Britain’s national debt over the past decade has always been a non-problem. For most of the last 300 years, it has been very much higher as a share of national output. Our public debt has been well-managed by the Bank of England, so that the average duration of government bonds is 15 years: there is close to zero chance of a crisis of refinancing or of confidence in public debt. At current rates of interest the overall cost of debt service is among the lowest in our history.
Britain has thus plenty of room to spend and borrow, and there was no need for the draconian Cameron-Osborne austerity squeeze in which cumulative cuts in public spending in many areas of government exceeded 40%. Deficit reduction could have been more measured and the pain mitigated. It was baloney from top to bottom – a cruel hoax that was one of the reasons for the Brexit vote, imposing wanton and needless suffering. I and other Keynesian economists have made these arguments in vain for more than a decade – indeed for most of my working life. So Wednesday’s budget was an extraordinary moment.
Chancellor Rishi Sunak repudiated the entire discourse and accepted core Keynesian propositions. He delivered the biggest fiscal boost for nearly 30 years, coordinating it with an interest-rate reduction by the Bank of England – exactly the Keynesian stimulus a flagging economy needed. Public investment was on target to become the highest since 1955, he declared – actually understating the coming public investment boom because in 1955 the comparable figures included investment by the nationalised industries, now nonexistent. The coming wave of investment in roads, rail, housing, schools, further education and ports is unparalleled. It was not just that the investment is needed: he accepted it was part of the government’s role in raising parlously low levels of productivity. Right again.
Yet a rubicon has been crossed. Keynesianism has been restored to its proper place in British public life
Alongside it current public spending is going to rise again, with an additional £12bn package to alleviate the impact of Covid-19. The government would do everything it could to alleviate the spread and impact of the virus. The larger point was that fiscal policy – excusing his party’s volte-face by trying to position it as part of the new international consensus – has got to shoulder its responsibility for driving the economy forward. Amen to that.
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On the Today programme the following morning my jaw dropped as Sunak informed his audience that reasons for confidence in his package included Britain’s public debt averaging 15 years in duration and debt service costs being extraordinarily low. To make the same argument during the Blair, Cameron and May years was to ensure you wore the mark of Cain – an outlandish Keynesian perspective that branded you as ignorant of the basic laws of economics and public finance. But if a Tory chancellor backed by his press makes the same argument, suddenly it becomes the new economic common sense. To be on the liberal left, as Neil Kinnock once remarked, is to be made to feel an alien outsider – even if reason and a majority of the electorate are with you.
Of course cruel truths remain. The colossal errors of the past decade, Brexit and austerity especially, cannot be expunged at a stroke. Britain’s long-run growth rate is barely above 1% as the Office for Budget Responsibility recorded. The impact of Brexit, it declared, would be to lower output over the next 15 years by 5.2% below what it would have been. The much-vaunted US trade deal, if it ever happens, will raise output by a mere 0.16%. Over the next decade exports and imports will be 15% lower. Britain, tragically, is closing – and becoming more intolerant and anti-foreigner in the process.
Nor can the social carnage of the past decade be quickly corrected. Sunak did little or nothing to address child poverty, the desperate plight of the court and criminal justice system or a host of other casualties. This was government from the centre for the centre: local government remained a neglected Cinderella. The increase in current public spending will redress only about a quarter of the cumulative loss in health and education spending since 2010.
Yet a Rubicon has been crossed. Keynesianism has been restored to its proper place in British public life. The Conservatives have once again shown their breathtaking and shameless capacity for reinvention. If Labour wants to trump them, it will need to take Keynesianism even further – into the wholesale Keynesian recasting of the way the financial system intersects with the real economy.
In the meantime it’s a big moment. Perhaps in this respect – and this only – Labour did win an argument at the last election. At the very least a new and beneficial consensus has been born.
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