The short-lived Truss era ended with an abrupt return to the policy of fiscal restraint. Rishi Sunak and Jeremy Hunt, the chancellor, tried to manage expectations ahead of this month’s autumn statement by talking about “hard to cry” decisions, black holes and inevitable spending cuts. The echoes of 2010 and the chancellorship of George Osborne are evident. Now as then, fiscal responsibility coupled with public spending cuts serve right-wing politicians, while trapping progressives in a race they have little chance of winning. In this context, it is essential to test both the economic aspects of Hunt’s political choices and the political decisions that are too often overlooked.
Economically, the size of the “fiscal black hole” is cited as determining whether the government can protect public revenues and services and invest in our economy. Estimates of a £35-50billion hole have abounded in recent weeks. Yet, what this number is, how it came to be, or the uncertainties surrounding it are rarely explained. In fact, these figures are the product of the budgetary rules that the government has set itself; they refer to the amount of taxes to raise or cut spending to ensure compliance with the rules. Labor and the Conservatives have as a condition in their rules that public debt must decline as a proportion of GDP by a given year. The government could choose a different measure to demonstrate fiscal sustainability, or a different year to achieve it.
Many deficit estimates also reflect particularly gloomy forecasts for growth and interest rates on the public debt. These numbers could turn out to be correct, but by citing only worst-case scenarios, the estimates imply an unwarranted “truth” of the numbers.
A report by the Institute for Public Policy Research (IPPR) finds that if growth rates and the cost of borrowing return to pre-pandemic levels, the government could actually run a primary deficit of $49 billion. sterling while reducing the debt-to-GDP ratio. ratio (implying an additional £40bn of government spending). Importantly, the government can choose policies to avoid a low growth scenario. If you are trying to reduce debt as a percentage of GDP, the GDP component is crucial. In fact, this ratio can fall even if the government borrows more, provided the borrowing is used for growth-enhancing purposes. After World War II, the national debt stood at 250% of GDP, but it steadily eroded thanks to sustained economic growth, falling to 45% in 1973.
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Today, investing in the green transition to create jobs and industry and investing in research and development (for which only Italy spends less among G7 countries) are crucial for collective prosperity. Conversely, reducing investment to “balance the books” will only lead to a catastrophic economic loop of the type we have known since 2010.
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This is not to say that economic policy can be reduced to ‘everybody wins’ – we need a clear and credible plan that identifies who will pay the most. In the medium term, if we want excellent public services and a protective welfare state, the government will have to increase tax revenues. Even after recent increases, the UK remains a low-tax country by Western standards, much closer to the US than its European counterparts.
There is an urgent need to support households and businesses through the cost of living crisis, both to avoid hardship and business bankruptcies, but also to mitigate the price hikes that people are feeling and expecting at home. future, which can lead to inflationary spirals. But this kind of support, if not financed by taxes, could itself exacerbate inflation. Offsetting some of this through tax hikes could create space to help deal with rising energy prices and protect NHS and education budgets in real terms.
Tax increases should be focused on the financial “winners” from the global energy price spike and the Covid-19 pandemic – a period that has seen huge windfall gains for the wealthiest households. Options could include equalizing taxes on labor and investment income, and increasing the windfall tax on energy producers. Sunak may be right that we will all have to pay more taxes in the future, but not before the richest have paid their share.
Macroeconomic policy, seen in this light, is not simply a technocratic exercise in filling a “black hole”. It is deeply political. It is simply not true that cutting spending is the sensible or even necessary response. On the contrary, they can be deeply reckless. The government can pursue policies that grow the economy, support public incomes and services, and quell inflationary pressures, funded by a mix of borrowing and taxes – starting with the wealthiest.
Regardless of what Sunak and Hunt decide, there are many pitfalls for Labor in its response. Chief among them is the acceptance of the “fiscal black hole” as an immutable reality, or the efforts of the Conservatives to impose spending cuts in the next parliament. Austerity is deeply unpopular and would not allow a Labor government to achieve its ambitions. After a decade of stagnation and inequality, the fiscally responsible approach is to build a strong economy, with public investment and tax increases on the rich as crucial tools.
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