Despite the lurid headlines about the state of the economy and media palpitations over the sums of government money spent over the course of the pandemic so far, Chancellor Rishi Sunak’s spending review was something of a holding operation – though one with a few politically motivated barbs. General government spending is set to rise next year, although by less than projected in March, while a further £55bn has been budgeted for Covid expenditure. Much of the spending remains inadequate: the £1bn extra for social care is the bare minimum the Tories could get away with. A decade of austerity will not be unwound by a few years of additional funding but, nonetheless, Sunak’s announcements do amount to real terms spending increases.
Heavily trailed plans for infrastructure spending and revisions to the Treasury rulebook, both deemed necessary to shift the balance of government capital spending away from London, have now been published. Both policies were apparently stolen from Labour’s economic programme under John McDonnell, including his proposal to move a chunk of Treasury staff out of the capital. However, the devil will very much be in the detail, and it remains to be seen if the Treasury’s institutional inertia can be overcome without a McDonnell (or even a Cummings) to push the plans through.
The barbs Sunak included were driven by political calculation. The pay freeze for more than two million public sector workers – a pay cut in real terms due to inflation – and the £4bn reduction of the overseas aid budget, allowed him to throw some red austerity meat to the end of the Conservative party still howling for bigger cuts and/or lower taxes. But both measures have immediately run into opposition.
The alliance of Tory grandees, the Archbishop of Canterbury and the aid sector demanding the restoration of aid funding is the more pressing, with one junior minister resigning and the threat of Tory MPs rebelling against a future parliamentary vote. On the other side, the shadow chancellor Anneliese Dodds made Labour’s opposition to public sector wage cuts clear, and civil servants’ union leader Mark Serwotka has hinted at industrial action. There is also likely to be trouble for Sunak and the government down the line over the Chancellor’s failure to make the £20 Universal Credit increase permanent.
Taken as a whole, the spending review was an intensely political economic intervention, built around the uneasy coalition the Tories assembled in the 2019 election, but lacking a vision beyond its one-year timeframe. At points you could almost see the joins in the assembly: that the £4bn cut from the overseas aid budget exactly matches the £4bn set aside for the “Levelling Up Fund” pork barrel is not a coincidence.
The Levelling Up Fund is a telling example of what happens when Tories start to spend money: the fund will be controlled by Whitehall, but aimed at smaller investment projects in the rest of the country, subject – and this is unheard of – to approval by the local MP. Barely a week after the National Audit Office found that “politically connected” firms were getting preferential treatment in government procurement, this caveat is spectacularly brazen.
Overall the review shows the government knows full well that the money is available; it always was. But you would be forgiven for thinking otherwise from the poor reporting that cluttered up the main media outlets. The BBC’s coverage in particular failed the most elementary tests of accuracy, with the broadcaster’s political editor Laura Kuenssberg afforded space on the flagship Politics Live show to inform viewers that “the credit card, the national mortgage is absolute maxed out” and that “there is no money left… there is really no money”.
[see also: No, the UK has not “maxed out its credit card”]
There is no “credit card” that can be “maxed out” by government. The government cannot, as a matter of simple economic fact, run out of money. We’ve had a spectacular demonstration of that reality this year. Government borrowing has hit £394bn, meaning £394bn worth of additional bonds have been sold by the government to finance its spending, above whatever it received in taxes. But the Bank of England has issued £450bn of additional Quantitative Easing (QE) this year too. QE works by having the Bank create new money, which it (mostly) uses to buy government bonds. In other words, the equivalent of the entire additional borrowing by government has been funded by the Bank of England as a result of its buying up government debt. But the Bank of England is also owned by the government. We are very close to a situation where one part of government is borrowing money another part of government has printed.
This isn’t a free lunch – for once, an economic cliché is accurate. Gary Stevenson, a former interest rate trader, describes the problem with QE well: principally, the new money created by the Bank of England distorts the economy in ways that worsen inequality. Globally, the super-rich have seen their wealth increase by $10trillion during the pandemic. Taxing them properly is both sound economics, and fair. But we shouldn’t treat QE (or any variant of it) as a proverbial magic money tree.
Nonetheless, it has meant there are no meaningful constraints on the government’s ability to finance its spending. Indeed, as the Office for Budget Responsibility has pointed out, despite the extraordinary levels of borrowing undertaken this year, the government is now set to spend £20bn less on servicing its debt than was forecast in March as a result of all-time low interest rates. Relative to tax revenue, the government is making the smallest interest payments since current records began in 1946.
Labour’s front bench has, so far, insisted that spending cuts and tax rises are not necessary. But this rational position is under threat from an unholy trinity of economically illiterate senior journalists, Thatcherite true-believers on the Tory backbenches, and, worst of all, a few Labour MPs who either think the 1990s never ended, chasing spending cuts, or are cynically prepared to act as if they didn’t.
The party’s economic team has put in solid performances, scoring notable hits against the Tories’ woeful pandemic response. But this won’t be enough against the yammering of the clueless, the ideological and the cynical. The spending review has created a little political breathing space: Labour’s front bench should make use of it to show they understand and can work with the new macroeconomics of low-to-zero interest rates, and begin to lay out a compelling vision for the future – one that doesn’t focus exclusively on public spending, but also on shaping an economy that is fairer, more sustainable and supportive of richer lives.