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| Under Chancellor George Osborne's stewardship, the Treasury is going to miss another of its fiscal targets. Photograph: Pound Coins from Pixabay (License) (Cropped) |
On Friday, at the quiet end of the week and under the cover of the Labour and Conservative leadership wrangling, Chancellor George Osborne announced that he was relaxing the fiscal rules demanding that the government deliver a budget surplus by 2020 (Ahmed, 2016).
Paul Johnson of the Institute of Fiscal Studies immediately stressed that the measure, though it would allow for more borrowing and so less spending cuts or tax rises to cover the shortfall caused by the post-Brexit downturn, would not mean the end of austerity (BBC, 2016).
On Sunday that was confirmed when the Chancellor announced his intention to further accelerate the reduction of the Corporation Tax rate down to a new low of just 15% (Monaghan, 2016) - a move entirely consistent with Chancellor's M.O. of managing the economy by creating seductive conditions for major firms.
With targets being quietly missed and dropped, and sweetened tax deals for major corporations being announced, it is disappointing that Labour MPs are too busy completely embroiled in their own mess to take the opportunity for a big public 'We Told You So'.
Labour are also in no position at present to step up the argument for seizing this opportunity to push for the much needed public investment plan that Shadow Chancellor John McDonnell has argued the Chancellor's fiscal rule did not allow for (Treanor & Allen, 2016).
While the first announcement was buried beneath other news on a Friday, where missed targets are often hidden, it was a move that brought the policies of Osborne and Tory leadership candidate Theresa May into alignment - as May said in her campaign announcement that she would put aside the aim to get a surplus by 2020 so as to avoid disruptive tax rises (The Independent, 2016).
While suspending the fiscal rule aligns with May's position, the decision to cut Corporation Tax may have a more complicated effect on the Tory leadership contest. Brexiter candidates have been keen to downplay the negative economic impact of the vote to leave and will seize upon any sign that life goes on as usual.
The Chancellor using the new freedom for a tax cut rather than as the first in a package of measures that include the rise in taxes that he previously warned might follow a vote to leave, could play into the hands of the Brexiter candidates. The idea that Britain still has room to manoeuvre, to make a pitch to international businesses that it is still a place to invest, will likely embolden Brexiters who accused the Remain camp of 'Project Fear'.
However, the reality is that public revenue in the UK is already tight and suspending fiscal rule only confirms the fact. Public spending is still in deficit and key benefactors like the NHS still suffer from shortfalls. Abandoning the rule means an admission by the government that only by borrowing more can it now keep up with spending demands - for now.
The big question remains as to whether borrowing, for public investment, or limiting and even eliminating borrowing, cutting public outlays and seeking private investment to cover instead - ie austerity, represents the sounder fiscal policy. Which will help produce growth and revenue?
From the OECD to the IMF (Elliott, 2016; Summers, 2014), the argument that the UK needs to borrow and increase public investment, because boosting public investment can drive the growth that delivers the tax receipts (Stewart & Asthana, 2016), has strong support. The economists who have joined John McDonnell on his New Economics tour have also made broadly the same case.
The argument from the Left is that the Chancellor's focus is on entirely the wrong part of the economy with his tax cuts, benefiting the richest in the hope that they see past their short-termist to invest with a longer view (Sikka, 2016). They also warn against the short term focus of austerity, which looks for gains by selling off parts of the government to would be rentiers, as flawed and likely to only increase problems in the longer run (Mazzucato, 2016).
From the OECD to the IMF (Elliott, 2016; Summers, 2014), the argument that the UK needs to borrow and increase public investment, because boosting public investment can drive the growth that delivers the tax receipts (Stewart & Asthana, 2016), has strong support. The economists who have joined John McDonnell on his New Economics tour have also made broadly the same case.
The argument from the Left is that the Chancellor's focus is on entirely the wrong part of the economy with his tax cuts, benefiting the richest in the hope that they see past their short-termist to invest with a longer view (Sikka, 2016). They also warn against the short term focus of austerity, which looks for gains by selling off parts of the government to would be rentiers, as flawed and likely to only increase problems in the longer run (Mazzucato, 2016).
The alternative is to instead start directing investment into ordinary people - whether that be through education, in skills through apprenticeships and training, through jobs repairing roads and other transport infrastructure or building thousands of much needed new homes - with every penny spent multiplying in value as it boosts the economy.
These are all long term projects, aimed at providing a stable and prosperous future. A progressive economic alternative needs to do more - from reforming welfare towards a compassionate Basic Income and improving workers' say and stake in the work they do - but public investment is the starting point.
The Chancellor has taken a step back but the pressures of austerity are not yet relieved. Progressives have to overcome their divisions so they can start building the arguments for a more prosperous future with the common good at its heart.
References
Kamal Ahmed's 'Brexit and the easing of austerity'; on the BBC; 1 July 2016.
'Osborne abandons 2020 budget surplus target'; on the BBC; 1 July 2016.
Angela Monaghan's 'George Osborne looks at corporation tax cut to attract overseas investors: The reduction from the current 20% rate will be part of the chancellor’s five-point plan to avert a DIY recession'; in The Guardian; 3 July 2016.
Jill Treanor & Katie Allen's 'George Osborne scraps 2020 budget surplus plan: Chancellor says he has to be ‘realistic’ about turning around public finances by end of decade'; in The Guardian; 1 July 2016.
'Theresa May's Tory leadership launch statement: full text - Home secretary positions herself as candidate of unity'; in The Independent; 30 June 2016.
Larry Elliott's 'OECD calls for less austerity and more public investment: One-time deficit reduction supporter slashes growth forecasts and urges richer countries to exploit cheap borrowing to spend more on infrastructure'; in The Guardian; 18 February 2016.
Lawrence Summers' 'Why public investment really is a free lunch: The IMF finds that a dollar of spending increases output by nearly $3'; in the Financial Times; 6 October 2014.
Heather Stewart & Anushka Asthana's 'Labour promises 'iron discipline' to shore up fiscal credibility: Shadow chancellor John McDonnell tells Guardian restoring Labour’s economic reputation is “struggle of generation”'; in The Guardian; 10 March 2016.
Prem Sikka's 'Brexit demands a new economic vision, not Osborne’s corporate tax cuts: The government needs a new fiscal policy and it should be built on investment in the people'; on Left Foot Forward; 4 July 2016.
Mariana Mazzucato's 'Selling public assets, like Royal Mail (to hedge fund) & now Land Registry, to reduce public debt, increase debt in long run. Pure ideology'; from Twitter; 3 July 2016.
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