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19 June 2018updated 20 Jun 2018 10:09am

What links austerity, Brexit and Britain’s national investment shortfall?

There seems to be no conception of the fact that spending your money on the right sort of things can actually make you richer.

By Jonn Elledge

Stupid or cynical? This question could apply to oh so many things, in oh so many different areas of British politics at the moment.

At the moment, though, it’s the Brexit dividend where it seems most relevant. It doesn’t exist. No serious economist believes that it exists. Even the government’s own projections show that it doesn’t exist – that Brexit will, in fact, have the opposite effect, shrinking both tax revenues and the wider economy, locking in austerity forevermore, even as at least some payments to Brussels continue, if only to stop the entire country from falling off a cliff.

Yet still they won’t stop banging on about it. Over the weekend Theresa May promised to spend the imaginary dividend on the NHS – failing, with the political nous for which she’s become famous, to spot the inevitability of the second day story being, “So, autumn tax rises, then”. Even now, the supporters of hard Brexit are still pushing it, and this morning Jacob Rees-Mogg tweeted: “The Brexit dividend is obvious, if you spend less on one thing it is available for something else.”

It’s tempting to read this as pure cynicism: a lie told consciously to boost political prospects. But, at least in the case of Brexit’s true believers, I’m not so sure. I think it also stems from something that, if not exactly stupidity, is at least a fundamental misunderstanding of the world.

References to “common sense” in politics can almost always be translated as “I have not thought about this for even half a second”. In that Rees-Mogg tweet, the word “obviously” plays much the same role. It does seem obvious that, if you spend less on one thing, you will have more to spend on another. Stands to reason doesn’t, it?

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But economics often isn’t obvious. Incentives are perverse; consequences unforeseen. In the case of the Brexit dividend, the thing Rees-Mogg is ignoring is what we get for our money: the tax revenues we gain from access to a single market that we helped create on our terms. The money we send to Brussels is less a cost than an investment – and investments offer returns.

The problem is, there are a lot of steps in that logic, and following them takes intellectual effort. Much easier to conceptualise it simply as a sunk cost. We send money to Brussels; Brexit means we can stop doing so.

There’s a similar breakdown in the logic of austerity. The parallel between a national economy as household budget is simple and compelling: if times are hard, you need to cut your cloth.

But here too, that apparently simple, compelling logic is often wrong. A government is not a household. It can run a deficit indefinitely, so long as the bond markets play. It can raise taxes as well as cut spending. There are limits on these things, but nonetheless it has options, in a way a household spending more than it earns does not.

Worse, austerity can be actively damaging, shrinking the economy by reducing demand. There’s no parallel for that in the household budget analogy: it’s both damaging and misleading, yet still it persists.

Why these misconceptions of economics have so unshakeable a hold on national debate is an open question. Partly it must be because they’re simple and compelling (that’s the stupidity part of explanation taken care of). Partly because, they’re convenient to a noisy chunk of our political class (that, right on time, is the cynical one).

But I sometimes wonder if there’s a third. Among the many ongoing problems with the British economy is its chronically low investment: whether in fixed capital or staff training, businesses just aren’t very willing to forego benefits today in the hope of bigger benefits tomorrow. Once again, there seems to be no conception of the fact that spending your money on the right sort of things can actually make you richer. Perhaps it’s not just about the specifics of austerity or Brexit. Perhaps it’s an entire national attitude problem.

Basically what I’m getting at here is that Margaret Thatcher’s tendency to talk about the economy like it was a household budget wasn’t just nonsense: it was massively destructive nonsense. We don’t always have to choose between cynicism and stupidity.

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