In my last piece, I outlined the expected consequences of a depreciating pound and that a looser fiscal response was the only feasible short-term policy response that would be available to deal with the massive macroeconomic shocks that are likely to ensue (an uncoordinated) NO DEAL Brexit.
Three and a half questions follow:
- What is the Boris math for the litany of fiscal promises issuing since his “inauguration”?
- Are these spending promises feasible & credible in terms of the macro-fiscal context the UK will face in a NO DEAL scenario?
- What should our response as LibDems be to unpick if not defenestrate the Tory Wafflenomics in the run-up to October 31st? The half-question I leave for another occasion, what should be our policy response to deal with the after-effects from November 1 should a No Deal actually take place.
Math on Boris’ Fiscal Promises and projected values
(…mind you we’re just a few weeks in..)
- 20,000 new police officers: £1bn (one-off)
- Rise in 40% tax threshold from £50k to £80k: £10bn
- National Insurance contributions at higher trigger: £11bn
- Schools: reversing cuts in Education envelope: £5bn
- Health: Unclear but: 20 New hospitals £1.8bn + wooing female voters £2bn + ??promised £350m per week: £3.8bn – £20bn
- social care: £10bn
- new railway Manchester – Leeds: £2.1 – £3.6bn depending on sources, assume £3bn
- Help to farmers: £0.5bn (but is this just for the Welsh lamb?)
- No-Deal Planning: £2.1bn (let’s assume £100m no-deal advertising part of this budget line)
- Unbudgeted thus far: other sectors e.g. Fisheries, medicines, food shortages, …you get the picture…cost of increased policing…
Totting these figures gives £42bn excluding the £350m/week which alone would imply a further £18bn…and per year if the red bus promise is to be kept strictly. Large numbers in absolute terms (a billion has nine zeros) but not in relative terms as the UK economy is £2 trn in value (a trillion has 12 zeros), meaning that £42bn equates to around 2% of GDP or 5% of the current budget and therefore chunky but not a huge fiscal expansion…of itself..
To give some context, I include Chart 1 from the 2018-19 Budget document from HM Treasury – itself taken from the independent Office for Budget Responsibility or OBR.
The UK budget for 2019-20 was a cool £842bn of which the 2 largest components are Health and Social Protection, accounting for £422bn or exactly 50% of the budget.
So the implied fiscal loosening thus far is not eye-watering and certainly feasible. But where is the financing from and what happens if, as expected, the economy goes into a massive recession following a NO DEAL Brexit…in that case the fiscal deficit would rapidly balloon as a share of a shrinking GDP… additional fiscal fire-power would be needed for each of those bits of the pie in Chart 1.
Show me the Money
(Aka Tom Cruise as Jerry Maguire.)
Would these measures accounting for 2% of GDP expenditure be enough to ward off a major, say, 7%-10% economic compression in GDP in year 1 and a likely 5% further reduction in year 2 following a NO DEAL? (The only recent comparable to what the UK would face is the collapse of former Soviet and Yugoslav federations where real output collapsed by up to 30% and took several years to bottom out).
- Promises or pledges are not necessarily budgetary “commitments”. And are not, to use the jargon, “appropriations” ie actual disbursements for whatever purpose. There can be a lot of spin to dress up existing funding or to extend out “ new” expenditure over several years so as not to materially affect the annual budget balance. So, in one sense, the Tories can make headline promises and we’ll need to see the detail when the new budget statement comes out.
- A genuine rise in annual spending takes time to have impact, especially for capital spending and for infrastructure projects that take time to plan, procure and to commence. Current spending: ie wages, social care etc. can be ramped up quickly and was one of the mechanisms deployed, oddly enough… by the much-maligned EU… through targeted budgetary support in conjunction with the IMF/World Bank/African Development Bank, as part of the global response to assist 30 odd Low Income Countries after the Financial Crisis in 2007-08 to stop hard pressed ministries of finance simply cutting back on Education and Healthcare – and which worked. But the UK isn’t a fragile poor economy so we’d need to get some real sense in granular detail of what this extra recurrent budget would be for and the implied impact.
- Every 1% cut in GDP means a cut of £20bn in British Income, so a 7% GDP hit would imply a hit of £140bn. There would then be ripple effects across into private sector balance sheets – most notably on housing –and on government finances and “risk premium” on UK debt (ie how much more foreign investors would want to hold UK debt), a further crashing of the pound, higher imported inflation, further reduction of the purchasing or “real” value of government expenditure, cuts in real wages…and so the cycle would continue…and without the theoretical self-correction beloved of free-marketers as we’d be bang in the middle of a trade conflict with the rump 27-EU.
- Financing: so £42bn or 2% of current GDP isn’t too difficult but the reality would be a cascade effect and a potential “fiscal bail out” of say £200bn, and annually over several years…implying a possible rise in UK debt by a £1000bn ie £1trn. And I exclude any possible bank runs given the Bank of England’s assessment that they’re super ready for any eventuality.
- For what its worth, the posited fiscal expansion of £42bn could largely by raiding the safety cushion or “fiscal headroom” of around £27bn built by ex-Chancellor Hammond but then that would basically mean that the UK becomes “fiscally headless”….
- The promised £42bn, even if genuine, would pale into insignificance set against a self-enforced economic collapse with both demand and supply shocks (possible next piece) that could easily lead to a 7-10% economic shock and a massive explosion in budget deficits and deficit financing of £200bn+. The exact numbers aside, the likely trend of a NO DEAL Brexit is fairly clear, and we need to get the message across of the macro-fiscal and real societal costs of a No Deal scenario. The real impact of these numbers, alas, would be a massive haemorrhage of people’s jobs and livelihoods, food & medical shortages coupled with mass unrest.
- This bleak potential outlook cannot be unknown to Numbers 10 and 11, nor to the EU negotiating team backed by DG ECFIN and finance ministries in the main EU capitals. Leaving aside the possible political dimension for parliament to put a stop to this course through a no-confidence vote, in pure “game theory” the Boris do-or-die date of 31 October therefore doesn’t stand up– its simply not credible.
- Whether the PM is manoeuvring for an extension or not, we need to continue to whittle away the lack of economic and financial logic of the NO DEAL scenario.
* With experience across academia, think tanks, central banking, EU Accession and reforms across 40 developing and transition countries, Dr Rupinder Singh works with multilateral organisations and governments as an independent adviser.