Since Cameron was first elected in 2010, the orthodox economic policy of the Conservatives has been that the budget deficit must be first eliminated and then turned into a surplus so that the national debt can be repaid. This is one of the few things on which they have been entirely consistent from the outset â€“ the only changes to the policy have been in relation to the timescale. The glorious days of surplus are continually pushed further and further into the future. The Labour Party, partly out of fear of being branded financially irresponsible, but mostly because they suffer from the same version of economic dogma as the Tories, have supported the same aim of deficit reduction differing only at the margins on issues such as the balance between tax rises and spending cuts. They share the same key aim of deficit reduction as the Tories.
Whilst there is a sensible argument to be had about what the appropriate level of deficit (and debt) should be in relation to GDP, and about the timescale over which any change in that ratio should occur, the underlying assumption (that the government should aim to â€˜balance the booksâ€™) is, and always has been, complete nonsense. As history shows, a budget deficit is the norm, and depending on the rates of growth, interest and inflation, a continuing deficit is entirely sustainable. Indeed, since (as all accountants will realise) the net level of borrowing in the economy must effectively be zero, a public surplus can only be financed by debt elsewhere. And it is noticeable that, as the public deficit reduces, household debt is â€“ as one would expect â€“ increasing. What looks to the government like debt appears to those of us with pension funds to be investment, and there is still a queue of people lining up to lend their money to a government which is increasingly unwilling to take it.
The deficit fetishism of Tory and Labour alike is what leads to the policy of so-called â€˜austerityâ€™, and, as ever, it is those at the bottom in economic terms who suffer most, whilst those at the top are able to protect themselves or even further enrich themselves. It isnâ€™t the only possible approach, no matter how many times they argue that â€˜there is no alternativeâ€™. In an attempt to regain the momentum which his leadership campaign has so carelessly thrown away, Boris Johnson has this week suggested what is presented as an alternative approach, namely to slash taxation drastically. He doesnâ€™t say, of course, how he would pay for this, but his comparison with the Trump tax cuts in America at least suggests that he is supporting a huge increase in public debt. If thatâ€™s what he really proposes, then it really does trash the policy which he and his party have been supporting for the last 8 years.
Whether it would work or not is another question entirely. For some the jury is still out; the US economy may appear to be booming, but the extent to which that is down to the tax cuts is arguable at the least. What we do know is that corporations and the wealthy have benefited tremendously. Itâ€™s a policy which treats â€˜trickle-downâ€™ â€“ the idea that if the wealthy have more money, then everyone else will also benefit eventually â€“ as an article of faith rather than depending on any evidence of wider benefits. It does, though, benefit the likes of those who advocate such a policy and those who move in their immediate circles; they have a large personal incentive to be true believers.
But, if reducing the deficit quickly and immediately is not the absolute priority as which itâ€™s been painted, there are other ways of managing the economy. Portugal is an interesting case in point. Instead of following a policy of cutting spending, the Portuguese government has chosen to follow a policy of investing more in public infrastructure. Not only has it boosted the Portuguese economy, it has also provided another route to deficit reduction as well as reducing inequality and promoting economic growth. Those who consider all state spending to be inherently a bad thing start with an ideological perspective which blinds them to the possibility. But state investment can, ultimately, generate more in benefits and revenue than it costs.
Itâ€™s a lesson that I donâ€™t expect the Tories to ever be able to learn, and even Labour seem to be struggling with it. There is also another lesson here for Labour in particular: Portugalâ€™s membership of the EU hasnâ€™t prevented them from following an alternative path. The EUâ€™s rulebook does not preclude the sort of state action which they have taken, yet the belief in some Labour circles that the EU places such constraints on member states is what leads them to support Brexit. Itâ€™s an idea which is as divorced from reality as deficit fetishism itself.