The fourth horseman of the economic apocalypse

This is the fourth in a series of blogs I’ve written over the past month focusing on ways of funding what appears to be an insatiable demand for increased public expenditure. The final available option is economic growth: the panacea for every ill that can always be trotted out when all else seems to be failing. So why should economic growth be a horseman of the apocalypse? Surely it is a white knight riding to the rescue on a gleaming charger? It would perhaps be more accurate to call the threat ‘delusions of growth’.  

The question is whether this particular horseman can deliver the substantially improved public services that people demand – services that two of the other horsemen (printing money and borrowing money) cannot deliver, and that the third (taxation) is currently unable to deliver.

A starting point is to ask what annual growth in GDP would be required to finance Labour’s manifesto promises at the June election. Leaving aside capital commitments (and also leaving aside the suggestion that historic student debt might be written off), Labour’s proposed increases to current expenditure amounted to about £36 billion: £13 billion for replacing student loans with maintenance grants, £6 billion for the NHS, £7 billion for schools, £8 billion for social care and £2 billion for assorted other promises.

At present, GDP stands at £1,940 billion and government spending at £772 billion, or 39.8% of GDP. To fund Labour’s current spending plans without increasing taxes (which was not, of course, what Labour proposed) and without borrowing more or printing more, would require an annual growth in the economy of 4.7%. This is not unachievable: between 2000 and 2008, the annual growth in GDP averaged 4.7% per year. If the part of Labour’s plans that was to be funded by tax increases is taken into account (and assuming that the actual revenue matched the estimate, which is debatable), the annual target for GDP growth falls to 1.5%. Quite modest, on the face of it.

However, as usual in any such discussion, there are a great many ‘buts’. Labour’s proposed expenditure is additional to the government’s existing plans, but the government is already planning increases in spending, so some future growth is already spoken for. Also, the Labour programme included substantial infrastructure investment on top of spending plans. That would also need to be funded, as would the additional current costs that invariably result from them. Then there is the question of what happens when there is a downturn in the economy. The charge against Gordon Brown’s increases in public expenditure is not only that they were unaffordable even at the period of high growth that then existed, but that they created annual commitments way into the future that were utterly unsustainable when the recession came. The same reservations apply now.

On top of this, there are two specific issues that compound these more general concerns. The first is Brexit. I remain a devout agnostic on the question of whether in the long term – 15 or 20 years ahead at least – we will be better or worse off outside the EU than within it. But I am convinced that, from the moment we leave the EU until at least 10 years later, there will be severe economic difficulties, which will make it hard to sustain growth at reasonable levels, even if the world economy is booming. Many other people feel the same. We may all be wrong, of course, but this does not feel the right moment to be advocating major new spending commitments way into the future. Nor does it feel like the right moment to be imposing increased taxes on businesses, who will need all the help they can get. Labour, in particular, is proposing to do this, but so are the Conservatives on a smaller scale. This does not seem sensible. However, without these increased taxes, Labour’s spending plans become far less affordable.

The second specific issue is pensions: the elephant that the Conservative manifesto bravely sought to usher into the room, but which has now been banished to outer darkness again. The state pension currently costs the government £92 billion a year. Even allowing for changes to the retirement age, on some estimates this figure will nearly double in the next 15 years. As a rough rule of thumb, an annual growth in GDP of 1% every year will be required simply to fund the increased pension budget.

The Labour manifesto was painted as offering a massive increase in public expenditure, and Labour was probably happy to see it described in this way. But it didn’t really offer that. It offered a significant rise rather than a massive increase, which would almost certainly have ended up disappointing those who supported its agenda. The sad fact is that reality can probably now never match public expectations.

Of course, economic growth would help, and the more the better. But growth is already required for pensions and is threatened by Brexit. The statistical chances of another downturn, and maybe another recession, in the next 10 years are high. The belief that economic growth alone can power a surge in public services is almost certainly a delusion. The best that it is likely to provide is a modest increase.

None of this means that, at some future election, voters will not choose to gamble. It is not impossible that the gamble will pay off, but it probably will not, and then we will be back to another period of austerity. How will we all react to that? It is dramatic, but may not be over-dramatic, to say that there is an impending apocalypse.

Even if, as I argued in my blog on 30 July, printing money is an option in some circumstances, a period of rising inflation will not be one such circumstance. Even if, as I argued in my blog on 6 August, national debt and the interest on it are not high by historical standards, continuing to borrow more money than we spend, year after year, even when the economy is growing, seems a recipe for disaster. Even if, as I argued in my blog on 13 August, making international corporations and extremely rich individuals pay their fair share of tax did raise additional revenue, it remains to be seen how much, and in any case no government has yet found a way of doing it. Even if, as I am arguing in this blog, there is continued economic growth, no downturn and no great shockwaves from Brexit, growth alone will not fund our expectations.

So where do we go from here, if our expectations are to be met?