Britain is permanently poorer, and the British state weaker, as a result of Covid, the collapse in GDP and the gargantuan debt binge that has kept us going. Our economy is the most socialised it has ever been outside of war, and we have resorted to the printing presses to finance spending in a shockingly unprecedented way, pushing the great fiat money experiment close to breaking point. We will spend a lot more every year even after the virus is gone, which will necessitate tens of billions worth of tax hikes or spending cuts merely to stabilise the debt.
That, in summary, is the economic devastation described or implied by the Office for Budget Responsibility (OBR) in what is easily the most terrifying official economic assessment from a developed nation I have ever read. The fact that much of the spending was necessary, that we can “afford” it (in the sense of being able to borrow more), that interest rates are dementedly low and that growth will bounce back with the vaccine, is no consolation.
We remain in what the Chancellor correctly described on Wednesday as an economic emergency, one which will scar our private sector and society, damage our long-term economic performance, shift us further towards a social-democratic European economic model and leave us stuck with a debt level of over 100 per cent of GDP.
In fact, the scale of the catastrophe is even worse than the official forecasters admit. Nobody knows what the impact of extreme QE will be on the structures of the financial system. The cultural damage is unquantifiable, with a return to welfarism, statism, an exodus of foreign workers and a growing sense that money is free, that government doesn’t really suffer from a budget constraint. The OBR is optimistic in other areas: it thinks the economy will only be 3 per cent smaller permanently than it would otherwise be, which as Pantheon Macroeconomics says, implies that “scarring” will be less than half the scale seen after the previous three recessions.
The aid cut was red meat for the Right, dismantling one of the last vestiges of Cameroonism, but it should have gone further. Why wasn’t there a public sector recruitment freeze (ex-NHS)? Why not “build back better” by using this crisis as an opportunity to fundamentally reform the public sector? Why not scrap public sector defined benefits pension schemes? Why no war on waste? Why no cuts to various departments? Why no delays to spending promises? Why is the living wage shooting up again, guaranteeing more job losses in hospitality?
I don’t blame Sunak. His speech almost deliberately emphasised the extremity of the internal contradictions, the cognitive dissonance, the inconsistency between economic reality and the politics. He identified the economic emergency, but did little to tackle it.
The Chancellor, a free marketeer and fiscal conservative, perhaps couldn’t convince Boris Johnson that now was the time to tackle the public sector; instead, he set the scene for a future ideological reckoning in the Tory party, one which will determine whether we become more like Italy or more like Singapore.
As Sunak knows full well, the challenge isn’t just about the deficit: it’s also about growth and competitiveness. Brexit needs to be accompanied by radical cuts and changes to tax and regulation, as well as longer-term reforms to training and education, to succeed. Massively increasing taxes would kill that dream, and Johnson’s legacy, stone dead.
This spending review didn’t tell us what Rishinomics looks like. The Chancellor will soon have to put his cards on the table, and stake his career on his vision. Meanwhile, he must explain to his increasingly economically illiterate party that it cannot continue its debilitating descent into proto-socialist stupidity. The Tories must get real, or else they will never be forgiven for ruining the economy.
Yes, incredibly, the total cost of servicing our debt will fall to a new historical low of 1.7 per cent of government revenues next year, and yes we have been able to borrow longer-term than other countries, locking in this cheaper financing, but what happens if and when interest rates go up? We are, to paraphrase Bill Gross, writing at the time of the financial crisis, lying on a bed of nitroglycerine. In a crucial line, the OBR explains that the impact of each 1 percentage point rise in short-term interest rates on the deficit has doubled from £6 billion (0.2 per cent of GDP) to £12 billion (0.5 per cent of GDP).
Rishi Sunak understands all of this, and can surely barely sleep as a result: what if a future banking or trade or military crisis sends interest rates up by 3 per cent? The deficit would jump by £36 billion immediately. And what if rates shoot up even higher?
Every big economic crisis overshadows politics for at least a decade, changing everything for better or worse: the crisis and stagflation of the Seventies, in which I include the recession of 1982; the boom, bust and ERM crisis, culminating in the nightmare of 1992; the financial crisis of 2008; and now the Great Pandemic.
Set against the economic carnage, it is therefore staggering that our political landscape remains stuck in an absurd state of suspended animation. Our political classes seem to believe that they can continue as if nothing had happened. The Government clings to an obsolete manifesto predicated on the very opposite of a Covid shock: an assumption that we were richer than we thought, that the supposedly austere 2010s were over, that we could afford to live beyond our means.
Hence why, incredibly, it is sticking with its promise of years of French-style, debt-fuelled public binging on grands projets – some useless (HS2), others worthwhile (roads, hospitals and broadband) – and lots more cash on day to day spending, not least the levelling-up fund, despite the radically changed economic backdrop.
The only cuts unveiled at the Spending Review were symbolic: the welcome reduction in the foreign aid budget from 0.7 per cent to 0.5 per cent of GDP, and a botched public sector pay freeze which will see most public workers’ wages rise at a time when the private sector is being furloughed or fired. Sunak rightly didn’t extend the increase in universal credit, but that was always meant to be temporary.