Are the days of austerity numbered?
With the row over public sector pay showing little sign of abating, the chances of Theresa May’s weak government abandoning its unpopular fiscal agenda appear to be growing.
Chancellor Philip Hammond is making a valiant effort to resist the demands of his fellow ministers. Yet outside the Cabinet, a large section of the public has had enough – which perhaps goes some way to explaining Jeremy Corbyn’s surprisingly strong performance in the election. There might be a political case for scrapping austerity, but is there an economic one?
Keynesians are quick to point out the damage that austerity can do to a struggling economy, and lobby for fiscal stimulus to increase demand. But the hero of their ideas, John Maynard Keynes himself, was a lot more cautious than the ideology named after him now suggests.
It is true that Keynes proposed public spending as a solution to downturns – a philosophy that formed the basis of Roosevelt’s New Deal. But he was no opponent of austerity per se. In fact, the left’s favourite economist advocated restraint while the economy was doing well. He wrote in 1937: “the boom, not the slump, is the right time for austerity at the Treasury”.
Unfortunately, what tends to happen is the exact opposite. Governments are swayed by reams of healthy tax receipts when the economy is booming and splash out on fancy projects instead of saving. Then, when the economy crashes and recession bites, they rein in spending, at precisely the moment when some well-planned fiscal stimulus projects could provide a useful boost.
This was precisely the warning given yesterday by James McCormack, a managing director at credit-rating giant Fitch. He issued a reminder that government debt levels in Britain and other developed economies remain stubbornly high – a point also made by the Office for Budget Responsibility last week, which warned of the UK’s inability to survive another recession. According to McCormack (and, one presumes, to Keynes were he still alive), the time for looser public spending was immediately after the 2008 financial crisis, but not now, nearly a decade later.
While growth may be tepid, the fact is that the economy has been in expansionary territory for several years now and it is right that the government has made some progress in reducing the annual deficit. When the next recession strikes – which it will – we will need to be in the best possible position to cope with the hit.