Brian Easton wonders whether the Autumn 2024 British budget points to a change in fiscal strategies

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

Many countries found their fiscal position was unsustainable, following the 2008 Global Financial Crash.  Their public spending was well in excess of their public revenue and they had to borrow more heavily than lenders thought prudent. Almost unanimously, such countries tried to fiscally rebalance by cutting back their public spending rather than raising tax revenues. The poor and those on middle incomes bore the burden of adjustment.

In some ways the strategy, called Austerianism – a portmanteau word from austerity and Austrian economics – was surprising. Certainly the rich had been hard hit by the GFC but they had been the main beneficiaries of the financial boom which had caused it. Ironically, that boom was accompanied by the demand that governments should not get involved in regulating the financial markets, but when they crashed, the same financiers expected their governments to bail them out.

The Austerian policies which followed tend to protect the rich at the expense of the rest of the community. Rarely, for instance, did governments try to reduce the fiscal gap by raising the top tax rate or reducing the tax loopholes of the rich. Neoliberals seized the crisis to pursue their ambition of reducing the size of the state.

Not surprisingly, Austerian policies resulted in political turmoil. Yet they continued. Even the Ardern-Hipkins Government pursued them with the promise of no significant tax rises and a restrictive borrowing target which meant that public spending – including supporting the poor – was severely constrained. Less surprisingly, the Luxon-Willis regime is also broadly Austerian, as had been the Key-English regime. (The measures which we associate with Ruth Richardson were also Austerian.) Admittedly, all of them fudged around the margins – we shall see more fudging from this government.

The British Starmer-Reeves Government budget represents a major break from this approach. It faced a major fiscal imbalance inherited from the Conservative Government which it has just replaced. Its response has been to raise taxes and maintain public spending. (Its borrowing is coming down more slowly than the Austerians would want).

The Blair-Brown Government had left Britain’s government spending at just over 46 percent of GDP in 2011. The Conservative Governments which followed had squeezed the ratio to under 40 percent just before the Covid crisis. After, it rose to near 45 percent but the Conservatives planned to squeeze the ratio down to 42 percent by 2029. Labour announced spending plans which would have kept the ratio at 45 percent, not quite the Blair-Brown level, but nearly. ( Comparing country ratios is tricky because of institutional differences but I am pretty sure the British public spending ratio is effectively higher than New Zealand’s, which is reported at about 28 percent.)

I think it reasonable to assume that had the Conservatives returned to power, facing the same fiscal gap they would have cut government spending even further. British Labour is adjusting primarily through increased taxation. What it will further do while it is in power is conjectural. (The next Britiah election may not occur until 2029.). But the reasonable expectation is there will be further tax increases. British fiscal policy has entered a new era.

Of course it may not work. Economic policies have a practice of being blown off course by events external to the economy. Often, the forecasts prove too optimistic or other events occur (in New Zealand’s case we seem to be building up considerable expenditure commitments to compensate for some of the dreadful things that past governments did – often by neglect, sometimes a long time ago). And there is always the possibility that lenders will raise the cost of borrowing. In the past, governments with similar intentions have often had to retrench.

There was widespread disappointment that the economy is expected to be growing slightly more slowly under the Reeves October budget projections than under the last Conservative budget in March. But there may have been new data indicating the economy has been tracking lower than the March forecast. Moreover, one expects some slowdown if a fiscal hole has to be addressed.

But third, we are naive if we think a single budget can make a major change to the long-term economic growth rate (if only it were that easy). The sorts of spending policies which Labour hopes will work, like on infrastructure and industry targeting, will take years to come onstream. That is why that sort of spending is among the first items to be cut under an Austerian budget. So there always seems to be an infrastructure deficit. As this government is telling us; it will be lucky if any of its infrastructure projects have any impact on the growth rate before the next election.

(It’s hard to identify a change in trend, given there are so many possible endpoints and cycles. I remain uncertain whether there was a slowdown after about 2008, and why.)

If I was advising the British Government, I’d suggest they would get a quicker boost to their growth rate by negotiating a better trading interface with the European Union, reducing the extraordinary transaction costs that Brexit has generated. A budget is not the only place for policies which can also substantially affect economic performance. 

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.