orAfter all the announcements about the budget expenditures that Rishi Sunak has made on the eve of the current event tomorrow for child services, regional transport, minimum wage and increase of public salaries, you can be forgiven that you think the chancellor will explain the importance of public expenditures in an economic downturn.
He has no habit. After his speech at the Conservative party conference, we can be very confident that Sunak means that what he is actually doing is regulating public finances. By this he means, after the emergency expenditures of the pandemic, I am restraining expenditures and borrowing again to reduce the total debt of the nations.
How can he look like wasteful and stingy at the same time? First, he has more money to spend than he had planned because the economy has had sharp growth, which has brought in more tax revenue than expected. Second, he has used the familiar trick by which new announcements are apparently combined with existing budgets to make them look bigger. Third, the increase in public sector wages will have to be paid from the budgets of the departments, which (excluding health) have already been forced to make cuts. For most public services provided by central and local government, this budget will look like a reinstatement of austerity measures.
The argument that Sunak will make is that, at about 100% of GDP, public debt is now at an unsustainable level. Future generations, he says, do not have to pay for current expenses. If debt is not reduced, markets will punish the government by increasing the cost of borrowing. So the government needs to reduce the deficit (i.e. borrowing required this year, which contributes to the overall level of debt), which means spending cuts. Higher spending would boost already rising inflation by forcing the Bank of England to raise interest rates and thus stifle the recovery.
The problem is that none of these sentences are true. Public debt is indeed higher than in recent years, but it was more than double the current level after World War II, when the economy grew particularly strongly. The debt-to-GDP ratio is not a significant number, whether 100% or otherwise. Economically what matters is the cost of servicing debt and the value of things for which government borrowing is paying.
Due to near-zero rates, interest payments the government makes on its debt are now at the second lowest level in 70 years, in just 6% of tax invoices. The Bank of England now owns 37% of all government coffers and returns to the Treasury the profit it makes from interest. (This has saved the government up to $ 100 billion over the last decade.) The bank can continue to finance government debt at low interest rates, which means that financial institutions will continue to buy bonds in the UK: no there is no sign of falling demand for them. larg.
Therefore, the government still has room for further sustainable borrowing. Most importantly, she has a lot of very productive investments for which she needs to borrow. Last week it published its zero net strategy to reduce greenhouse gas emissions in the UK. But, as many environmental organizations have pointed out, the expenditures it has allocated will not achieve the stated goals. We know that green investment in areas like home insulation and improving public transportation has multiple benefits. It not only reduces emissions, but creates jobs and improves productivity and in some cases can reduce poverty and also tackle air pollution. It is particularly strange that the Treasury should claim (as it did in it Net Zero Review last week) that future generations will not want to be burdened with debt for such expenses. It would seem far more likely that they would be very grateful for the costs that help reduce the devastation of the climate crisis they would otherwise experience.
The government announces its commitment to raising, reducing geographical and other inequalities. But even here public investment is needed. The reason why so many parts of the country feel economically left behind is because the private sector generally does not want to invest in them, it much prefers London and the southeast. So any serious leveling program will need government investment to fill that gap especially in areas such as transport infrastructure and emerging industries, many of them green, which can create jobs and make places more attractive for private investment.
The government says it wants to improve the UK infrastructure. He even set up a national infrastructure bank for this purpose, but without providing the necessary funds. But there is also concern about places social infrastructure services that also enable the expansion of an economy, but are often overlooked by the main economy: health, education, childcare and social care. These make the workforce more productive and the latter enable women, in particular, to work more hours (creating more tax revenue in the process).
Very simple economic principles work here. Investments and expenditures generate economic multipliers that reduce unemployment and help increase incomes. Borrowing that supports growth will pay for itself over time.
Despite what the chancellor may say, it is only such an increase that will reduce the debt. We know from the experience of the last decade that trying to reduce government deficits by cutting spending is self-destructive: attracting demand, especially investment austerity measures slows the recovery, and therefore fails to bring in the tax revenue it can enable the reduction of borrowing. The economy is not as a family, as Margaret Thatcher insisted; debt will fall much faster if the government invests than if it does not invest.
But what about inflation? The Chancellor is obliged to call her spectrum. But as the Governor of the Bank of England has acknowledged, the current burst of inflation has temporary causes: higher global energy prices and global supply chain shocks. It is not the result of spiral wage demands of the 1970s type.
In the end, the only way to overcome inflationary pressures is to invest in productive capacity. As more than 70 academic economists and nine think tanks told the chancellor open letter over the weekend, it would be economic folly to cut public investment and spending just at a time when the recovery is stalled.
Sunak means he is bound by his fiscal rules. But like any other chancellor in recent times, he has invented these rules himself, to suit his political goals. Many economists now argue that it is time to replace such rules with more reasonable fiscal mechanisms.
And what are the political goals of Sunaks? The answer is not hard to find. After 18 months in which huge spending and government intervention have proved substantial and successful, the rhetoric of sound public finances acts as a blanket of consolation for Conservative MPs and party members worried about tax increases. Sunak is following where many chancellors have gone before: the party leadership position under the guise of fiscal responsibility. It may or may not be a good policy. It is a terrible economy.
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