Parliament Street’s Director of Financial Services Tim Focas has written a new opinion piece published by City A.M. asking whether Boris Johnson’s government can avoid a post-Coronavirus return to austerity.
Read the article here.
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There is still a widespread view that austerity at the start of the last decade was somehow a political choice — that David Cameron and George Osborne (remember them) thrust the term into the political discourse simply as an ideological excuse to shrink the size of the state.
But far from being a political smokescreen, we now know that the policy of austerity was facing up to fiscal reality.
In 2009, the country was on the brink of a funding crisis in the aftermath of the global financial crash. Nothing underlined this more than when the nation suffered a failed bond auction bid of more than £100m short of the £1.75bn the government was trying to raise from the debt markets at the time. For the first time since the early 2000s, those pension funds and asset managers that would usually be lining up to buy UK gilts said thanks, but no thanks.
So be under no illusions: despite Britain selling bonds with an average yield below zero for the first time earlier this month, this government has even less fiscal wriggle room once the economic reality of the Covid-19 aftermath hits home.
The central role of the last government was to try and deal with a budget deficit that was 11 per cent of the national income. This figure, due to the spending commitments rightly made to deal with this unprecedented health crisis and accompanying economic fall-out, is forecast to skyrocket to between 20 per cent and 25 per cent.
Attempts to tackle with this new deficit will, of course, be restricted by some obvious constraints. One would presume that that health spending will continue to rise as we learn to live with this new virus. But this in turn puts immense pressure on other spending areas, such as welfare and defence, presenting a fundamental political problem to a government that has committed to significant annual increases in departmental spending.
The trouble is that no government in recent history, regardless of its supposed ideological motives, has been able to get the proportion of national income that comes from taxation much above 40 per cent of GDP for long. From Margaret Thatcher through to Tony Blair, national income hovered around 41 per cent of GDP. While it naturally jumped to 45 per cent following the 2008 crisis, it was back down to roughly 40 per cent come the end of Cameron’s premiership.
This begs the question: how on earth can Boris Johnson and Rishi Sunak spend their way through this pending crisis, when historically, spending can’t be much more than 40 per cent of GDP? It can perhaps be a little higher if — and it this is a big if — the economy grows in real terms. However, all credible economic forecasts are suggesting no sign of growth anytime soon. In fact, most forecasts predict a deep recession.
While this is a crisis driven by a new disease as opposed to banking, the same set of economic challenges that faced Cameron and Osborne now face Johnson and Sunak — only on a much, much bigger scale.
Britain emerged from the last crisis as the fastest growing economy of the G7 with record employment. This was down in large part the fiscal measures taken, which meant that we didn’t suffer the mass unemployment experienced by our continental counterparts. This looks unlikely to be the case going forward today.
This government cannot really be described as conservative in the traditional sense of the word. However, with unemployment is already rising, this Prime Minister, just like his predecessors, will have little choice but to convey some form of prudence and fiscal conservatism — as much as it politically pains him to do so.
