The 'End of Austerity?' More Like the Start of the Next Recession

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Headlines about the “end of austerity”, an inadequate attempt at crisis-management, and some investments in things that are going to make climate change worse? Must be Tory budget time again.

With the global economy on the edge of recession, the first budget of this Parliament on Wednesday delivered the biggest increase in borrowing for three decades. Rishi Sunak, the new Chancellor, has planned a £30 billion increase in current spending, along with a massive £600 billion worth of infrastructure investment over the next five years.

The statement was a weird game of two halves in terms of rhetoric: First, the bit about coronavirus that Sunak needed to do, then came the Brexit triumphalism that surely would have kicked things off in normal circumstances.

The headline announcements were:

Forced to self-isolate as a result of the virus? Good news: you will have access to statutory sick pay, including those of you on zero hours contracts. Bad news: At £94.25 per week, next to £574.70 in Germany, sick pay in the UK is amongst the lowest in Europe.

Small businesses will receive support for paying sick pay, relief on business rates and help paying outstanding loans, and if you’re a welfare claimant you will no longer have to attend job centres to receive universal credit. The NHS will receive an extra £5 billion but there’s no extra money for highly-strained adult social care services, which provide services to the elderly and those with chronic conditions.

What with the global pandemic you could have forgot about this other looming crisis, and it looks like the Tories have! The fuel duty freeze – estimated to have increased UK carbon emissions by around 5 percent – will continue.

On the other hand the tax loophole that allowed industries to use red diesel more cheaply is to be scrapped. A tax on plastic packaging will be introduced, and flooding relief will be increased.

The threshold for paying National Insurance will rise to £9,500 – this sounds good, but it’s actually a fairly regressive measure as it represents a giveaway to everyone, including high earners. The Chancellor has also announced an infrastructure investment package worth a whopping £600 billion, targeted at roads, rail, broadband and housing.

A lot of people will be looking at these figures and thinking “where is the money coming from?” The Conservatives have spent the last decade pushing the argument that there simply isn’t any money left after the financial crisis, which is why they were forced into implement a painful austerity programme in 2010. We didn’t want to hurt the poor, but we had to, for their own good – honest! Sunak might argue that this situation has now changed, but it hasn’t: government debt as a percentage of GDP is higher today than it was in 2010.

The fact is, austerity was based on a lie: the idea that the government can only spend as much as it earns. Governments don’t pay for spending out of tax receipts, they borrow money by issuing bonds – contracts through which investors agree to lend the government money that it agrees to repay over a given time period. Today, the interest rates at which the government can borrow money from investors are extremely low, which means that borrowing is more affordable than ever. But interest rates have been low for years, so why has the government loosened the purse strings now?

There are a few reasons for the sudden change of tack. First, Boris Johnson won this election by flipping dozens of seats in Labour’s traditional heartlands and promised that he would repay the confidence of those working-class voters who “lent” him their votes – hence Sunak’s promises of cash to “level up” underperforming regions.

Second, Johnson has made some personnel changes in his cabinet – most notably, replacing Sajid Javid with Rishi Sunak. Javid represents free marketeers within the Conservative Party who aren’t happy with Johnson’s plans to abandon austerity. Sunak, who at 39 is very young for a Chancellor of the Exchequer, is likely to be much more pliable. (Tensions between these two sides won’t disappear this Parliament – some Tories will be spitting teeth about Sunak’s spending plans.)
Third, and probably most importantly, the UK is on the brink of a major recession. In many ways, this was to be expected – recessions come fairly regularly every ten to 15 years and we haven’t had one since 2008. But the timing and likely severity of the coming downturn will obviously be linked to the spread of coronavirus.

The virus now seems likely to spread all over the world, forcing millions into isolation and killing thousands. People won’t be able to go to work, so businesses will shut. People won’t be able to buy much other than basic necessities, so shops will shut. If enough relief isn’t provided, many businesses and mortgage-holders could default on their debts. Just to add to your sense of dread, the chief economist at the IMF has said that we could be facing a recession worse than that which gripped the global economy in 2008.

In other words, this is no ordinary budget – it’s a crisis-avoidance package. As the recession deepens, Sunak will cast his £600 billion worth of infrastructure spending as a Keynesian stimulus package designed to create jobs, boost productivity and contain the impact of the downturn. But clearly a few hundred billion pounds of investment in railways isn’t going to alleviate the impact of the biggest economic downturn since 2008.

Perhaps more importantly, the measures in the budget to deal with the climate crisis are woefully inadequate. With interest rates low, and the government showing its willingness to spend, now would have been the perfect time to announce a big package of investment aimed at decarbonising our economy. Instead, the Chancellor is channelling investment into roads and freezing fuel duty. Climate crisis – what climate crisis?

The Conservatives will be trying to sell this budget as a game-changing stimulus package, but it won’t even scratch the surface of the challenges the UK is facing right now.

@graceblakely