UK fiscal policy: The Augustinian budget

The death of fiscal austerity has been proclaimed in the UK following Chancellor Hammond’s 2019 budget to parliament in which he managed to reduce the borrowing requirement whilst simultaneously increasing spending on the NHS, with a little bit set aside for defence, and some cuts in income taxes to boot. But there is a different way to look at it. The fact that the OBR raised its projection for tax revenues in the current fiscal year by £11.5bn (around 1.5%) proved to be the main source of the largesse, with additional help provided by lower funding needs in some key areas (interest outlays). Like a gambler who wins a modest amount on the lottery, Hammond has blown his good fortune in one fell swoop.

Admittedly, much of it has gone on good causes but as the OBR pointed out, “experience shows that a favourable revision in one forecast can be followed by an unfavourable one in the next.” The OBR continued by describing the package of measures as one which ”has the familiar Augustinian pattern of a near-term giveaway followed by a longer-term takeaway.” Indeed, the OBR adopted a very circumspect approach to the whole Budget process, pointing to “repeated failures [by the government] to observe the agreed timetable” which sounds like a lot of last minute horse-trading went on as the Chancellor tried to accommodate the prime minister’s desire to end the age of austerity.

All this comes at a time when growth continues to underperform relative to pre-Brexit projections, running at a rate close to 1.5% per year over the next five years when ordinarily we would expect something closer to 2% per annum. Then there is the looming spectre of Brexit itself. When asked by the OBR whether it wished to provide any additional information on post-Brexit policies, the government merely directed it to the White Paper published in July, which is widely believed to be a lame duck. However, the Chancellor did make it clear that if a no-deal Brexit results in March, the Spring Statement may have to be a full fiscal event as the government contemplates a bigger hole in the public finances.

Whilst Hammond was able to ease the purse strings somewhat, it is premature at this stage to sound the all-clear on austerity although the budget was definitely a step in the right direction. Key front line services such as the prison service are creaking at the seams and additional funding for the police is long overdue. Indeed, a key chart in the Economic and Fiscal Outlook (shown below) indicates that once we strip out the impact of additional health spending, real per capita spending across other departments implies a modest squeeze well into the 2020s.

Indeed, the damage being done by cuts in non-health spending are wide and pervasive. Local spending has borne a huge amount of the burden as central government seeks to reduce the grant to local authorities. Services which are provided locally have had to be cut and local government has had to find ways to fill the gap – not easy when its main source of revenue is council tax which can only be raised to a limited extent. It is austerity at this level that people tend to notice first and the measures announced this week do little to address such concerns. It will thus take considerably more fiscal boosts of the same magnitude as those announced in the October 2018 budget to begin to redress the balance.

I have made the point previously that the austerity initiated by George Osborne during his time as Chancellor was overly harsh and appeared to be driven by ideology as much as economics. Perhaps the Brexit vote was the first sign that the electorate was beginning to tire of the relentless assault on public services, and the 2017 election affirmed that Labour’s message that austerity was damaging the country was beginning to be heeded. Accordingly, we should view the Conservative Party’s message that austerity is over as an indication that it believes taking further steps down the austerity path will be electorally counterproductive. Having driven the deficit from 10% of GDP in 2009-10 to a projected 1.2% in 2018-19, enough appears to be enough – so long as Brexit does not torpedo the plans in five months’ time.