Last autumn, we were all arguing about Labour’s fiscal policy and to what extent it had pre-committed to sticking with Tory budget plans. This hinged on, among other things, whether they were going to exclude public sector capital investment from the numbers or include it. It looked for a while as if it was going to be excluded, but more recently the Eds have been talking about the current budget, i.e. the budget less capital investment. This is important, among other things, because capital investment is the primary channel for a Keynesian intervention in the economy.
If you doubt, recall 2010-2011 – a lot of people were in the habit of protesting that there “hadn’t been any austerity yet” but for some reason the economy was tanking. There hadn’t yet been much change in the overall budget balance, but there had been massive cuts to public sector capital investment, largely because it’s easy to cut investment projects. They are distinct, discrete lump sums and you can make them stop. Identifying and cutting spending in the NHS, say, or the civil service is much more difficult. Idling a lot of public sector construction was a great way to set everyone’s expectations low. In the first 2 years of the Coalition, they cut public investment by 40 per cent. They have taken it from 3.3% of GDP to 1.4% and their forward plans would take it down to 1.2%.
And then the Eds signed the Charter for Budget Responsibility. This is one of those tiresomely American devices that were fashionable at the time, when the Treasury was convinced that the public needed reassuring with austerity-y mouthnoise and extra committees to prevent that terrible out-of-control spending we had in 2005. It’s issued pursuant to the Budget Responsibility and National Audit Act 2011, which sounds like it should have a catchy acronym title even if it doesn’t. As a reminder, here’s that out-of-control spending in 2005-2006 again:
Osbourne bragging about his success and then those naughty Trots at the Telegraph post this: pic.twitter.com/07iM7NsqBV
— Mike Collins (@MIKECOLLINS99) March 18, 2015
The Tories tout the fact Labour didn’t vote against this version as some sort of big concession. However, if you read the thing, you’ll find that it requires only cyclically-adjusted, current balance by the end of the five-year forecast horizon. Unpacking this, this means that it provides an escape hatch in the event of a recession, because the assessment is linked to the output gap, quite a bit of wiggle-room anyway in the determination of the economic cycle, and it excludes capital investment.
Signing up to it, therefore, actually grants Ed Balls substantially more freedom of action than he had before, not least because he can refer critics to the austere and solemn charter. We were arguing, before this, about whether it might be possible to sneak a school or two in. The Charter, as it stands today, explicitly keeps the option open. LSE’s John van Reenen reckons this could be a difference of £35bn over the five years to come, concentrated on public sector capital investment.
And, don’t forget, the horror is still to come. Under Tory plans, we’re going to get as much austerity again, packed into the next two years:
6. In current plans, public spending cuts accelerate sharply next year pic.twitter.com/JD0Uk1akEu
— James Plunkett (@jamestplunkett) March 19, 2015
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