Austerity may be over, but Britain is right to hold back on the spending


Let the good times roll! Governments of advanced economies have finally ditched austerity, according to the International Monetary Fund, and are spending again. Breaking a five-year streak of budget cuts, governments loosened the purse strings by 0.2pc of GDP last year.

As this marginal shift indicates, however, the mood is hardly celebratory. Instead, it illustrates that rich countries have exhausted the stimulating potential of monetary policy and are turning back to fiscal policy for a boost.

Thankfully, Britain has so far decided not to take part in this reckless policy reversal and Philip Hammond (assuming he is still Chancellor in June) would be wise to keep it that way.

Britain’s overall deficit, including debt interest payments, is still 3.1pc, showing the importance of reducing debt

Public debt remains higher than ever. Gross government debt in advanced countries is 107.6pc of GDP. The halt in fiscal consolidation means that instead of declining to about 100pc in the next five years, as the IMF previously expected, it is now forecast to stay fairly level over that period, creeping down to about 106pc.

The number of governments loosening their fiscal policy rose from eight in 2015 to 11 in 2016. The number keeping their budgets neutral rose from 7 to 14, and the ranks of those still cutting fell from 19 to 10.

Britain was one of those staying the third category.

More worrying than the level of ongoing government profligacy in the developed world, though, is its expected composition.

The United States is set to lead the charge, despite still having the developed world’s second-largest budget deficit at 4.4pc of GDP. In fact, with an economy growing strongly and operating at full employment, the US could not be a less suitable candidate for a fiscal stimulus.

That doesn’t seem to bother Donald Trump, who seems determined to embark upon a massive round of tax cuts even if he can’t keep promises to cut the cost of healthcare and other government programmes to compensate.

The US’s situation is “particularly troubling,” says Silja Sepping, an economist at Llewellyn Consulting, given its limited room for manoeuvre. Ms Sepping places the US in 20th place out of 21 advanced economies in terms of its capacity to overspend without consequences.

Uncle Sam, though, can usually rely on the reserve currency status of the dollar to keep a lid on its borrowing costs, despite Mr Trump’s declaration that the dollar is “too high”.

Philip Hammond

The US isn’t alone. Germany, which can well afford to spend more, is loosening somewhat to pay for more infrastructure spending and the cost of hosting over 1m refugees, most of whom still aren’t allowed to work. Spain, its economy now booming after some painful years, can also afford to let go a little,

The largest category of countries in expansion mode, however, are those large, lumbering economies where strong growth has been hard to come by and governments are trying to flog them into life. In other words, Japan, Italy and France. Here, the IMF’s advice is a list of impossible contradictions.

Governments ought to invest more, keep an eye on fiscal sustainability and debt and make sure their fiscal policy is “anti-cyclical” (spending more in recessions and less during booms), the Fund says. When your economy has been in depression for years, however, fulfilling all of those requirements is a tall order.

With the hawkish Mr Hammond now in charge, Britain has stayed safely removed from the fray. Cutting has slowed down, however, and a review is in order.

Some precipitous cuts, like the slashing of social care budgets, seem to be causing back-ups into other parts of the system like the NHS.

Other protected areas, like the ballooning aid budget and “triple lock” on pension payments, must surely now be prime choices for shouldering some of the ongoing fiscal crunch, especially with the Tories unfettered from some of the rash promises made in their 2015 manifesto.

Meanwhile, capital spending could do with a bigger boost, given Britain’s pitiful levels of public and private investment.

With an election in the offing, it would be tempting to junk austerity altogether. Britain is in a much better position than it was, with its primary balance (excluding debt interest payments) now down to a deficit of 1.3pc.

And thanks to the incredibly long maturities on its debt, averaging 14.4 years, Ms Sipping places Britain sixth out of 21 in her league table of countries with “fiscal space” to spend.

The eurozone is growing

It’s no time to get carried away, however. Britain’s overall deficit, including debt interest payments, is still 3.1pc, showing the importance of getting to a point where the country can reduce the debt load.

Whatever the economic impact from our transition out of the EU, we still haven’t felt its effects yet. And the economy’s startling resilience is fuelled by consumer credit.

Britons are drawing down their bank balances and buying – no bad thing if they can afford it, but the falling pound is likely to cause a sustained rise in inflation, eroding our spending power.

Mr Hammond would be foolish to rely on an unbroken stream of good news about the economy.

The truth is that although advanced economies might look like they are in recovery, they have actually just forestalled the reckoning.

Public debts are high and private debt is still rising. Productivity and trade growth are slowing. And asset prices, pumped up by years of quantitative easing, are sky-high.

It’s heartening to see GDP growth take hold not only in the US but also in the beleaguered Eurozone, but the underlying structural problems with these economies – too much debt and too narrow a base of innovation – are still there.

It might seem like now is a good time to embark upon a massive spending splurge, but the outlook could turn darker very quickly.

Britain is holding out against the shifting fashion in developed countries and it should stick to its guns.

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