Why austerity is coming to an end

28 July 2018

9:00 AM

28 July 2018

9:00 AM

The last day of the parliamentary term is usually an occasion for the government to get a whole bunch of bad news out of the way all at once. But this summer’s end-of-term announcements were used as a chance to put out some seemingly good news. Teachers, prison officers and members of the military will all receive pay increases of above 1 per cent for the first time in five years. The lifting of the public sector pay cap is another reminder of how politics and the Tories have moved on from the age of austerity that George Osborne announced in his 2009 conference speech.

Much has been written about the 2017 election and how the loss of the Tory majority changed Brexit. But it had almost as big an impact on government spending rules. It persuaded the Tory party that the public sector pay cap was unsustainable. Indeed, Gavin Barwell, the Prime Minister’s chief of staff, thinks that the cap was one of the things that cost him his Croydon seat. He wasn’t alone in thinking that the election showed the public were fed up with ‘austerity’. Philip Hammond’s conclusion was that the public were ‘weary of the long slog’ of getting the deficit down.

The 2017 election changed something else. George Osborne had weaponised the deficit. He set deficit reduction targets (which he never hit) and then attacked Labour for not matching them. Every Labour spending commitment was met with the response: are you going to raise taxes or increase borrowing to pay for that? The Tories stepped away from that approach in 2017; they didn’t even commit to balancing the books within the parliament. Having decommissioned the deficit, the Tories now can’t bring it back as a weapon. Compounding this, they are faced with a Labour party that is promising to spend a lot more on nearly everything.

There are two schools of thought on how the Tories should respond. One argues that clear blue water is needed with Labour: that now, more than ever, the Tories must stand for fiscal restraint. The other says that when you offer the British public a moderate form of something and an extreme version, they opt for moderation. So the Tories should offer to spend a bit more. The Budget this autumn and then next year’s spending review will give us some idea of which of these arguments is winning.

I’m told that inside the Treasury there is a debate about when the Budget should be. Civil servants are pushing for October, so they can get it out of the way before any of the key Brexit votes; they fear that other-wise the Budget could end up being taken hostage by one side or other in the Tory civil war. But I understand that Hammond prefers November, because he thinks that given the current pace of negotiations, there are unlikely to be any important Brexit votes until December.

In the Budget, Hammond will set out only how he intends to fund the first year of the government’s increased spending on the NHS (which he didn’t want to commit to without an agreement on how to pay for it). With the public finances improving faster than expected, he may — just — be able to do that from the proceeds of growth.

The coming spending review will see almost every department demand more cash. The Treasury view is that the NHS splurge to which May has already committed the government means the kitty is already spent, so spending on schools, the police, the military and everything else can only rise with inflation. Their hope is that this will impose its own discipline. As one source tells me, ‘since the health announcement, people, including the parliamentary party, now realise that more public spending means more taxes’.

But nothing will stop ministers pitching for more cash for their departments: they’ll always argue that cuts can be made elsewhere. I’m told that when the cabinet discussed the public finances last week, there were only five ministers who seemed concerned about the deficit. They were: Hammond, his deputy Liz Truss, David Gauke (who spent the last seven years at the Treasury and continues to think like he’s still there), the Welsh Secretary Alun Cairns (who scarcely has a budget to spend) and Matt Hancock, the Health Secretary, whose spending settlement was guaranteed before his arrival.

There’s a strong case for giving schools more money. Many Tory MPs believe that what hurt them most at the last election was schools telling parents about what planned cuts would mean in terms of reducing teacher numbers and so on. Since being made education secretary in January, Damian Hinds has kept a low profile — but he broke cover at the weekend to stress that ‘education is a special case too’ and that it needs more resources. His campaign has begun.

Then there is the police. The rise in violent crime is being taken by many as proof that police budgets have been pushed too low. What good is a Tory party that cannot keep order in the streets? There will be pressure on the new Home Secretary Sajid Javid to fatten up the thin blue line: he has already promised to ‘prioritise police funding’, though he hasn’t said how. Tory MPs will be sympathetic to this need.

While defence might not have the political salience of crime or education, it is a question that exercises Tory MPs. There’s a clear case for increasing Britain’s military capabilities to show that Brexit is not about the country retreating in on itself.

Perhaps the most compelling case for more money, however, can be made for two areas that don’t attract much attention at Westminster: prisons and local government.

The raw politics points in the direction of more spending. As one cabinet minister observes, ‘We kept the public finances in good shape in the 1990s and look what happened.’ The Tories went down to their heaviest defeat of the modern era in 1997.

Combine all this with the economic choppiness that will accompany Brexit and it is almost impossible to see how the next few years won’t lead to higher spending. Looking at the parliamentary arithmetic, and the wider political dynamics, it is almost as hard to see a Tory PM significantly increasing taxes. All of which points to more borrowing. The only question is whether it’ll be relatively mild Tory borrowing, or Jeremy Corbyn’s cask-strength version.

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