by GK Strategy 18th October, 2018
3 min read

“The End of Austerity”? – a pre-budget analysis

The Institute for Fiscal Studies (IFS) published their annual Green Budget earlier this week and, with it, delivered a stark message to the Government ahead of the budget next week. The content of the report will likely come as no surprise to most readers – it will be impossible to square Theresa May’s recently declared commitment to “end austerity”, while balancing the budget by the mid-2020s. According to the IFS, taxes would need to be hiked to levels not seen since the Second World War to achieve these twin goals.

The incompatibility of the two promises is likely to be framed as a battle between the two figures that made them. May’s conference promise was viewed by many as a sign of acceptance that the economic orthodoxy of the past eight years is slipping, under pressure from Labour’s distinctly different model. The other main actor, Philip Hammond, seems less likely to be swayed by public sentiment in his crusade to balance the public finances.

What is clear is that May’s statement should be taken with a grain of salt. Her wording was deliberately vague and offers little scope for accountability. The non-partisan IFS take a narrow definition of May’s promise to “end austerity”, equating this to a commitment to no real-terms cuts to public services. Note that this definition does not take into account reduced spending of welfare. Those hardest hit by austerity may take a different view on what its end to should look like.

In calmer political waters, this news would surely be a much more significant story. The Prime Minister has overtly undermined her Chancellor’s guiding principle and most meaningful promise. However, in reality this is a sideshow that is unlikely to be picked up to any serious degree. Despite filling the two most senior positions in government, the two are weak politically and this disagreement has a hollow feeling; it is unlikely that either will be in power long enough to follow through on their positions.

The interim result will be compromise. It is impossible to achieve either goal quickly and there is a general understanding of this – surely an attraction of such pledges. IFS Director Paul Johnson believes it is likely that May will win out in the short run and that we should expect increased borrowing to fund some loosening in the budget, rather than tax increases. Neither has the political capital necessary to push through unpopular tax rises and as Johnson says, “increasing borrowing is clearly the line of least resistance”.

The Budget, due to be published on 29 October, will shine a light on quite how far the Government is prepared to go to ward off Labour’s advances on economic policy and, in the process, how happy May is to throw Hammond’s fiscal rectitude under the bus.

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