Damian Green says there won’t be any more austerity cuts under Theresa May – but he’s going to sneak them in anyway

Theresa May’s cuts to migration will take a toll on the state’s coffers since EU migrants tend to be, whatever right-wing populists assert, a net benefit to the public finances

Ben Chu
Tuesday 20 September 2016 15:48
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Damian Green, the work and pensions secretary announced this weekend there would be no further welfare cuts
Damian Green, the work and pensions secretary announced this weekend there would be no further welfare cuts

Earlier this summer Jeremy Hunt had the pleasure of being able to echo Mark Twain and announce that reports of the death of his political career had been greatly exaggerated.

The bête noire of the junior doctors hadn’t been sacked as Health Secretary by Theresa May, despite widespread rumours to the contrary.

But has yet another obituary been written prematurely?

At the weekend an interview with Damian Green, in which the new Work and Pensions Secretary pledged “no new cuts”, inspired chatter about the end of austerity.

So can we believe this obituary? No and yes. The no case is straightforward.

Theresa May to UN summit: Uncontrolled migration must be stopped

There is a major squeeze on public spending and welfare payments still to come over the next five years as a result of government decisions already taken – including the filleting of almost £9bn from the tax credit and working age benefits bill.

These will assuredly diminish the living standards of the less well-off. The Institute for Fiscal Studies has projected that those in the poorest tenth of the population will lose £800 a year by 2020 relative to those in the second poorest tenth at £1,500 a year and the third poorest tenth at £1,200 a year.

The new Chancellor Philip Hammond seems likely to announce an infrastructure fiscal stimulus in November’s Autumn Statement to help the economy ride out the Brexit shock – but no one expects him to reverse these planned welfare cuts.

What Green was referring to in his interview was the acceptance by ministers that it is not politically feasible for them to impose additional welfare cuts on top of those already outlined.

Similarly, with departmental spending, the question is whether there will be additional cuts to the substantial reductions agreed in last year’s four-year Spending Review, rather than a reversal of those already pencilled in.

And those spending cuts are, let us not forget, severe. The day-to-day budgets of unprotected departments such as environment, business, communities and local government are set to fall by an average of 18 per cent by 2020 relative to 2015 levels.

What has changed is that the new Government has made it clear that if the economy weakens it will not chase its tail by imposing still more cuts on departments in order to remain on course to deliver an absolute budget surplus by 2019-20, which was George Osborne’s lodestar. Borrowing will be allowed to overshoot instead.

This brings us to the sense in which one might reasonably argue that austerity has indeed expired. Austerity was often used by Osborne not so much as a policy tool to rein in public borrowing, but as a political club with which to beat the Labour party and, as a side benefit, to reduce the size of the public sector.

This was why Osborne refused to adopt a fiscal Plan B when massive cuts to state capital spending in 2011 and 2012 helped to stall the economy, even though a discretionary boost to government investment would have been perfectly permissible under Osborne’s own fiscal rules at the time and the cost of borrowing for the UK was touching historic lows.

This is why Osborne tightened his borrowing rules still further in 2014, refusing to make any allowance for productive state capital spending at all and setting a fixed date to deliver an absolute surplus in defiance of the advice of the vast majority of the economics profession.

This was really about painting Ed Miliband’s Labour as profligate for refusing to match these nonsensical and excessively stringent targets. In this sense austerity for Osborne was about politics, rather than economics. Theresa May has signalled she will no longer play this kind of “game”.

The international context has changed radically too. Germany is still hectoring governments everywhere to cut public expenditure – and leading by example. But it is losing the argument. Mario Draghi, the president of the European Central Bank, told Europe’s largest economy in no uncertain terms earlier this month that it has a duty to boost spending to assist the wider eurozone. “Countries that have fiscal space should use it. Germany has fiscal space” he said.

In Japan fiscal stimulus is back on the menu. Canada, under Justin Trudeau, has broken with the cuts-heavy approach of his predecessor Stephen Harper. As the US Treasury Secretary Jack Lew remarked last month: “The G20 is no longer debating growth versus austerity but rather how to best employ fiscal policy to support our economies”.

As evidence of the turn, economists at JP Morgan estimate that fiscal policy in developed countries will (albeit slightly) boost, rather than subtract from, overall growth for the first time this year since 2009.

The dogma that government should impose spending cuts regardless of wider economic conditions remains lodged in the minds of small state ideologues on the right in Europe and America. Yet most mainstream politicians have sloughed it off since the premature and economically damaging global shift to fiscal tightening in 2010.

Yet there’s another sense in which austerity, defined as underlying pressure for government economies, is not dead, at least for the UK. Britain’s budget remains in deficit to the tune of around 4 per cent of GDP at the end of 2015/16 – too high to be sustainable in the medium term.

The Brexit vote seems very likely to hit tax revenues in the short term as investment is reduced. They will also probably be weaker in the long-term due to Britain’s EU withdrawal.

And if Theresa May follows through on her promises to drastically reduce annual migration to the UK that will also take a toll on the state’s coffers since EU migrants tend to be, whatever right-wing populists assert, a net benefit to the public finances.

It doesn’t have to be paid today (and indeed it shouldn’t be) but make no mistake: there will ultimately be a big bill for all of us.

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