American conservatives could also learn to tolerate deficit spending to achieve policy goals that can restore the health of the republic.
American conservatives could also learn to tolerate deficit spending to achieve policy goals that can restore the health of the republic.
T he Conservatives were elected to office in the United Kingdom ten years ago on the promise to eliminate the deficit through an “austerity” program of spending cuts and tax rises. Prime Minister Boris Johnson and the Conservatives are now running their own deficit in response to the coronavirus crisis.
Long before the 2008 financial crisis, public spending had been ramping up under the previous Labour government, increasing the deficit to a staggering 10 percent of the gross domestic product (GDP) in fiscal year 2009–10. While falling short of eliminating the deficit entirely, the Conservatives managed to get borrowing back under control, at 1.8 percent of GDP in fiscal year 2018–19. Although this has given Britain reserves of fiscal firepower to use against the coronavirus pandemic, it has left the mainstream parties and the public exhausted with spending restraint.
In the early months of her time in office, Prime Minister Theresa May outlined a vision of economic reform to help the Conservatives move beyond “austerity” and address the socioeconomic divisions exposed by Brexit. This led to a communitarian platform promising to establish an industrial strategy, invest in skills, put workers on company boards, and intervene in uncompetitive markets. Despite the failure to win a majority in the 2017 general election, May left her mark on the Conservatives by launching the party’s transition away from “austerity.”
After assuming the Conservative leadership, Boris Johnson unveiled his own more populist brand of economics, sometimes referred to as “boosterism.” In the months leading to the general election last December, Johnson promised to recruit more police, invest billions more into the National Health Service, raise funding for schools, increase resources for research and development, and build more railways, roads, and broadband.
With this year’s budget, the Conservatives were already planning to turn the spending taps on in an effort to help left-behind communities after a decade of public-spending restraint and to start a decade of renewal. By fiscal year 2024–25, £640 billion of public money will be invested in rebuilding the nation’s infrastructure and public services. This loosening of fiscal policy is intended to rebalance economic growth for the benefit of deindustrialized regions that have not reaped the rewards of globalization.
The Conservatives’ fatigue with spending restraint has made them ready for the stimulus spending required to tackle the economic consequences of the coronavirus pandemic. Like many other nations around the world, Britain is in lockdown. Offices are shut as people work from home. Exercise outside is limited. Pubs, restaurants, and shops are closed. The economic shock of these measures has been deep and far reaching.
The Office for Budget Responsibility (OBR), Britain’s official fiscal forecaster, predicts that there will be an extraordinary 35 percent fall in GDP and up to 10 million people unemployed in the second quarter of 2020. A rapid rebound is still expected, but the consequences of this recession will be devastating for ordinary businesses and workers across the country.
Boris Johnson’s government has been quick to act in its economic response. The party of Thatcher, balanced budgets, and small government is now borrowing billions in order to keep the economy from falling into a depression. In a series of announcements, starting with this year’s budget, Chancellor Rishi Sunak, responsible for the Treasury, has unveiled a range of schemes. The government is now covering the costs of sick pay for businesses, increasing benefits for the unemployed, making interest-free loans available to businesses, deferring tax payments, and providing relief for homeowners and renters.
The linchpin of this program is the Coronavirus Job Retention Scheme (CJRS), which pays businesses 80 percent of their employees’ wages, with a cap of £2,500 per month, while they are furloughed. To put this scheme into perspective: 6.3 million people have been placed on furlough, costing £8 billion for the first month of the CJRS. More than 1 million people have applied for Universal Credit, the main welfare benefit for people out of work or on low pay. This has contributed to the result that over 27 million people, about 53 percent of the adult population, now receive funding from the government.
These schemes could cause borrowing to shoot up to £273 billion and the national debt to grow to 95 percent of GDP this fiscal year under the OBR’s current forecast. This is far worse than the fiscal situation inherited by the Conservatives ten years ago, but there is no real appetite among Conservatives for another extended period of spending cuts. Global interest rates are also at record lows, so there is no hurry to cut borrowing.
As the economy gradually reopens and government support is slowly withdrawn, public spending will fall again, but it is unlikely that there will be a return to “austerity.” Boris Johnson will stick with his doctrine of “boosterism” to power the recovery from the coronavirus and reshape the economy for the benefit of all the regions. Conservatives in the United States could also learn to tolerate deficit spending in order to achieve policy goals that could restore the unity and health of the republic.