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Artillery Row

John Maynard Sunak – the primer of the pump

Rishi Sunak’s first budget was Keynesian not Corbynite

Tasked with summarising in a single phrase Rishi Sunak’s first budget, it would be difficult to improve upon the new Chancellor’s own boast that it is “the largest sustained fiscal boost for nearly thirty years.”

The emergency measures to counteract a nascent pandemic have understandably received the top billing. But they are not proof of a sea-change in thought at the Treasury or across Boris Johnson’s frontbench. The coronavirus response might not have been much different if Sajid Javid or John McDonnell or even the ghost of Sir Geoffrey Howe had been standing at the government despatch box. Sunak promised extra NHS funding to deal with the virus on a rhetorically limitless scale, “whether its millions of pounds or billions of pounds, whatever it needs, whatever it costs.” In reality, this appears to mean £5 billion of the £30 billion designated to dealing with coronavirus’s wider economic consequences – for which ensuring small businesses will not pay business rates in the coming financial year is the most striking.

However, it is the budget’s grander strategic vision that will be felt long after the panic buying of hand sanitisers has eased. For even without coronavirus, this was the most Keynesian budget for decades. Much of the initial response has involved amazement that a Conservative Chancellor could be content to lavish such sums. There is touching naivety here in the belief that big splashes of cash have never been a feature of the Tory tradition. Anyone who thinks “Conservative” is a synonym for “austerity” needs to read more history.

It is doubtless likely that if John McDonnell had made the scale of spending commitments that Rishi Sunak has just announced then home counties MPs would have encircled the interview hotspots of College Green to castigate the socialist irresponsibility of it all. The more agile spinners of the Corbyn legend could have cited Sunak’s money splurge as evidence that “Jeremy won the argument.”

But both groups would have missed a critical point that it’s not just how much you spend, it is where you spend it. Labour’s money-hose was to have sprayed substantial pay rises upon public sector workers and a much bigger public sector through the nationalisation of utility providers, railways and the Royal Mail alongside a radical green revolution agenda.

Rishi Sunak’s money-hose is not pointed at state employees. The Budget of 2020 was light on the glory of smaller class sizes, the reward of bigger salaries or the abolition of student loans (indeed reform of student finance was one of the surprising omissions).

The scale of Sunak’s fiscal boost may find its equal in 1992, when Norman Lamont dramatically cut taxes in what he described as “a budget for recovery” and the Labour leader, Neil Kinnock, more accurately decried as “a panic-stricken pre-election sweetener.” But thanks to the joy of borrowing, Sunak’s budget had surprisingly little to say about taxation, beyond freezing most of the duties and raising the threshold on the tax that pretends to be National Insurance. Fiscal inventiveness was one of the few items in short-supply.

Where Lamont’s budget give-away was tactical and did not last, Sunak’s is meant to be strategic. In this respect, there has been nothing comparable in its debt to Keynes (and its indebtedness to debt) since Anthony Barber’s ‘Dash for Growth’ in 1972. That didn’t end well. But Sunak is not likely to soon face the combination of inflationary pressures and trade union militancy that made the largesse of Edward Heath’s Chancellor a masterclass in folly.

Just as “Conservative” and “austerity” are not interchangeable terms, there is more to Keynesianism that merely “spending money.” The investment sums (£600 billion) committed by Sunak over the next five years are so large that they could have been priced in the papiermark of the Weimar Republic. They represent the highest public net investment in real terms since 1955. If nothing else, the ultimate success or failure of this public money in transforming the country’s trajectory will provide a future generation of economic historians and financial analysts with a classic case study.

The sums committed are so large that they could have been priced in the papiermark of the Weimar Republic

Sunak’s intent is predicated upon Keynesian faith in the long-term benefits of focused pump-priming and that this is investment with an expected return rather than just more spending across the board. The goal is to stimulate higher economic growth through measures that increase productivity – the absence of which has been one of the major alarms about Britain’s recent economic performance. With government gilts at a historic low there will never be a better time to borrow now and not pay much more later. The Office of Budget Responsibility’s forecast is thus for an additional £220 billion to the national debt (taking it just shy of £2 trillion) by the end of the parliament. It was £1 trillion a decade ago when Labour was last in office. Aye, that’s Tory austerity for you.

The potential for this new borrowing bonanza going disastrously wrong should be obvious. What if there is no accompanying boost to the economy because of a protracted worldwide recession that is beyond the ability of a national fiscal stimulus to override? With declining revenue in this scenario, the budget deficit would soar and the last decade’s efforts at deficit reduction would have been in vain. What if the cost of borrowing goes back up? Future generations will curse, not thank, Rishi Sunak for burdening them.

But if the coronavirus downturn is reversed by the autumn and years of economic plenty follow with interest rates remaining low, then the gambler may cash a lot of chips. Besides the infrastructure plans, with £27 billion worth of new tarmac promised and – famously – a pothole fund in which to sink a bit more, the budget’s most imaginative initiative was the £22 billion increase in R&D and the creation of a British equivalent to the United States’ Defense Advanced Research Projects Agency (DARPA) whose commercially game-changing spin-offs have included the internet and the graphical user interfaces which made cursor and touch-screen technology possible.

The truth is that private investment has already proved itself in many R&D areas (just visit the science park north of Cambridge if you doubt this) and there is a danger that public money merely crowds-out what private funds could have supported along with the risks to be shouldered. But DARPA’s track-record suggests that private investors do not necessarily foresee inventive potential in its earlier, more theoretical stages, especially in the “blue sky” thinking from which so much invention derives. The consequences for energy, space and medical science are among the areas where this can be especially true. The boost to Britain’s university and research institutions could be considerable.

“We are at the beginning of a new era in this country,” Sunak declaimed, “we have the freedom and resources to decide our own future,” as he set out a Brexit Britain that is ready to go out on the town and is up for fun. “This is just the start,” he promised. How the bill is eventually split, well, we’ll worry about that when it comes. If it comes. Maybe it’ll pay itself.

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