New deal, old tunes
Boris Johnson’s infrastructure speech didn’t so much deliver revelations as reminders. There were no great new announcements. Instead there was a series of rehashed promises from the 2019 general election campaign. The government would build 40 new hospitals, improve school infrastructure, speed up HS2, reform the planning process, and invest in scientific development, Johnson said. This might be regarded as a surprisingly radical list for a Conservative prime minister to deliver, had he not delivered it countless times before on the stump.
One commitment that was expressed explicitly for the first time is Johnson’s opposition to austerity. “I just serve notice that we will not be responding to this crisis with what people called austerity. We are not going to try to cheese-pare our way out of trouble, because the world has moved on since 2008,” he said. This is part of the “Rooseveltian approach” through which the government hopes to “build, build, build” new infrastructure, which in turn requires it to spend, spend, spend.
Roosevelt – FDR – funded his New Deal with large tax increases. Total federal tax revenues jumped from $1.9 billion in fiscal year 1932 to $6.5 billion by fiscal year 1940, and this tripling occurred during a period of very low inflation. For those on an income of over $100,000, marginal tax rose from 25% in 1930 to over 60% in 1940. The richest paid the extraordinary cost of a radical plan for the working class. Even this wasn’t enough to balance Roosevelt’s annual budget, but he recognised the need to show that the government was ready to do something to pay for it.
Britain now faces a period of prolonged borrowing, contrary to the initial hope that a swift economic recovery would return the public finances to a fiscally healthy state. Continued social distancing and fresh local lockdowns, such as the one announced yesterday for Leicester, are likely to cost jobs and business, and ultimately reduce the government’s tax intake for several years. This is a gap that the government will have to fill, yet there was no recognition of the need for long-term fiscal sustainability in the Prime Minister’s speech.
In the Q&A that followed, he answered every question regarding taxation with a variation of “wait for Sunak’s speech next week”. We’re told that the Chancellor’s speech will cover the gaps in fiscal policy. If Sunak doesn’t provide a comprehensive plan to reduce borrowing in the medium term, however, it’s difficult to imagine that more free-market Conservative MPs will sit by as borrowed money is splurged. The financial markets, too, may eventually grow increasingly uncomfortable.
There could also be a concern that the government is borrowing for the wrong programmes. It seems addicted to quick fixes, such as spending an extra £1 billion for new school buildings, but it has less interest in confronting structural problems in education or indeed in the practicalities of the complicated matter of returning children to school. There’s little point in building glistering new classrooms if teachers consistently under-perform, or children show up hungry, or can’t show up at all.
Whatever the merits or otherwise of Roosevelt’s New Deal, it sought to transform existing institutions and create new ones to help working families climb out of an economic depression – a far cry from signing cheques every time a dysfunctional system nears collapse.
The Prime Minister looked stuck today between newly-won Red Wall voters, who would likely bear the brunt of another austerity programme, and many Conservative MPs who will struggle to swallow tax hikes or ballooning long-term debt. With the UK’s national debt at 100.9% of GDP and the annual budget deficit on course to £300 billion, he will soon have to disappoint one of those two groups.