Britain has eliminated the deficit on its day-to-day budget, the target originally set by George Osborne when he imposed austerity on public services in 2010.
ONS figures recently released showed that for the first full year since 2001, the UK government ran a surplus on its day-to-day spending. The announcement came as a surprise to many, and was welcomed by some as a vindication of the government’s austerity strategy for the past eight years. Former Chancellor George Osborne Tweeted that it has been “a remarkable national effort”. But has it been worth it?
While successive Chancellors have finally closed the government’s deficit, their efforts have opened up a yawning deficit in the budgets of UK households. With real wages remaining stagnant until very recently, household debt has continued its upward trend. Households have turned to credit in order to keep up with their normal consumption and spending habits. Furthermore, with interest rates expected to increase, the cost of servicing this debt is also set to grow.
Many blame stagnant wages on low productivity growth, which in part can be attributed to under-investment. Lack of public investement is a chronic problem for the British economy – investment as a share of GDP is the lowest of all G7 countries, and in the years from 1997-2017, was the lowest out of all the OECD members. While other governments have been active in filling the gap, the UK lags behind many of its competitors.
The straitjacket of austerity, which leading economists continue to label unnecessary and damaging to growth, means that the Chancellor gives himself very little room to manoeuvre. He will deliver a Spring Statement this week, but the Treasury has hinted at a low-key event, with “no official document, no spending increases, no tax changes”. As a result, the structural problems of the UK economy are left unresolved.
On the other hand, the burden of supporting the economy has fallen to the Bank of England, which since 2009 has created £445bn to support the economy via the financial markets, with £10bn of that total being used to purchase corporate bonds. What is most interesting in this case is that this money did not come from higher revenues or taxation but was created digitally – out of ‘thin air’ – in an effort to boost spending in the economy. Although this policy was somewhat effective in limiting the damage to the financial sector caused by the 2007-08 crisis, these effects did not ‘trickle down’ into the rest of the economy. Instead these funds have mostly circulated within the financial sector propping asset prices and increasing wealth inequality.
This brings the UK government’s strategy of austerity for eight years to question. Why is it acceptable to create money in order to prop up asset prices, hoping that it will trickle down to the rest of the economy? Should we not instead have directly used these funds to alleviate public debt, avoid austerity, and help raise much-needed public investment?
Each time there’s a budget, the Chancellor issues instructions to the Bank of England Governor, confirming what target he wants the Bank to meet, and which tools it’s authorised to use. This is one of the most important powers Philip Hammond has at his disposal. Instead of making tiny adjustments, he should instruct the Treasury to re-examine whether the Bank of England’s role and mandate is fit for purpose. Closer collaboration between the Bank and the government could help end this self imposed scarcity of funding, and help deliver the investment we urgently need.