Sunday, April 23, 2017
Hard decisions will be ducked in this Brexit election
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

ballotbox2.jpg

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

It is hard to think it was only two years ago. Then, in the run-up to the 2015 election, it was important to dig into the economic policy agenda offered by Ed Miliband and Ed Balls for Labour, and contrast it with David Cameron and George Osborne’s for the Tories.

Labour’s plans included, for those who have forgotten, no plan for a budget surplus but instead continuing to borrow to invest (in practice about £90bn more debt by 2020 according to the Institute for Fiscal Studies), but alongside a “budget responsibility lock”, bringing back the 50% top rate of tax and a mansion tax.

Apart from the fact that it looks as if we will end up with something like the fiscal numbers set out by Labour two years ago, and not the budget surplus promised by the Tories, so much has changed). We did not get the 50% tax rate or the mansion tax, though some say Osborne’s stamp duty reforms were worse.

And, as we head into another election, which even tests the appetite of an enthusiast like me, the rules of the game have been transformed. So far has Labour moved away from the political mainstream, and so distant is the main opposition party from returning to government, that it is not worth spending time on its economic plans.

The shadow chancellor could propose a 100% tax rate on anybody with two pennies to rub together and we could still relax in the knowledge that it is never going to happen. In all the time I have been writing about these things, there has never been anything quite like this.

The other rule-breaker, and for similar reasons, is that governments usually seek to ensure that voters are nicely buttered up in time for a general election, and feeling confident about the future. But consumer confidence, while a little higher than immediately after last summer’s referendum, is 10 points lower than it was in April 2015.

Households are more upbeat about their own finances than about the economy, with a net 20% expecting the economy to get worse over the next 12 months. The squeeze on people’s real incomes has begun, as I wrote last week. Figures on Friday showed that retail sales suffered their first quarterly fall in four years and their biggest in seven. As Andrew Goodwin of Oxford Economics puts it, the attitude of consumers “appears to have been one of jam today, which leaves very little for jam tomorrow”.

Such “pocketbook”, or wallet, concerns would normally be uppermost in the concerns of election planners. But the Tories under Theresa May are so far ahead in the polls that, as I say, the normal rules do not apply. The last Tory prime minister to gamble and fail on turning a small majority into a larger one and failing was Edward Heath in his “Who governs Britain?” election of February 1974. But, though he won the popular vote, he lost the election, and in the run-up to that the Tories were neck and neck with a more formidable Labour party, not more than 20 points ahead. Accidents do happen but this would be without precedent.

The normal rules do not apply, partly because of the state of Labour under Jeremy Corbyn but mainly because this is the Brexit election. And, from the perspective of Brexit, it makes perfect sense.

It means the negotiations do not nudge up uncomfortably against the next election. It improves the chances of a “softer” version of hard Brexit, as described in detail here three weeks ago. If the hardliners in her own party are neutered, it gives May more opportunity to make concessions, as she will undoubtedly have to do. It means that the necessary transition arrangements, beyond 2019, can be put in place.

It also greatly reduces the risk of a suicidal, cliff-edge “no deal” departure from the EU, which is why sterling has risen in the wake of the election announcement.

What is good for the Brexit timetable and the government’s negotiating position is not necessarily good in other respects. One of the fears about Brexit, that it would divert attention from everything else, is coming to fruition. The Brexit parliament was supposed to be 2015-20. Now it is 2015-17 and 2017-22 combined, unless the prime minister decides in two or three years that she has struck such a good deal that she should have it endorsed in another election. I suspect that the parliament after 2017-22, will be taken up a lot with Brexit too.

In the context of this election, it means all the hard questions will again be ducked. As Paul Johnson of the IFS wrote a couple of days ago: “At the heart of the choices we face is one over the size of the state that we want, and how to pay for it. This is a question which politicians always duck.”

They will do so more than ever this time. The Tories will leave themselves with fewer hostages to fortune than in 2015, when they ruled out increases in all the main taxes. But there will be considerable continuity, for example on arising the personal allowance and the higher rate threshold, to £12,500 and £50,000 respectively. There are hints that the Tories will take the sensible step of promising to scrap the co-called triple lock on pensions, though if so they will surely sweeten the pill for pensioners. Labour will continue to pretend that soaking the rich will pay for everything.

What this means is that, barring a sudden outbreak of candour on the part of the Tories, putting the public finances onto a permanently sounder footing will be deferred.

A few weeks ago the Office for Budget Responsibility (OBR), published its annual fiscal sustainability report. With a few other things going on it did not get the attention it deserved. It defines the country’s fiscal position as unsustainable if the government needs an ever-increasing share of national income to pay the interest on public sector debt.

On that definition, or any other, Britain has an unsustainable fiscal position. The ageing population , together with developments in health technology and the increase in chronic health conditions, will push up spending on the National Health Service and pensions, while leaving revenues broadly unaffected.

The numbers are frightening. Health spending will double from roughly 7% of gross domestic product to over 12.5% over the next 40-50 years, with state pension costs up from 5% to 7.1% of GDP and social care costs doubling to 2% of GDP. After stabilising in the short term, at 80%-90% of GDP, public sector net debt will head up to 230% of GDP and beyond.

These are long-term projections, and as somebody once said in the long run we’re all dead, but the sooner you act on a problem, the better the chances of preventing a dangerous trajectory from developing. As a rough guide, raising taxes or cutting spending by 4% to 5% of GDP, approaching £100bn, would be needed in the next parliament to put the public finances on a more stable footing.

Will we hear that spelled out in the next few weeks? No. The prime minister will surely decide, with Brexit at the forefront of her thoughts that, to coin a phrase, now is not the time.