I am used to being astonished by Conservative budgets. Towards the end of my time as a special adviser to Vince Cable under the coalition, I was incredulous at how the then chancellor, George Osborne, was willing to threaten years more of cuts, despite having already slashed spending across the “non-protected” departments. Never mind whether the economy could take it, or the bond markets demanded it – this was no longer cutting fat or even muscle, but bone.
Now I stand equally astonished, but this time for the opposite reason. The figures produced by Rishi Sunak in his first outing as chancellor might have come from a Conservative attack document titled “Labour’s secret plans to borrow hundreds of billions”. Glance over the budget measures table and you can find promises to spend an extra £175bn over five years, and raise just £25bn of that in tax. And this not just for cherished projects like the doubling of R&D or an infrastructure revolution – this is a chancellor willing to bandy around phrases like “fiscal stimulus”. The once-heretical idea that public spending might boost the economy is back with a bang.
What happened to all the arguments against spending? In the apocryphal words of John Maynard Keynes, when the circumstances change you should change your mind. In fairness, some of the circumstances have indeed changed. Back in 2013 the government expected interest rates to normalise to 3%; now they look set to stagnate at below 1%. On £175bn of borrowing, the difference is considerable. The deficit was a bit higher back then, and had been extremely high only a couple of years before. The euro crisis was barely out of the way, and the idea of a government being bullied into good behaviour by the bond market still carried a lot of weight in the Treasury.
But in other regards the arguments then were no stronger than they are now. Fiscal stimulus makes sense when there are underused resources in the economy, and much less when it is at capacity. In 2013 unemployment was far higher than it is now, and there was still a lot of catching up to do after the collapse in spending after the financial crisis.
And it is hard to find good uses for government investment; I remember a Conservative Treasury minister complaining that “everyone keeps saying their spending idea will save money in the long run”. Misdirected spending can crowd out the private sector, waste resources, distort competition and even leave an area relying on the public purse rather than being left to stand on its own two feet. That kind of intelligent scepticism is as appropriate now as it was then – in fact, even more, now that so much of the new investment is aimed at such an avowedly political end as “levelling up” the regions newly converted to the Conservative cause.
Advocates of the changed approach keep pointing towards the record low interest rates, but this is an argument that can be stretched too far. Under the coalition, far from menacing the government, the bond markets acted like pussycats, and by the middle years were willing to lend to the state for just 2%. It was a powerful signal from the markets that the problem was deficient demand, not the cost of finance – but in both word and deed the government continued to behave as if the financial doors were about to slam shut. Being able to borrow at effectively zero in real, inflation-adjusted terms was the sort of argument the Labour opposition was allowed to deploy, but not the expansionists within the coalition such as Cable, my boss.
And although everyone thought rates would rise eventually, that was only because growth was expected to rise back towards 3%. With an economy that strong, you can easily afford a little borrowing. In retrospect, no matter how reasonable it felt at the time, it is hard not to conclude that the deeper cuts of the coalition were a mistake, in particular the decimation of capital budgets. There would not be such a loud call for an “infrastructure revolution” right now had there not been such a drastic curtailment earlier, and this feast-then-famine approach risks much more waste. I am worried about the economy’s ability to deliver all these projects, particularly at a time when employment is already high and access to valuable European construction skills is about to take a hit. As for Osborne’s drastic cuts to departmental budgets, even he realised they were neither wise nor deliverable: immediately after the 2015 election, the next budget undid half the damage, and the rest was unwound by his successor, Philip Hammond. Reality has a funny way of winning out in the end.
The truth is that fiscal policy is always more of a political choice than the politicians like to admit. Faced with the enormous implications of their decisions, some may find it easier to blame the markets or the unavoidable dictates of timeless rules than admit to real agency. From that point of view, Sunak’s budget is refreshing in more ways than one – here is a chancellor willing to use his autonomy to its full, astonishing extent. I just hope that all those warnings about the terrifying bond market really are only fairytales.
• Giles Wilkes is a former adviser to Vince Cable and Theresa May on economic policy