The fiscal vandalism of Brexit

The reaction of Conservative MPs to George Osborne’s warning of a post-Brexit emergency budget makes me wonder where they have been for the past five years.

We do not believe that he would find it possible to get support in parliament for these proposals to cut the NHS, our police forces and our schools.

If the chancellor is serious then we cannot possibly allow this to go ahead. It would be unnecessary, wrong and a rejection of the platform on which we all stood.

Eh, come again?

The platform on which they all stood was, first and foremost, about eliminating the deficit. That was the flagship Conservative policy in 2010 and 2015. They used public debt, very effectively, as a stick to beat Labour with. Everything else was subordinate to the need to reduce the deficit and start ‘paying down the debt’. If that meant cuts to the NHS, police forces and schools, so be it. Those were the sort of hard choices we’d have to make. One of the letter’s signatories, Liam Fox, has called for an end to the NHS budget ring fence. Another, John Redwood, complains frequently about the slowness of deficit reduction.

The government’s plan to eliminate the deficit by 2019-20 is a tall order as it is. If the economy were to take even a short-term hit after Brexit, which it almost certainly would, the only way to meet the target would be with more tax increases or spending cuts.

The Institute for Fiscal Studies looked into this in detail last month. They concluded that the impact of Brexit on trade and investment would slow the UK’s economic growth down, thereby reducing tax revenues. The £8 billion net contribution to the EU, that Leave campaigners have already ‘spent’ many times over, is largely irrelevant. It is a tiny amount when compared to total public spending. The IFS calculated that, even if GDP growth is only 0.6 percent less than forecast, the £8 billion would be completely wiped out.

The economic shock of leaving the EU would, says the IFS, make reducing the deficit by the end of the decade a lot more difficult. Even allowing for the extra £8 billion, under its most optimistic scenario, the IFS reckons that a further £15.5 billion of tax rises or spending cuts would be needed on top of the £25 billion or so the chancellor already has planned. So about £40 billion then.

That would take us back into the looney tunes spending cuts territory of December 2014, before George Osborne gave himself an extra year to eliminate the deficit. It would, indeed, be economic madness, and could well turn a slowdown into a recession but Dr Fox and Mr Redwood weren’t saying that 18 months ago.

It’s really not difficult this. Even a mild economic shock, and it’s hard to see how we could pull off Brexit without one, will make the already tough task of eliminating the deficit that bit tougher. If you are going to oppose any more spending cuts or tax rises, you must accept that the deficit reduction timetable will be pushed well into the next decade. If you are not going to allow the chancellor (whoever may be in the job by then) to increase taxes or cut spending even further, then you must be in favour of more debt. There’s a headline that didn’t get written last week, ‘Fox and Redwood demand MORE public debt.’ That’s a justifiable economic argument, of course, but it’s one they have been violently opposed to since the end of the last decade.

Brexit would, in all probability, leave the UK with a worse version of the fiscal dilemma than it already has. It would kill off any remaining hope of eliminating the deficit by 2020 without a politically unacceptable tax hike or the closure of parts of the state. With our economy already wobbling, even a small hit to GDP would be enough to blow an even bigger hole in our public finances. It really isn’t worth the risk.

Post Brexit Dilemma


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6 Responses to The fiscal vandalism of Brexit

  1. Florence says:

    A clinical discussion. It might have been better with a little more flesh in the bones about consequences.

    • Interesting you say that. I think many of us know and fear the consequences and I found this valuable precisely because it is clinical, stark and simple. Reposted Rick (yet again) and thanks for the work.

  2. gunnerbear says:

    Guess what…..all this theorising is b*****ks if you’re at the bottom of the pile….something even the Guardian Editor has realised…..

    • XY and Z says:

      You cannot reason somebody out of a belief they didn’t reason themselves into.

      • gunnerbear says:

        So are you saying that the workers mentioned in the Guardian Ed’s article are wrong? Are you claiming a massive over-supply of labour doesn’t depress wages?

  3. Dipper says:

    not sure what your point is here. A policy that hasn’t worked and isn’t going to work is not going to work even more if we leave the EU? Not really a deal breaker.

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