaving booby traps for their opponents. I suspect much of the theatre of this week’s Budget was to try and frame the forthcoming General Election so that it is based on fiscal consolidation.   

Labour will have to be very careful not to fall into a trap which would result in the next election being fought on arbitrary fiscal targets when what we really need is a debate on the need to return UK political discourse back to reality and away from the populist nonsense that has consumed it for over a decade.