Arms Race of Election Pledges Comes Too Late for Many in U.K.
Britain’s decade of austerity is coming to an end as politicians pursue an arms race of spending pledges before next month’s election. For the 90,000 or so people of Hartlepool, relief will be too late.
The run-down town on England’s North Sea coast was once a thriving steelmaking center. Like swathes of post-industrial Britain, it voted overwhelmingly in 2016 to leave the European Union in what amounted to a protest over the Conservative-led spending curbs that followed the financial crisis.
While Hartlepool’s decline began much earlier, austerity took a brutal toll. The town is among the most deprived in the U.K., according to government figures: Unemployment is double the national average and almost one-third of households have no member in work.
Siri Minsaas recalls being forced to ration glue sticks and refuse students new exercise books when she began teaching there in 2015. Austerity didn’t end at the school gate; the impact of cuts in welfare benefits and services was even more vivid.
“It was really quite awful,” said the 26-year-old Norwegian national, who quit teaching two years later. “You’d see a few in the lower-set classes who were shorter; they just looked unwell. They had hair that was growing in patches; some people were really skinny, or just generally looked a bit malnourished.”
As the shock waves from the 2016 referendum on EU membership reshape politics and harden divisions in a country once known for moderation, the fiscal landscape is shifting, too, on a scale that has taken many people by surprise.
Gone are ambitions to balance the books. The talk is of a return to the kind of spending seen in the 1970s as politicians at opposite ends of the political spectrum outdo one another with election promises ranging from more police officers on the streets to an expansion of free child care.
Whether the victor is Prime Minister Boris Johnson’s Conservative Party or Jeremy Corbyn’s opposition Labour, the U.K. is headed for public spending levels reminiscent of those under Harold Wilson and James Callaghan.
The prospect of a reopened money spigot has triggered reactions ranging from fear to hope.
An infrastructure renaissance would bring opportunities for companies and a welcome boost for a Brexit-hobbled economy, yet major projects can be hard to deliver. Some worry that hundreds of billions of pounds could be added to an already stretched national balance sheet. There’s also concern that austerity would come right back if the economy worsens and hits tax receipts after Brexit.
The public appetite for change is undeniable, after 100 billion pounds ($130 billion) of spending cuts and tax increases deployed to bring down the budget deficit, which soared to 10% of GDP after the financial crisis.
School spending has failed to keep pace with rising pupil numbers; recipients of working-age welfare last received an increase in 2015; and millions of public-sector workers had pay rises capped below inflation for years.
Johnson and Corbyn are vying to pour billions into the National Health Service, which has actually had its budget protected since 2010. Meanwhile a debate rages over the links between soaring levels of knife crime and cutbacks in policing, community centers and education.
Austerity isn’t unique to Britain. Greece, Spain and Italy experienced deeper cuts in the aftermath of the European sovereign-debt crisis. But the pain in the U.K. has dragged on for far longer than foreseen, leaving spending as a share of GDP below the average of advanced economies and tax revenue at its highest sustained level since the early 1950s.
When the then Chancellor of the Exchequer, George Osborne, announced his first budget in 2010, the deficit was forecast to be virtually eliminated over the next five years. Partly because of the debt crisis unfolding in southern Europe, those shortfalls persisted.
Osborne’s successor, Philip Hammond, started the process of unwinding austerity. By the time he was forced from office in July, however, he had all but given up hope of closing the budget gap by the mid-2020s.
Any lingering ambitions were formally abandoned this month when the newly installed finance minister, Sajid Javid, declared that the Conservatives are now prepared to run a deficit of 3% of GDP to fund spending on infrastructure -- meaning an extra 20 billion pounds a year of borrowing. Labour would boost investment by 55 billion pounds a year in its first term, more than doubling current levels to around 4.5% of GDP.
Either plan would reverse an improvement in the deficit, which fell below 2% of GDP last year for the first time since 2002. Both parties are pledging to pay for increased levels of day-to-day spending with tax revenue -- a task made easier for the Tories after Johnson this week canceled planned reductions in corporation tax. The risks facing the public finances were underlined earlier this month when Moody’s Investors Service threatened to downgrade Britain’s credit rating.
An infrastructure boom could be good for the economy, however, since investment provides a far greater boost to growth than spending on public services and wages, and would ease the pressure on the Bank of England to maintain ultra-loose monetary policy.
What Our Economists Say:
“How the fiscal loosening affects growth will depend on how quickly viable projects can be found and brought on line. It seems unlikely it will be ramped up immediately, so the effect on growth will probably be spread across a few years. In our forecast, which assumes the election returns the Conservative Party to power, investment increases over two years. The most significant impact is in 2021, when growth gets a boost of 0.5 percentage point.”
--Dan Hanson, Bloomberg Economics. for the full report, click here.
So far, there has been little disturbance in the bond market, which determines the cost of borrowing for the government, companies and households. Huw Worthington of Bloomberg Intelligence says 10-year gilt yields could double to around 1.6% if the Tories win the election, as Brexit uncertainty fades and traders price in rate increases rather than reductions.
However, a Labour government, which would issue bonds to pay for its planned nationalization of key industries, could alarm foreign investors who have bought around 170 billion pounds of gilts since the end of 2014.
“Selling by this key investor group would possibly mean sharply higher 10-year yields, with domestic investors demanding higher returns before taking up a flood of net issuance,” Worthington said.
Minsaas, the former teacher who now works for a charity that helps children from less advantaged backgrounds reach university, hopes that as spending is increased, the funds can be better targeted.
“I’m cynical about these promises coming through,” she said. “But I also recognize that there are so many things they could be spending on. I’d like to see them actually ask the schools what they need, rather than just promise them money.”
©2019 Bloomberg L.P.