Can the Tories and Labour afford their spending promises?

The Resolution Foundation produced a report suggesting that spending sprees intended to quell austerity are central to the Tories’ and Labour’s manifesto promises during this general election. The think-tank predicted that regardless of which party can form a government after December 12th, spending would increase to 37.4 per cent of GDP, levels not witnessed since the 2008 Recession.

The Chancellor, Sajid Javid, will increase the proportion of annual government spending to 41.3 per cent of GDP by 2023, which is likely to go further than the 42 per cent average recorded between 1966 and 1984 once NHS spending is taken into account.

Labour will increase spending by £48.6 billion. Furthermore, Shadow Chancellor John McDonnell has announced a £250 billion ten-year capital investment plan, which would cause government spending as a share of GDP to shoot to 43.3 per cent.

Increasing public spending has always been central to Labour’s beliefs, but the Conservatives have held office for nearly ten years. They have presided over austerity and following Corbyn’s electoral surge in 2017, they are keen to attract Labour voters who have felt squeezed by cuts. That is why they are aiming to appeal to the ‘Bolsover Brexiteer’- named after Labour MP Dennis Skinner’s famous constituency, these are voters who are patriotic but cherish the public sector. The Tories’ strategy is to deliver Brexit and ensure the UK has the best public services.

There is reason to be optimistic that public spending should increase. Since March 2018, the budget deficit, excluding net investment, has been eradicated for the first time since July 2002. The Office of Budget Responsibility received healthy tax receipts that year. This is a substantial achievement the Conservatives should be promoting during the general election considering the budget deficit stood at £100 billion in 2009-10, even though government debt is more than twice its pre-2008 level as a share of national income.

The Financial Times‘ Chris Giles argues that the NHS, social care, prisons and local government cannot meet public expectations whilst austerity remains. He adds that Brexit uncertainty and stress in public services means that the main parties cannot ignore the case for increased spending for much longer. Before he resigned as Chancellor, Philip Hammond admitted there is a case for a modest increase in public spending. But Javid’s recent announcements would lead the electorate to believe that austerity is over.

As Alberto Alesina, Carlo Favero, and Francesco Giavazzi explain in their book Austerity: When It Works And When It Doesn’t, austerity is effective when you only cut public spending and refuse to increase taxes.

The truth is, neither Labour nor the Tories can afford to increase public spending. The national debt continues to rise which can lead to an increase in the yields on the UK’s bonds and have a negative impact on economic growth. For example, borrowing can squeeze other investment as investors loan money to the government, rather than the private sector. Growth stagnates when nations witness their debt levels reach 90 per cent of GDP, with the median growth rate falling by 1 per cent and average growth dropping substantially.

A paper called On the Nominal Interest Rate Yield Response to Net Government Borrowing in the U.S.: An Empirical Analysis with Robustness Tests (2014) discovered that raising the federal deficit in the US has had an adverse effect on the economy by slashing private sector investment, economic growth, and employment between 1971-2008.

Both the Conservatives and Labour need to be careful when they promise 1970s-style spending sprees. A budget surplus and short-term electoral gain are not valid reasons to begin splashing out cash on public services as the national debt continues to rise. If either party pursues this path in government, it will be future generations that pick up the tab.