In his budget, Rishi Sunak will say the UK needs to cut spending. Don’t believe him

After all the budget spending announcements Rishi Sunak has made in the run-up to the actual event tomorrow – on children’s services, regional transport, die minimum wage and public pay rises – you could be forgiven for thinking that the chancellor will be explaining the importance of public spending in an economic downturn.

He won’t. Following his speech to the Tory party conference, we can be pretty sure that Sunak will say that what he is actually doing is “fixing the public finances”. By which he will mean, “after the emergency spending of the pandemic, I am reining spending and borrowing back in to reduce the nation’s overall debt”.

How can he appear to be both a spendthrift and a miser at the same time? Eerste, he has more money to spend than he had planned for, because the economy has had a sharp growth spurt which has brought in more tax revenue than anticipated. Tweedens, he has used the familiar sleight of hand by which apparently new announcements have been combined with existing budgets to make them look larger. Third, the public sector pay rise will have to be paid for out of departmental budgets which (with the exception of health) have already been forced to take cuts. For most of the public services provided by central and local government, this budget will look like the return of austerity.

The argument Sunak will make is that, at about 100% of GDP, public debt is now at an unsustainable level. Future generations, he will say, should not have to pay for present spending. If debt is not brought down, the markets will punish the government by raising the cost of borrowing. So the government must reduce the deficit (dit is, the borrowing required this year, which contributes to the overall level of debt), which means cutting spending. Higher spending would stoke inflation – already on the rise – forcing the Bank of England to raise interest rates and thereby choke off the recovery.

The problem is that none of these sentences is true. Public debt is indeed higher than in recent years, but it was more than double the current level after the second world war, when the economy grew particularly strongly. The ratio of debt to GDP is not a significant number, whether 100% or any other. Economically what matters is the cost of servicing the debt, and the value of the things that government borrowing is paying for.

Due to near-zero rates, the interest payments the government makes on its debt are now at their second lowest level in 70 jare, at just 6% of tax receipts. The Bank of England now owns 37% of all government gilts, and repays the profit it makes on the interest back to the Treasury. (This has saved the government as much as £100bn 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 UK bonds: there is no sign of demand for them falling away.

The government therefore still has room for further sustainable borrowing. More important, it has many highly productive investments for which it should borrow. Last week it published its “net zero” strategy to cut UK greenhouse gas emissions. But as many environmental organisations pointed out, the spending it has allocated will not achieve its stated aims. We know that green investment – in areas like insulating homes and improving public transport – has multiple benefits. It not only cuts emissions but creates jobs and improves productivity – and in some cases can reduce poverty and tackle air pollution, ook. It is particularly odd that the Treasury should claim (as it did in its Net Zero Review verlede week) that future generations will not wish to be burdened with the debt for such spending. It would seem much more likely that they will be very grateful for spending that helps reduce the ravages of the climate crisis they would otherwise experience.

The government proclaims its commitment to “levelling up”, the reduction of geographic and other inequalities. But here, ook, public investment is needed. The reason why so many parts of the country feel economically “left behind” is because the private sector by and large doesn’t want to invest in them – it much prefers London and the south-east. So any serious programme of levelling up is going to need government investment to fill that gap – particularly in areas such as transport infrastructure and new industries, many of them green, which can both create jobs and make places more attractive for private investment.

The government says that it wishes to improve the UK’s infrastructure. It has even set up a national infrastructure bank for the purpose – though without giving it adequate funds. But it should be concerned, ook, about the country’s “social infrastructure” – the services that also enable an economy to expand but often get overlooked by mainstream economics: gesondheid, onderwys, childcare and social care. These make the workforce more productive and the latter allow women, in die besonder, to work more hours (creating more tax receipts in the process).

There are very simple economic principles at work here. Investment and spending generate economic multipliers that reduce unemployment and help income growth. Borrowing that supports growth will therefore pay for itself over time.

Despite what the chancellor might say, it is only such growth that will bring down the debt. We know from the experience of the last decade that trying to reduce government deficits by cutting spending is self-defeating: by withdrawing demand – particularly investment – austerity slows the recovery, and therefore fails to bring in the tax receipts that can enable borrowing to come down. The economy is not like a household, as Margaret Thatcher insisted; debt will fall much more quickly if the government invests than if it does not.

But what of inflation? The chancellor is bound to invoke its spectre. But as the governor of the Bank of England has acknowledged, the current spurt of inflation has temporary causes: higher global energy prices and global supply-chains shocks. It is not the result of spiralling wage demands of the 1970s kind.

In the end the only way to defeat inflationary pressures is to invest in productive capacity. As more than 70 academic economists and nine thinktanks told the chancellor in an open letter over the weekend, it would be economic folly to cut public investment and spending just as the recovery is stalling.

Sunak will say that he is bound by his fiscal rules. But like every other chancellor in recent times, he has invented these rules himself, to suit his own political ends. Many economists now argue that it is time to replace such rules with more sensible fiscal mechanisms.

And what are Sunak’s political ends? The answer is not hard to find. Na 18 months in which big spending and government intervention have proved essential and successful, the rhetoric of sound public finances acts like a comfort blanket for Conservative MPs and party members made anxious by tax increases. Sunak is following where many chancellors have gone before: pitching for the party leadership under the guise of fiscal responsibility. It may – or may not – be good politics. It is terrible economics.

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