Sam Thurgood is the Area Chairman for London South East, a small business owner, and former Parliamentary candidate.
Since 2010, much of the economic argument in politics has taken place against the backdrop of the deficit. From the Coalition to Brexit, political decisions have often been formed whilst considering the impact on government finances – to fix the roof whilst the sun is shining.
That has changed in recent years; pollsters tell us that the public are bored of austerity. But the death of the importance of the deficit has not coincided with the actual death of the deficit. It remains, hanging like a sword over the modern British economy.
We often think of deficits as a modern phenomenon, but that depends on your view of when the modern economic era starts. Certainly since the inception of so-called cheap money and the financial crisis, deficits have been the only ballgame. But longer term, there have only been five annual surpluses since 1970. It is clear that the British state is addicted to spending beyond its means.
But this addiction by politicians doesn’t mean that this view is correct. More than ever, we are seeing the need to carry fiscal headroom for use in day-to-day government spending.
During the pandemic, it is estimated that the Government spent up to £6,100 per person in support. Few would question the validity of this spending, but many forget that the Government had to fund all of it, and more, from borrowing.
If we were carrying fiscal headroom through a surplus, the cost of such intervention would be massively reduced. For although the spending was up to £6,100 per person, the true cost will be much more – when the cost of borrowing that money is taken into account.
Even more pressing, now, is the inflationary impact that deficits have. The purpose of interest rate rises are to increase the cost of capital. In doing so you incentivise saving, and reduce investment borrowing, thereby reducing the overall money supply and depressing economic activity.
But the impact of rising rates has been reduced as the mortgage base has fallen. The number of homeowners with a mortgage is 13 per cent lower than a decade ago, and at a time that the population has seen significant growth. Since 2010 there has also been sustained growth in the length of fixed-term mortgage products.
Both of these effects result in reducing the number of individuals impacted by rate increases. As such, we likely need a much steeper rate rise to achieve the same market effect than we would have 20 years ago.
Inflation is attacking the real economy in a way we haven’t seen since the late Eighties and early Nineties; many people today have little if any experience of inflation like this. Meanwhile, significant hikes in interest rates putting greater and greater pressure on household budgets, particularly those with a mortgage.
Yet it is too easily forgotten that government spending, too, is an inflationary tool – particularly where this is funded through borrowing. It is additional money being pumped into an economy, and is less likely to be influenced by higher interest rates, at least in the short-term.
Indeed, rising inflation drives rising tax take as, for example, higher wage packets drive up income tax receipts, and higher prices lead to higher VAT returns.
This increasing tax take can have a false effect of temporarily (before the full effect of cost increases are felt on the public purse) making the tax position look better; this in turn increases political pressure on a chancellor to use this additional fiscal headroom to spend more.
In the last few weeks we have seen welcome news that inflation has started to come down. But it must come down quicker if the Government’s inflation target is to be met, and if the effect of falling interest rates is to be felt by the time of the next election.
Reducing public spending would reduce the pressure on inflation and therefore the pressure on interest rates. Otherwise, we might be guilty of spending our way into electoral defeat.
High inflation doesn’t necessarily mean that cuts in public spending are necessary, though they should be examined. Instead, if Jeremy Hunt resists the pressure to use this increased fiscal headroom in the autumn statement, then a significant real terms reduction in spending can be achieved.
Both recent inflation and our experience of near-term shocks clearly make the case for the Government running a budget surplus. Doing so is neither easy nor simple. But it is the best way to ensure that our government retains the firepower to react to changing conditions, rather than being led my them.
In contrast, whilst spending more nearer to an election is often an election winning strategy, this time it is likely to consign us to defeat.
Economically, the case for using government spending as an avenue for controlling inflation is clear. But so too is the moral and political case for doing so now. The Conservatives’ chances at the next election may yet prove to rest more in the Chancellor’s hands than the Prime Minister’s.
Sam Thurgood is the Area Chairman for London South East, a small business owner, and former Parliamentary candidate.
Since 2010, much of the economic argument in politics has taken place against the backdrop of the deficit. From the Coalition to Brexit, political decisions have often been formed whilst considering the impact on government finances – to fix the roof whilst the sun is shining.
That has changed in recent years; pollsters tell us that the public are bored of austerity. But the death of the importance of the deficit has not coincided with the actual death of the deficit. It remains, hanging like a sword over the modern British economy.
We often think of deficits as a modern phenomenon, but that depends on your view of when the modern economic era starts. Certainly since the inception of so-called cheap money and the financial crisis, deficits have been the only ballgame. But longer term, there have only been five annual surpluses since 1970. It is clear that the British state is addicted to spending beyond its means.
But this addiction by politicians doesn’t mean that this view is correct. More than ever, we are seeing the need to carry fiscal headroom for use in day-to-day government spending.
During the pandemic, it is estimated that the Government spent up to £6,100 per person in support. Few would question the validity of this spending, but many forget that the Government had to fund all of it, and more, from borrowing.
If we were carrying fiscal headroom through a surplus, the cost of such intervention would be massively reduced. For although the spending was up to £6,100 per person, the true cost will be much more – when the cost of borrowing that money is taken into account.
Even more pressing, now, is the inflationary impact that deficits have. The purpose of interest rate rises are to increase the cost of capital. In doing so you incentivise saving, and reduce investment borrowing, thereby reducing the overall money supply and depressing economic activity.
But the impact of rising rates has been reduced as the mortgage base has fallen. The number of homeowners with a mortgage is 13 per cent lower than a decade ago, and at a time that the population has seen significant growth. Since 2010 there has also been sustained growth in the length of fixed-term mortgage products.
Both of these effects result in reducing the number of individuals impacted by rate increases. As such, we likely need a much steeper rate rise to achieve the same market effect than we would have 20 years ago.
Inflation is attacking the real economy in a way we haven’t seen since the late Eighties and early Nineties; many people today have little if any experience of inflation like this. Meanwhile, significant hikes in interest rates putting greater and greater pressure on household budgets, particularly those with a mortgage.
Yet it is too easily forgotten that government spending, too, is an inflationary tool – particularly where this is funded through borrowing. It is additional money being pumped into an economy, and is less likely to be influenced by higher interest rates, at least in the short-term.
Indeed, rising inflation drives rising tax take as, for example, higher wage packets drive up income tax receipts, and higher prices lead to higher VAT returns.
This increasing tax take can have a false effect of temporarily (before the full effect of cost increases are felt on the public purse) making the tax position look better; this in turn increases political pressure on a chancellor to use this additional fiscal headroom to spend more.
In the last few weeks we have seen welcome news that inflation has started to come down. But it must come down quicker if the Government’s inflation target is to be met, and if the effect of falling interest rates is to be felt by the time of the next election.
Reducing public spending would reduce the pressure on inflation and therefore the pressure on interest rates. Otherwise, we might be guilty of spending our way into electoral defeat.
High inflation doesn’t necessarily mean that cuts in public spending are necessary, though they should be examined. Instead, if Jeremy Hunt resists the pressure to use this increased fiscal headroom in the autumn statement, then a significant real terms reduction in spending can be achieved.
Both recent inflation and our experience of near-term shocks clearly make the case for the Government running a budget surplus. Doing so is neither easy nor simple. But it is the best way to ensure that our government retains the firepower to react to changing conditions, rather than being led my them.
In contrast, whilst spending more nearer to an election is often an election winning strategy, this time it is likely to consign us to defeat.
Economically, the case for using government spending as an avenue for controlling inflation is clear. But so too is the moral and political case for doing so now. The Conservatives’ chances at the next election may yet prove to rest more in the Chancellor’s hands than the Prime Minister’s.