Today, this thinking is being stood on its head. In the new orthodoxy, the UK now needs to embark on a massive programme of public spending and infrastructure works.
Greater public debt, far from being a constraint, is more likely to lift our rate of economic growth. And across the bastions of conservative economic thought, an unsettling doubt has started to emerge: might the Marxist economics of John McDonnell and Jeremy Corbyn now be right?
This radical rethink goes deeper than the conversion to big spending already under way by the two contenders for the Conservative Party leadership and UK premiership. And little wonder Chancellor (for now) Philip Hammond has gone down with an attack of the vapours.
Boris Johnson is campaigning for a raising of the tax threshold for middle and higher earners – a proposal estimated to cost £9.6 billion a year. He is also calling for extra police officers, a boost for the Northern Powerhouse, and extension of full-fibre broadband to every home ahead of the current 2033 target.
Not to be outdone, Jeremy Hunt wants to cut Corporation Tax from 19 per cent to 12.5 per cent, has called for extra spending on the military, with defence spending to be raised by £15bn over five years, and free TV licences for the over-75s.
Bear in mind there is another fortnight of campaigning still to go. In vain, it seems, has Hammond warned the Conservative Party against throwing away “one of its greatest assets – its reputation for fiscal responsibility – in a bidding war of unfunded spending and tax cutting pledges by the candidates.
“If we are tempted down this route,” he declared, “we abandon one of our party’s proudest achievements and most enduring hallmarks: fiscal responsibility. And then, when the next general election comes, we will find ourselves standing naked in front of a Labour Party which knows no fiscal discipline at all and will always outbid us in a war to borrow the most.”
But who is listening to this orthodoxy now? Tax cuts – whether for basic-rate or higher-rate taxpayers, or reductions in Corporation Tax or business rates are not in themselves a threat to fiscal sustainability – so long as constraints on spending are maintained. It is the combination of tax cuts and sending splurges that has lifted this leadership contest well clear of previous Conservative fiscal thinking. Indeed, it is a total reverse.
But there is a greater departure from orthodoxy. It is the view that, with interest rates still at ultra-low levels, the government can embark on a massive borrowing programme for infrastructure projects – and raise our rate of economic growth.
Why not, the argument runs, take on extra debt at little or no cost for urgent public investment? Today the UK can borrow for 50 years at an interest rate of 1.33 per cent. “Nothing like this,” says right-of-centre economic commentator Ambrose Evans-Pritchard, “has ever been seen before.”
He cites OECD findings that a 0.5 per cent boost to GDP from extra investment would lift UK output by 0.6 per cent – and cut the debt ratio by 0.2 per cent over the next year. Former US Treasury Secretary Larry Summers has eloquently set out the argument that deficit spending can cut debt burdens.
“The incoming Tory leadership,” says Evans-Pritchard, “has a chance to break free of the Treasury view and prepare the ground for the most radical fiscal experiment of any country in the world”.
Simple “plain vanilla” Quantitative Easing has run its course with directionless bank borrowing and a surge in asset prices. A national investment bank on the lines of the German KfW, which raises bonds for development loans, now has a £434bn book which is not treated as public debt by rating agencies.
The UK Treasury’s National Infrastructure and Construction Pipeline says the country needs to spend £600bn over the next decade on 700 projects – from flood defences to smart motorways and social housing. But it is one thing for the Treasury to have a “to do” list. It is quite another to bring it into practical being. This would require a major conversion in both Treasury and Bank of England thinking where decades-old assumptions have yet to recognise the massive change that has overcome debt and deficit calculations as interest rates worldwide have collapsed.
Can we wait around for the old orthodoxy to shift? Many are now talking of the risk of a global recession setting in next year. Meanwhile, here in the UK, we look set for an EU departure that could disrupt cross-border trade – however temporarily – and further undermine business confidence.
Better surely, to take pre-emptive steps that could help reduce the worst of the feared disruption with the pre-launch of a £100bn programme of extra infrastructure spending, prioritising those most likely to improve productivity and growth.
So it could prove that, with the passing of the neo-liberal ascendancy of the Thatcher years, and despite the Conservative protestations of “shock horror” at Jeremy Corbyn economics, Corbynism may indeed have a point – if only up to a point.
The key difference, of course, between this radical thinking on the Conservative Right and the massive public spending boost envisaged by the Corbynistas is on programme priorities. Labour is much more wedded to increases in social care and welfare spending, the big spenders on the Right to investment projects likely to lift our growth rate – and thus tax revenues – in the medium to long term.
Brexit is heading to be a major disrupter of our political and economic universe. But not for the first time, such disruption could prove the catalyst for a radical departure in government thinking and policy. We do not have to stand helpless and unresponsive, waiting for painful blows to fall – particularly when, it seems, we are indeed, “all Keynesians now”.