Rishi Sunak delivered a Budget for a triple emergency. The first emergency is the coronavirus, which will tank the economy over the spring and summer, pushing the NHS to breaking point. The next is the imminent hard Brexit crisis – the implications of which are so bad that the government couldn’t be persuaded to discuss them with the Office for Budget Responsibility (OBR).
But it’s the third and biggest emergency that has prompted the Conservatives to suddenly drop austerity. Our busted economic model means that, even after 12 years of “recovery” and the longest stock market rise on record, British wages are still at their 2008 level, productivity is stagnant and growth is zero. If this is as good as it gets at the top of the economic cycle, the coming downswing is going to be very bad.
In response, the Johnson government has effectively reversed austerity. The government will borrow and spend £125bn over the next five years, with the deficit due to peak at £66.7bn in 2021-22. The Conservatives’ ultra-tight fiscal rules are set to be comprehensively broken in the process. Like a quack doctor who discovers their patient has been taking the wrong tablets for a decade, the Tories have decided to inject a big dose of the right medicine. But they still don’t understand the disease.
It’s easy to forget that in the first Cameron/Osborne Budget of 2010, the promise was that by slashing public spending the Conservatives would “rebalance the economy” away from its reliance on the state and towards growth driven by business investment and exports. Ten years on, according to the new OBR figures, business investment and exports will contribute the grand total of -0.1 per cent to GDP growth this year, while half of all growth is being driven by state spending.
Whatever else the Budget means, it should be seen as the tombstone for ten years of failed austerity. GDP growth stands at a projected 1.1 per cent this year and will “peak” at 1.8 per cent next year before falling back thereafter. Productivity is flat. And while real wages are now rising, the spending power of the average pay packet is still no higher than in 2008.
This is the legacy of austerity – and one of the drivers of Sunak’s U-turn on fiscal policy has to be the realisation that a hard Brexit will make all this worse. How much worse, we will just have to guess, because while the government has already banked the annual £11bn it will theoretically gain from Brexit, it would not put a figure on the hit to economic growth that will result if the UK crashes out with no trade deal in December.
The new growth and productivity forecasts are truly dire. They are, in their own way, just a second instalment of the official verdict on austerity – following last month’s Marmot review on health inequalities. This showed that life expectancy has stalled for the first time since 1900, that the gap between poor lives and rich lives is growing, and that the reason for this is “large funding cuts”.
There is dismay among some parts of the Labour left over the ability of the Tory frontbench to steal the party’s anti-austerity message. But it is misplaced. Just because the Conservatives have finally realised the medicine of austerity was killing the patient, it doesn’t mean they understand the cure. You could see that in the almost manic way Sunak threw out a million here and two million there on classic “roads to nowhere” projects that, to the Tory mind, constitute an investment strategy.
Labour, in truth, has finally won the argument on austerity: but millions of people will go on living with the consequences of a decade of health, welfare and education cuts. The crimes that went unsolved, the criminals that went unpunished, the people needlessly dead from preventable diseases and, in the most acute cases, those who starved, are not forgiven simply because a slick used-car salesman in a suit promises to borrow and spend in future.
If Labour has won the argument about public spending, the bigger argument lies ahead: what kind of country do we want to be? There will be mothers hovering around the cut-price food shelves in Tesco and Lidl tonight, making the same decisions about whether to eat or pay the rent as before. There are young people who should be at university toiling in call centres and coffee bars.
Labour, under Jeremy Corbyn and John McDonnell, was never simply committed to reversing austerity. It was overtly committed to ripping up the neoliberal model and building a new one, driven by state-led investment, redistribution and a radical plan to decarbonise the economy.
To rebalance distribution away from profits and towards wages, you need more than some tax giveaways and a £27bn road improvement programme. You need what Labour has fought for – a National Investment Bank, with regional lending arms, designed to unlock access to finance for small firms, co-operatives and municipal investment projects. You need a social housebuilding programme at affordable rents – not the speculators’ charter Sunak issued.
To decarbonise Britain by 2050 you need to build railways, green energy systems and big modal changes in transport – not the “Trumpton gets a bypass” approach with which Sunak wowed the Tory backbenches. Finally, to redistribute wealth, you have to make inroads into the power of capital.
So if the Budget marks a sea change in conservatism, it needs to mark an even bigger sea change for the left. The differences between our project, and the Tory project, are now down to an irreducible core: we want an open, globalised economy, tolerant of migration, based on high-waged work and low carbon energy – and with a state-directed private sector to achieve it. They want a closed, xenophobic society based on low wages and haphazard public investment, speculation and inequality.
Make no mistake – just as with Donald Trump, the purpose of this new fiscal largesse is to buy support for economic nationalism. It is dirigisme without the means to direct; amateur Keynesianism done by people who, in their hearts, still believe that the market is self-correcting and that inequality is a good thing.
Sunak acknowledged the theoretical challenge for conservatism when he postponed the bigger decisions to the autumn. Promising to review the current fiscal rules by the autumn, he said: “There is a live global debate about what our low interest rate environment means for fiscal strategy…about the case for fiscal policy to play a more active role in stabilising the economy… and about the best ways to measure productivity-enhancing investment in the economy, such as human capital, or measuring value on the public balance sheet.”
Let me translate this. There’s not much of a debate, in fact: there’s a growing consensus that by slashing interest rates and printing money, central banks are contributing to the low-growth environment that Britain and other major countries are trapped in.
The solution is to switch to fiscal measures – ie tax, borrowing and public spending – to try and revive growth. But to do this right you have to shape the economy, via the state, so that public and private investment starts to drive innovation, so that wages rise, and so that life expectancy in poor areas stops going backwards.
We need a whole new economic model – and there is no way we can get one unless Treasury and central bank economists cut the crap they have been talking for more than a decade. Mainstream economics is opposed to borrowing to invest in skills, or to boost public health outcomes, because these are not classed as “investments”. Likewise, when a railway is nationalised, to the mainstream, that’s just a cost – not a benefit to the whole economy. And when the government builds a railway line from A to B, official economics refuses to accept that people travelling on it will buy magazines and cappuccinos, or get better jobs on higher pay.
So the opportunity for Labour’s incoming leadership is not simply rhetorical. The argument we need to win over the next six months is for a massive investment programme in transport, green energy and skills – and new institutions to direct it.