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23 November 2017

How the Budget undermined the Conservatives’ austerity argument

Philip Hammond has proved that the government can borrow and spend more without being punished by the markets. 

By George Eaton

The Conservatives used to justify austerity on the grounds that it was unavoidable. Unless the UK sharply reduced borrowing, they warned, it would face a Greek-style debt crisis. 

Even before yesterday’s Budget, this argument had been discredited. George Osborne continually missed his deficit targets and was never punished by the markets. But Philip Hammond yesterday provided definitive evidence. 

The Chancellor, a self-described fiscal conservative, uncharacteristically announced a £25bn stimulus in an effort to resurrect his fortunes and those of the government. Consequently, Britain will still have a budget deficit of £25.6bn in 2022-23 (after cumulatively borrowing £59bn more from 2018-19) and, on present trends, will not achieve a surplus until 2030-31 (16 years later than Osborne originally promised).

Yet faced with what the Tories once denounced as “reckless” profligacy, the markets have shrugged. Far from rising, UK ten-year bond yields have fallen. When Osborne missed his targets, his allies argued that his long-term commitment to a surplus bought him credibility with the market. But so persistent is government borrowing that this argument no longer holds weight (if it ever did). 

Austerity, it is crucial to note, has not been ended. As Institute for Fiscal Studies director Paul Johnson noted this afternoon, day-to-day spending on public services outside of the NHS is forecast to fall by 7 per cent over the next five years and a further £12bn of welfare cuts will be imposed. Indeed, far from ending austerity, Hammond has extended it to 2022-23 by pencilling in further departmental cuts to compensate for his earlier fiscal easing. 

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This approach reflects the intense political and economic pressures on the Chancellor. There is no majority for austerity in the Commons, or in the country, and the Conservatives are terrified by Labour’s advance. Brexit will depress economic growth in forthcoming years (and may eradicate it altogether). In these circumstances, it would be reckless for Hammond not to soften austerity. But in doing so, the Chancellor has conceded further political and intellectual ground to his opponents. The austerity consensus that Osborne worked relentlessly to establish has fractured.