Chancellor Philip Hammond is thought to be less than enamoured by Theresa May’s remarks for they have raised expectations that we could see a generous budget, with public spending controls relaxed and tax reductions.
In “normal” circumstances we could reasonably expect a generous, if not a giveaway, budget. After eight years of cuts which have seen £45 billion or 10 per cent in some years stripped from central government spending, some easing is surely due. Government borrowing has come sharply down. The budget deficit in the year to March was down to £40.7bn, a fall of £6.5bn compared with the previous financial year and equivalent to just two per cent of GDP, comfortably below the Maastricht Treaty reference level.
But the economy is not growing as strongly as it could – or as it did prior to the banking crisis. Large areas of government spending have been squeezed. And household incomes have struggled to keep pace with the increases in utility bills and general inflation.
We are surely due a break. But these are not normal circumstances. The biggest concern today is not the budget but Brexit – and in particular the critical negotiations that lie immediately ahead. The Chancellor cannot dare to risk a game-changing “end of austerity” package for fear that the prospect of a “no-deal” Brexit might require an abrupt reversal. The Treasury has to be braced for the possibility of a severe plunge in confidence and a further fall in sterling.
Indeed, in these circumstances he may struggle to go much beyond the pledges that the Prime Minister has already given on billions of extra cash for the NHS, maintaining Fuel Duty at its current level and relaxing the cap on local authority borrowing for housing – a move which, without a change in the way this is accounted for in the Treasury books, will lead automatically to a rise in the borrowing total.
However, even without all the Brexit uncertainties there is a distinct reluctance to revert to the “tax and spend” status quo ante of the pre-crisis years. Surely we have learnt the wisdom of keeping borrowing levels low to non-existent in non-crisis periods to prevent resort to the emergency handbrake and sudden reversals of policy.
The difficulty here is the slapdash use of the word “austerity”. What exactly does it mean? What we have experienced over the past ten years was, while tough, nothing like the post-war shortages and rationing experienced by our grandparents.
The Oxford English Dictionary definition is “difficult economic conditions created by government measures to reduce public expenditure”. But not every measure to reduce spending leads to “difficult economic conditions”. And indeed, a failure to control the growth in public expenditure, resulting in higher borrowing, higher debt interest charges and higher taxation could well create more “difficult economic conditions” than those resulting from expenditure reduction.
Yet the word “austerity” has now come to be a universally applied “boo” word – tagged on to almost every action taken to control expenditure – but it needs to be constantly controlled lest the commitments run out of control.
Now pain there has certainly been. As Derek Mackay, Scotland’s Cabinet Secretary for Finance and the Constitution, set out in his budget for the current financial year, over the decade between 2010-11 and 2019-20, Scotland’s discretionary budget allocation will be eight per cent – £2.6bn – lower in real terms. Over the next two years alone, our Block Grant from the UK government for day-to-day spending in Scotland is projected to fall by over £500 million in real terms.
But a £2.6bn real terms reduction since 2010 works out at £260 million a year – well within prudent changes a £330bn budget should be able to manage. And look at what Mackay was able to set out: an increase in health spending of more than £400m; provide £120m – over and above core education funding – direct to head teachers to help young people fulfil their potential; lift the 1 per cent public sector pay cap and provide for a 3 per cent pay rise for NHS staff, police, teachers and others earning up to £30,000; protect local government day-to-day spending for local services in cash terms and deliver an increase in capital spending of £89.9m, with £4bn earmarked for infrastructure. There is more in this vein. But does it merit the description of “austerity”?
As for the UK government finances, here too the word “austerity” may not be the most apt description. Total managed expenditure at UK level has risen from £380.5bn in 2016-17 to £407bn this financial year and is forecast to rise to £452bn in 2022-23. Welfare spending, which stood at £217bn in 2016-17, is scheduled to hit £224.5bn this financial year and keep rising to £248.5bn in 2022-23.
Much of this has been financed by ever more debt. General government gross debt was £1,763.8bn at the end of the financial year ending March, equivalent to 85.8 per cent of GDP. And it comes with a mounting cost of debt interest. This has already climbed from £35.5bn in 2016-17 to £39.8bn this financial year and will continue to climb to £44.3bn in 2022-23 – well in excess of the total amount spent annually by the Scottish Government.
The harsh truth is that at all times every government – left or right – has to be in favour of some degree of “austerity”. Because if spending and borrowing is not kept under control it would not only be a huge burden for future generations but will also inflict colossal damage on the economy. No politician would survive long on a declared programme of Austerity Forever. But the reality is that spending restraint is the beginning and end of all good government It goes, of course, not by the name of “austerity” but by something else we are altogether more in favour of: setting priorities.