The men vying to be prime minister have promised the kind of spending for which they once lambasted Labour, says the Guardian’s economics editor Larry Elliott
All this, of course, at a time when the economy is listing, the financial markets look ripe for serious trouble, and Britain is less than four months away from a new Brexit deadline. Both Hunt and Johnson are planning to use fiscal policy – tax and spending – to counteract any negative economic shock caused by Britain’s EU departure, which was precisely what the Labour government did when the banks had their near-death experience in 2008. The new Tory approach to fiscal policy will bring a wry smile to the lips of Gordon Brown, pilloried as he was by Osborne for his alleged spendthrift behaviour a decade ago.
The government plans to borrow just over 1% of GDP this year to fill the gap between what it spends and the money it rakes in. To be fair, that’s slightly less than the deficit when the financial crisis broke in 2007, but not by much. On the other hand, the national debt – the sum of the annual deficits and (increasingly rare) surpluses going back centuries – has more than doubled over the past decade to more than 80% of GDP. And all the other sources of money to finance tax cuts – North Sea oil, council houses, nationalised industries – are no longer there. The country’s underlying financial position is considerably worse than it was when Brown was in charge.
Even so, the race to the bottom on tax is in some sense welcome. For a start, it validates the use of tax and spending as an economic tool. Since 2010, there has been far too great a reliance on the Bank of England to stimulate the economy through ultra-low interest rates and the money-creation process known as quantitative easing. What’s more, the terms of the political debate will now change as a result of the clear desire of Johnson and Hunt to draw a line under the austerity years. Tony Blair’s success in both the 2001 and 2005 elections had much to do with the ability to frame the choice for the electorate as between Tory tax cuts and higher Labour spending on public services.Read more: The Guardian
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