Boris has suggested in a recent article that we should think of the positives of brexit. Well okay, for starters he’s not going to be PM, his two Bullingdon buddies Cameron & Osborne will also be joining him in the job’s centre soon enough, Farage has gone, oh and Osborne appears to have finally thrown his toys out of the pram and declared that the policy of austerity is over. Given the uncertain political waters the UK is now entering into both he and the likely new PM (Teresa May) have accepted that they cannot met the planned fiscal targets (of course we’ve known that for sometime) so he’s going to give up even trying to cut the deficit.
Of course the reality is that the Tory policy of austerity was always smoke and mirrors. The reality is that the chancellor’s policy flies in the face of Keynesian economics. While the labour government did run up a large deficit immediately after the financial crisis, most years they ran a much smaller deficit than Osborne and indeed even ran a surplus for several years. Overall Osborne has borrowed far more in 6 years than Gordon Brown did in 13 years.
To draw an analogy, with a stalling economy Osborne wants the UK economic plane to climb, so he’s been pulling back on the controls in an effort to get the nose up (I want to cut the deficit so I cut spending). However, a stall usually means insufficient lift and raising the nose will just reduce airspeed further (cutting public spending just worsens a recession and slows down the economy further), as well as changing the angle of attack on the wings, which also reduces lift, i.e. it makes a bad situation worse not better. It also raises the risk of the plane entering into a deep stall (which means loss of all vertical control) which makes recovery from the stall nearly impossible (that would be the Greek economy). In effect the Keynesian argument is that, much like a plane the counter-intuitive response to a stall is you push the controls forward, put the plane into a shallow dive (i.e. increase public spend as tax revenue is falling in recession), pick up speed and restore lift. Then you level off and resume the flight.
The real reason for austerity was that the Tories wanted the excuse to cut public services that do not benefit their social class, while cutting taxes for the wealthy. The fact that its plunged many in Britain into dire poverty does not register. And given how many of the poor also voted for Brexit (so desperate is their plight) it just highlights the heavy price the country has been paying for austerity. As a consequence I’m doubting that the Tories are now about to embrace Keynesian economics.
Keynesian economics says the role of government is to effectively act as a damper in the economy. Increasing public spending when the economy is in a downturn, ensuring the welfare state stops people falling into a poverty trap, protecting public services (vital to any recovery). Then when the economy does recover the state will of course need to raise taxes to pay off the debts its run up. Instead what we’re likely to see is much public spending targeted to benefit Tory voters and specific special interests.
For example take the troubled Hinkley C project. The project was in crisis even before Brexit, now some argue the case for the plant has been fatally undermined. The consequences of it being cancelled would be disastrous for the UK’s credibility. Not only would it be mean no new nuclear plants in the country, but a host of other large projects from HS2 to Heathrow expansion would all be unlikely to proceed. So I can all but guarantee that the necessary cash will be found by the UK to help fund this, even though the country is already giving an effective subsidy of 68% of the cost of every watt Hinkley C will generate.
Similarly the slow down in the construction industry will likely have a knock on effect for UK manufacturers. Let’s say JCB, whose boss very publicly backed brexit, was to get in trouble. Would it be acceptable, while they are trying to sell the concept of brexit to the doubters (a situation made worse if a leave backer like Gove is in charge), if a load of workers who were told by their boss to vote leave started losing their jobs. I can just see the protest banners now, we voted leave and all we got was a pink slip. So I’m guessing that if this happened, the government would be very quick to open the cheque book.
And similarly the spiv’s and speculators can make all the risky bets they want from now on. Its all but guaranteed that if any bank gets in trouble, over the next few years, they will be bailed out, regardless of the cost. The economy is in too fragile a state for another banking crisis. brexit has effectively given the city a blank cheque to be as irresponsible as they want.
Of course, a key feature of Keynesian economics is that, while there is nothing wrong with a government borrowing in hard economic times. But! it must be prepared to cut spending (i.e. on large infrastructure projects, not welfare) and raise taxes in good economic times to pay off its debts. Osborne has steadfastly refused to do this. He has had several periods of moderate growth where he could have raised taxes, yet he chose not to. Indeed he’s now talking about lowering corporation tax as a result of the expected brexit slow down.
While the working class have taken a hammering from austerity he’s not made cuts in areas that benefits older voters or wealthier voters (presumably because they tend to vote Tory). And of course he’s pressing ahead with a Trident renewal, the costs of which are spiralling out of control (latest estimate? A jaw dropping £167 billion once you factor in running costs and decommissioning).
In short the economic policy of the next few years is likely to be continued austerity and squeezed incomes for many, but with Norman Lamont style deficits run up paying for Tory pet projects and bailouts to those in their circle of friends. And needless to say, its likely the UK’s public debt will soar. The party that won two elections on a ticket of deficit reductions will leave the UK with a level of debt unseen since the 1940’s. If you hear a creaking sound that will be John Maynard Keynes rolling in his grave.