The November spending review arrived with a loud reminder of how austerity has distorted the public’s understanding of fiscal policy. Journalists used fatuous analogies to explain the situation facing chancellor Rishi Sunak, claiming the government had “maxed out” its credit card and had “no money left”. These soundbites weren’t just economically illiterate: they were indicative of a deeply conservative worldview.
Attitudes to fiscal policy can be divided broadly into three camps: the fundamentalists, the centrists and the heretics. Fiscal fundamentalists pray to the God of small government. They are outraged that a Conservative chancellor who has borrowed £400bn to fight the Covid-19 pandemic, taking public debt from 85% to 100% of GDP, wasted the opportunity to make the necessary cuts to prevent Britain facing ruin. As true believers, they refuse to confront the facts that the UK government is borrowing at record low interest rates, and that next year it will pay back £20bn less in interest than it had planned for.
When fiscal fundamentalists announce the government has “maxed out its credit card”, they belittle the experience of every poor family that has been forced to live on credit and pay higher interest as they borrow more. The truth is that the government can afford to take on debt. But acknowledging this reality would invalidate the fiscal fundamentalists’ beloved rhetoric of “tough choices”, which you will likely hear over the next few years from those attempting to make austerity palatable again.
The fiscal centrists, meanwhile, know that Rishi Sunak has already effectively introduced austerity through a combination of public sector pay freezes, higher council taxes hidden in the small print and cuts to planned non-Covid spending in the future. Centrists also worry – rightfully so – about where the money is going. When the crisis forced them to spend, the Conservative party gave Covid contracts to their friends and rewarded their voters, all the while pretending that there was no money available to feed children in poverty.
While accepting that spending and taxing are political choices, centrists pray to the God of pragmatism. They believe the British public will not listen to politicians who forever throw money at social and economic problems, and that economic credibility is hard to earn and easy to lose. This is why they share the fundamentalists’ view that in the long run “tough choices” must be made.
This “tough choices” narrative – raise taxes or cut spending to reduce the deficit and bring public debt down – is compelling for centrists not because it is correct, but because it chimes with the public’s common sense, which has been shaped by decades of media coverage and political discourse venerating balanced budgets. The fiscal centrists, captive to their audience and unwilling to engage into the Herculean task of changing minds, can only ever promise to cut and tax better or slower than the Conservatives.
The government is not a household, and it does not have a credit card that can be maxed out. Fiscal heretics know this, and reject the idea that we face a public debt crisis. There are numerous reasons why this narrative is flawed. The government, unlike a household, has a central bank that can keep borrowing costs under control. The Bank of England, like other central banks across Europe, has this year bought more than 80% of all debt issued by the British government. It hasn’t done so under political pressure, but because independent central banks have come to accept that large-scale purchases of government bonds are a legitimate and effective monetary policy instrument.
And unlike households, governments can rely on the financial sector to buy their debt in times of crisis. Modern financial institutions view government debt as the ultimate risk-free asset, a safe haven to run to when economic shocks hit. For instance, on 26 November, one day after Sunak warned that “the economic emergency has just begun”, investors were prepared to lend for 50 years to the UK government at an interest rate of less than 1%.
These two forces combined – the central bank and the City – explain why interest rates on public debt are at historical lows. Rather than making cuts, the government should be using this opportunity to borrow more in order to finance the country’s recovery.
And unlike a household, the government does not need to worry about paying back debt when interest rates rise. Interests rates will only rise if economic growth returns. When it does, this will mean higher revenues in state coffers and, with higher employment, less public spending on safety nets for poorer households. At this point, taxes should go up, to ensure that corporations and the rich pay their fair share.
But for economic growth to return, public investment needs to be considerably higher and better planned than what the fiscal fundamentalists in power are prepared to contemplate. Paradoxically, the imminent return of full-blown austerity dims the prospects of higher growth and higher interest rates in the future.
That these facts are akin to heresy is an alarming demonstration of how austerity still shapes the conversation about fiscal policy in the UK. The heretics may be right on the economics, but we face an uphill battle. The most pressing problem is to find effective ways of educating the British public on macroeconomic issues. It is a measure of our collective failure as macroeconomists that the British public finds the household analogy plausible without seeing the deeply conservative implications behind it.
Changing people’s minds about these conservative talking points isn’t just a bulwark against austerity: it’s essential if we’re going to make substantial progress in the fight against the climate crisis. While the only cuts we should be making now are to carbon emissions, green fiscal fundamentalists will tell you that Britain is at the forefront of the climate fight, and that nudging the market in the right direction will take us closer to net zero.
But they are wrong: public spending is crucial to averting the climate crisis, and experts have stressed that the government’s new green policies do not go far enough. The Institute for Public Policy Research thinktank estimates that the government would need to invest around £33bn a year in low-carbon homes and buildings, nature restoration, transport and industry to truly address the scale of the crisis we face. We need public investment, particularly in green areas. And contrary to what the fiscal hawks may claim, we can easily finance it.