Warning From The 1970s About Over-Spending
“If I lose just six seats, Jeremy Corbyn will be sitting down to negotiate with the presidents, prime ministers and chancellors of Europe”. So said Theresa May, just ahead of Thursday’s election, in a bid to encourage the Conservative faithful to turn and vote.
Well, May lost more than six seats and Corbyn could soon be running Britain. Whatever the outcome – be it a workable “confidence and supply” deal with the Democratic Unionists” or some Tory backroom blood-letting – there will surely be another election soon.
May sought a “stronger mandate” for the UK’s looming Brexit negotiations – and clearly didn’t get it. Yet I don’t feel this election result suggests the public got cold feet when it comes to leaving the EU.
Both the Tories and Labour – commanding over two-thirds of votes cast between them – stood on a ticket insisting last June’s referendum result must be honored. The two biggest campaign cheerleaders for staying in the EU’s single market, meanwhile, the Liberal Democrats and Scotland’s SNP, failed to impress.
Those backing “soft Brexit”, though, still sense this could be their moment. Yet the reality of single market “membership” – beyond the slogans – is on-going multi-billion pound payments to Brussels, continued supremacy of European law and, quite probably, still accepting the EU’s “freedom of movement” rules.
That doesn’t amount to Brexit – as this column has often said. If it happens, many Leave voters will feel not just angry, but betrayed. No matter that the economic advantages of the single market are wildly exaggerated – discriminating as it does against service-oriented economies like the UK. If we end up with “soft Brexit”, a large swathe of the British electorate will conclude, with dismay, that last year’s seminal referendum result has been somehow overturned. UK politics – generally moderate, if occasionally surprising – would turn nasty and more extreme.
Even if May does form a government that lasts, political risk in the UK just rose exponentially. The pound plunged by more than 2pc on news of Thursday’s “exit poll”, as investors contemplated what Corbyn might do if in power. London share prices held firm, though, the only certainty on Friday morning that if British politics gets really choppy, the Bank of England will end up unleashing more quantitative easing – a guaranteed sugar-high for stocks.
I must confess, amidst all this political intrigue, to an underlying economic fear. Yes, politics has gone crazy, with people on both left and right saying the rules have been torn up. While covering this election count, though, moving between various television and radio studios, I heard a lot of otherwise sensible people talking as if the laws of mathematics no longer held.
A big danger now is that a rattled Tory party, desperate for approval, opens the spending sluice gates. Ascribing Corbyn’s increased vote share to Labour’s “fully-costed” manifesto, a minority Conservative government could be tempted to start playing fast and lose with the nation’s finances – a mistake the markets would severely punish.
“Everyone is sick of austerity,” say the pundits. I accept, of course, that a public sector wage squeeze, and cuts in some of our public services in recent years no doubt shored up support for Corbyn. The truth is, though, the UK has run a budget deficit in each of the last 15 years. The truth is that our national debt has ballooned, despite endless talk of “austerity”, from 27pc of GDP before the 2008 crisis to almost 90pc today. Already, the government spends more on debt interest than on schools. And with rates stuck to the floor with printed money, the government’s interest bill is only going to rise.
In 2010, a Tory-led coalition pledged to run a budget surplus within five years. By 2015, despite reasonable economic growth, our annual deficit was still a massive 5.2pc of GDP – as the government continued to spend. The Conservatives then said we’d see a surplus in 2020. Yet May’s manifesto for this election, with no explanation, extended that to “the middle of the next decade” – so 2025.
No-one is saying for one moment that parts of the public sector haven’t suffered. Yet someone has to point out that the overall envelope of public spending, despite harsh adjustments falling on many ordinary workers and those heavily reliant on public service, remains out of control – amidst grotesque amounts of inefficiency and waste.
What the UK desperately needs, to get our debt burden back to safe levels, is economic growth. That is often less about vast public spending, and billions of pounds in additional borrowing, than enabling the private sector to do its job. The government needs to unleash a huge house-building program, making state land available now, with strict conditions on developers to provide school and hospitals. We need to initiate infrastructure bonds, getting our huge private savings stock out of inert government gilts and into projects that boost growth.
If the UK’s political class comes to accept that Corbynism makes economic sense, that we can do QE ad infinitum, seeking solace under Labour’s magic money tree, then all bets are off.
There was much talk, as the election results rolled in, that Britain could go back to 1974 – when Harold Wilson, having failed to win a majority, held a second election months later. Something similar could happen now. The danger isn’t a 1974 back to the future episode, but 1976 – when politicians and pundits ignored the lessons of history, convincing themselves we could borrow and spend with abandon. Britain ended up at the International Monetary Fund, amidst a sterling crisis, staving off sovereign default. Politics can be interesting. But economics always wins.