David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.
Most Conservatives must view 2023 with a large degree of trepidation. The Party is a long way beyond in the opinion polls, living standards are forecast to continue to fall sharply, and we are in an era of tax rises and tight constraints on public spending.
However necessary this fiscal discipline may be, the Conservatives are vulnerable to the accusation of being the same old Tories, pursuing the same old “austerity” policies. Attempting to consolidate the public finances once while in office is one thing; doing it a second time is clearly politically perilous.
The task is made all the harder because the fiscal policy of David Cameron’s Government of 2010-16 has – in recent years – become rather friendless. It is no surprise that those on the left of politics who opposed it at the time continue to do so, but it has been striking how few senior Conservatives have defended it. In particular, Cameron’s three successors could hardly be described as enthusiasts.
Theresa May is a believer in delivering taxpayer value for money, but fiscal consolidation was not her project and her joint chief of staff, Nick Timothy, was positively hostile to it. During the 2017 general election, the plan was to ignore the economic approach pursued pre-2016, which left an undefended flank as Jeremy Corbyn put all the ills of society down to austerity.
By the time we came to the next general election in 2019, Boris Johnson had reinvented the Conservatives as a party of high spending, promising more police officers and hospitals. He was able to present himself as a change candidate. Rather than defend the post-2010 fiscal strategy, Johnson distanced himself from it.
Liz Truss, of course, won the Conservative leadership on the basis of opposing “Treasury orthodoxy”. Whereas Rishi Sunak – both as Chancellor of the Exchequer and, subsequently, as leadership candidate – favoured relative fiscal discipline, Truss offered tax cuts, and lots of them, unconstrained by the need to make the sums add up.
As it turned out, the brief Truss premiership inadvertently made the case for a cautious approach to the public finances but it is telling that the right of the Conservative Party – and 57.4 per cent of the party membership – coalesced around a candidate who gave every impression that she thought that the fiscal approach of the Government in which she had served for ten years was mistaken.
Does the policy deserve to be so friendless? Is it fair to condemn the process of fiscal consolidation as going too far, too fast, being unfairly distributed and damaging economic growth?
It is all too easy to forget the circumstances of 2010. We were borrowing more than at any time in our peacetime history, the markets were restless (the head of Pimco described UK gilts as resting on a bed of nitro-glycerine) and any UK Government was going to have to take action to provide reassurance.
As we were to see in September 2022, if a particular country or currency was seen as being an outlier, the risk of a loss of market confidence was real, with the currency weakening and interest rates rising. Regaining lost confidence would be much more painful than taking pre-emptive action to retain it.
George Osborne took decisive action by announcing a fiscal consolidation that was designed to eliminate the structural deficit over the course of a Parliament. The markets’ attention moved elsewhere (to the Eurozone) and interest rates remained low. The fact that there was no market turmoil for the UK in this period does not mean that the risk did not exist but, instead, that the fiscal strategy had succeeded in meeting the objective of avoiding a loss of confidence.
Did the policy go too far? One cannot precisely calibrate what is needed to maintain market confidence, and it is possible that a smaller consolidation might have worked. But it might not. I would argue that the 2010 plans were a reasonable and prudent assessment at the time and, in practice, were applied more flexibly than is often appreciated so that only half the deficit had been removed by 2015.
Should we have waited for longer before implementing a fiscal tightening? The depths of the global financial crisis were in 2008, the consolidation effectively began in January 2011 (when VAT went up) which was a decent interval. In any event, it would not have been credible with the markets to delay commencing a fiscal consolidation late into a Parliament. If action had to be taken, it had to be taken then.
Was the pain of austerity unfairly distributed? The caricature presented by the left is that the rich got richer whilst the poor suffered from spending cuts. In fact, there were substantial tax increases levied on the richest in society (pensions tax relief, capital gains tax and SDLT, for example). It is true that the poorest tend to be more dependent on public spending and public spending was cut. But it is also true that income inequality did not rise, largely because there was a remarkably jobs rich recovery.
My view, looking back, is that spending did more of the heavy lifting (and tax less) than should have been the case. Increasing taxes after the initial VAT rise proved troublesome, and there was great pressure (curiously, from the Liberal Democrats) to cut taxes (by increasing the income tax personal allowance).
The June 2010 plan was a 77/23 spending cuts/tax increases split (taking account of measures already put in place by Labour), we ended up with an even greater share coming from spending when a lower share would have been more sustainable.
The final charge is that the fiscal consolidation damaged growth. There are two elements to this – that austerity took too much demand out of the economy and capital budgets were cut too much.
On the former point, running the economy ‘hot’ would have come with the risks of inflation (as recent event have demonstrated) but, in any event, a tight fiscal policy allowed a looser monetary policy. It is true that, by historic standards, growth was not high during 2010-16, but we cannot ignore the context. We were recovering from a financial crisis, and growth can often be weak in these circumstances. Over this period, the UK’s economic growth was level with the US’s and exceeded the other five members of the G7. In other words, on international comparisons, we did well.
As for capital budgets, ideally these would have been protected more but it was inevitable that savings were going to have to be found from here. Indeed, we ended up spending more on capital budgets than Alistair Darling had set out in his own (less ambitious) fiscal consolidation plans.
By the time we got to 2016, the public finances were on a sound footing, growth was respectable, living standards and business investment were rising strongly and there was a good chance that the fiscal policy of the previous period would have been viewed as being instrumental in laying the foundations for a period of prosperity.
This, of course, did not happen. The blame for this lies not with austerity but elsewhere (something happened in June 2016 which damaged business confidence and hit living standards) but, nonetheless, defending the post 2010 fiscal approach has become very unfashionable. As the Truss Government demonstrated, even many Conservatives had learnt the wrong lessons. One of Sunak’s challenges will not only be to explain why fiscal discipline is necessary now but why it was needed at the beginning of the Tories’ time in office.