What Theresa May’s End to Austerity Really Means

At Conservative Party Conference in September, I along with many others watched Theresa May declare that austerity is over. At the time, it made political sense. The mood in the country is that services like the NHS need to be better funded.A significant proportion of the electorate is willing to turn to the dangerous hard left to deliver this. Since May’s declaration though, the media have continually talked about what it means. This week, the Institute for Fiscal Studies (IFS) claimed that the promise requires £19bn a year in extra spending. This report is deeply irresponsible.

The economist’s definition of austerity is usually quite different to the meaning understood by the public. An austere individual might be someone who spends less than or equal to what they earn. In economics, austerity refers to a reduction in the structural deficit run by the government. This is to say, a reduction in the deficit ignoring the effects on it caused by the economic cycle. Important to note here is that austerity does not necessitate cutting spending. Rising taxes can have the same effect on the deficit.

So when the IFS, a supposedly impartial economic think tank, publishes a report saying ending austerity means £19bn per annum extra spending something is wrong. The report claims that Philip Hammond and the Treasury will need tax rises to pay for the end of austerity. Yet this is economically illiterate – tax rises are by definition themselves a form of austerity.Indeed, the 2010 coalition government in the UK raised VAT to 20% as one of its first austerity measures. The IFS report strays from economics and is distracted by the way politicians like Jeremy Corbyn talk about austerity.

In reality, all that is required for austerity to end is for the real structural deficit to cease falling. This can happen without any real terms spending or tax changes, in theory. If all budgets were simply increased in line with inflation, then assuming real growth in the economy (as we have had every year since the recession of a decade ago) the structural deficit will remain constant in real terms but fall as a proportion of GDP.

The Chancellor of the Exchequer continues to talk of a ‘balanced approach’ to the economy. He says the proceeds of growth will be split between investing in public services, cutting taxes and reducing the deficit. This is not incompatible with ending austerity. The bulk of the cuts have come, now it is a matter of keeping spending increases sensible. Simultaneously, reform to the way services like the NHS spend money is necessary to ensure efficiency in the way taxpayers’ money is spent. The funding boost for the NHS, to be delivered alongside reforms to decrease waste, represents a good start.

The threat of Corbyn looms large, but what is important now for the Conservatives is not to let politics get in the way. The national mood is largely as it is because they have not been fighting their corner. Corbyn has been allowed to dictate the narrative. The Tories must not kowtow to his demands but put forward the case for responsibility with public money.

Austerity has reduced the deficit. This fiscal conservatism must continue. Perhaps it is time to allow a little more spending, but certainly it is not time to abandon economic competence. A good proportion of extra spending which does arrive must be centred around infrastructure and projects which will themselves boost the economy. These are far more beneficial than simply throwing billions at every department in sight. The years of hard work will pay off when the tough times come around again.


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