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Sunak’s Great Splurge – a masterclass in delusion


WEDNESDAY’S Budget was a masterclass in delusion. In the short term it will accelerate growth, through significantly higher public spending, albeit it very inefficiently. In the long term it is storing up multiple problems. It embeds a huge and inefficient state, indeed rewards failure, makes monetary normalisation harder, distorting investment decisions and prioritising asset prices over productivity, risks embedding inflation further and does nothing to address the huge tax and growing regulatory burden on families and business. 

Despite record tax rises the money is to be frittered away with significantly higher public spending, averaging 3 per cent real across departments, despite plummeting public sector productivity. According to the ONS data (see chart below) public sector productivity today is a staggering 13 per cent lower compared with 1998 some 22 years ago. The gap with the UK economy as a whole over that period is 23 per cent, with a 60 per cent underperformance relative to manufacturing. Yet the response is to reward this underperformance with even more treasure. That is why it is rewarding failure. 

There is little public sector accountability, oversight or competence if the past performance is any record. Outcomes deteriorate and money is thrown at self-inflicted problems – such as the NHS’s inability to deliver a basic non-Covid-19 service for many or education failure caused by school lockdowns amongst many others. How many public services are now virtual? Contrast that with the private sector which finds a way of dealing with adversity. 

Rather than beginning to restore the economic damage caused by lockdown, this Budget makes it even harder to normalise monetary policy given the continuing need for deficit finance. While the OBR see, despite much higher public spending, the fiscal deficit falling sharply to around 1.5 per cent GDP by 2027, from a current 12 per cent GDP, I struggle to be so optimistic. 

Given spending pledges this looks way too optimistic, despite the largest increase in taxation announced since the Budget of 1993. I expect a deficit embedded in the range of 5-7 per cent of GDP in the medium term assuming no further growth or lockdown interruptions, which is far from certain.

While perhaps one should be grateful that in the short term there are not yet further tax rises, make no mistake, this Chancellor, despite preening his sound money credentials, has done exactly the opposite – puffing up the economy for short term expediency but storing up serious trouble ahead. 

Britain cannot safely continue like this. If we are to have any substantive free society at all only the private sector can deliver true growth and prosperity. Hampering it with increasing regulatory burdens (currently the notable ‘net zero’ changes, but also across the board), significantly higher taxes and crowding out via a State, is the road to ruin. 

I expect socialists to come up with crazy plans based on a utopian vision of State omnipotence, but for the Conservative Party to act in such a manner is tragic, against a clear and obvious history showing that such excessive state management does not work. 

Public spending increased by 32 per cent during the pandemic, reaching a staggering 53.1 per cent of GDP currently. The OBR see this declining to 41 per cent by 2027. We shall see, but given ‘the public sector pump prime’ don’t be surprised if the state remains embedded in the 45-7 per cent range in the medium term. That, sadly, is my expectation.

The OBR also believes the damage from lockdown to be 2 per cent in the long term, bizarrely only half as significant as their estimate of the alleged cost of Brexit. Of course there will be a bounce back from lockdown, but the long-term scarring from asset destruction from forced inactivity, changed practices, monetary policy dislocation and much higher public spending at the expense of the private sector, makes the cost a multiple of this estimate in my view. A 2 per cent hit, while significant, is chicken feed compared with the £370billion cost of lockdown so far in terms of public spending, the changed trajectory of future public spending and the disruption to individuals and business. The productivity scarring is significant.

The error really comes from the prolonged nature of lockdown, which was a political choice. Britain’s GDP performance was the second worse of the major developed nations in 2020 despite, or perhaps because of, Sunak’s £370billion lockdown spending which changed attitudes and dampened productive activity. Sweden, with a more minimalist and liberal lockdown approach, was hit far less, and indeed now has seen an almost total GDP recovery.  

The die has been cast. This Government has chosen the Statist route to try to grow its way out of this crisis. Our role is to monitor closely the success, or otherwise, of this approach. 

I hope to be confounded with a much stronger public sector productivity performance than has hitherto been achieved. 

I hope to be confounded that the government starts to re-trust the people and sensibly de-regulate and lower taxes to sustainable and competitive levels. 

I hope to be confounded with both the fiscal deficit reducing much more quickly than I anticipate and monetary policy starting to normalise so that the economy can function effectively again. 

I do hope to be confounded, but despite the Chancellor’s lip-service to fiscal prudence, low taxes and a small state, all his actions lead in the opposite direction. 

Yes, short term growth may surprise on the upside, but this is far from normal with rising inflation, savings rates and borrowing costs close to zero, a damaged and highly taxed private sector and public spending aplenty. 

This first appeared on Brexit Watch on October 28, 2021, and is republished by kind permission. 

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Ewen Stewart
Ewen Stewart
Ewen Stewart is a City economist who runs the consultancy Walbrook Economics. He is director of the think tank Global Britain and his work is widely published in economics and political journals.

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