In 2009, as the UK’s budget deficit surged after the financial crisis, the Conservatives berated the Labour government for its economic irresponsibility. As shadow chancellor, George Osborne denounced Gordon Brown’s emergency fiscal stimulus to support growth and declared that an “age of austerity” was now necessary.
Upon entering the Treasury in 2010, Osborne implemented the largest public service cuts in postwar history in pursuit of a budget surplus. Though this goal was never achieved, the dream of eliminating the deficit remained a Conservative project. Today’s Budget, however, marked its end.
Chancellor Rishi Sunak announced that, far from falling, the deficit would rise from 2.1 per cent of GDP in 2019-20 (£47.4bn) to 2.4 per cent (£54.8bn) in 2020-21 and 2.8 per cent in 2021-22 (£66.7bn). Crucially, these figures do not include the £30bn fiscal stimulus announced by Sunak to combat the economic threat of coronavirus, since this was announced too recently to be included in the OBR’s deficit forecast.
While Osborne opposed the use of a fiscal stimulus package in 2009, today’s Budget reflects the government’s new direction of travel: increased spending on the NHS, education and policing, and significantly higher infrastructure investment (£175bn over the next five years). Just as Osborne’s Keynesian opponents once did, the Conservatives now argue that ultra-low government borrowing costs (below 1 per cent) mean the state can afford to expand.
Even in advance of today’s statement, government borrowing so far this financial year had already risen by 15 per cent. And though Sunak officially respected the the Conservatives’ existing fiscal rules – balancing the current budget within three years and keeping capital spending below 3 per cent of GDP – they are likely to be broken once the full impact of coronavirus is accounted for (Sunak was careful to promise a review).
The government’s shift, however, should not be overstated. Though cuts in real day-to-day spending per person will be fully reversed by 2024-25, they will be reversed by only a third as a share of UK GDP.
The Conservatives’ embrace of deficits is mirrored by that of Republicans in the US. Donald Trump once vowed to eliminate the US’s $19trn national debt “over a period of eight years”, having branded Barack Obama “the most profligate deficit and debt spender in our nation’s history”. But in office the president has proved unable to resist the lure of borrowing. Under Trump, America’s deficit has swelled to 4.6 per cent, its highest level since 2012, after dramatic tax cuts and a surge in military spending. The national debt is set to rise by $1.7trn over the next decade, reaching 95 per cent of GDP, its highest level since the aftermath of the Second World War.
For both the Conservatives and the Republicans, fiscal conservatism has been subordinated to projects of national greatness: Brexit, “levelling up”, and making America “great again”. Donald Trump and Boris Johnson have learnt from the slowest economic recovery in history that there are few votes in budgetary restraint. For states that can borrow in their own currencies, as the US and UK can, and which retain national lenders of last resort (the Federal Reserve and the Bank of England), there are few economic incentives to pursue cuts.
After a decade in which central banks assumed the leading role in promoting growth, Leviathan – the state – is finally rising from the depths. But it will take more than a few years of higher spending to compensate for years of famine.