Rightwing thinktanks call time on age of austerity | Tax and spending

Britain’s leading free-market thinktanks, which backed Margaret Thatcher’s tax-cutting and privatisation agenda and sanctioned the last 10 years of austerity, have lent their support to the government’s plans for unprecedented and sustained increases in public spending.

In a shift of stance that will give Rishi Sunak political clearance to ramp up UK debts to levels not seen in peacetime, the Adam Smith Institute, the Centre for Policy Studies, the Institute of Economic Affairs and Policy Exchange said they endorsed public spending increases to confront the coronavirus outbreak and state-funded investment to boost the recovery.

The support for widespread state intervention to rescue the economy came as Boris Johnson told backbench Tory MPs there were no plans to impose a public sector wage freeze or other austerity measures to bring down public spending in the crisis.

In a call to around 125 members of the 1922 Committee of backbenchers, the Daily Telegraph reported that the prime minister said there was “no question” of a return to austerity, and assured them he would “double down” on funding transport projects in the north of England.

Johnson addressed MPs after a leaked Treasury memo revealed that some officials were putting in place detailed plans for spending cuts to arrest a public sector deficit expected to climb by at least £300bn this year.

Britain is expected to enter a deep recession following the lockdown to prevent the spread of Covid-19. Figures from the Office for Budget Responsibility, the independent body responsible for forecasting the public finances, showed the economy suffering a 35% decline in output between April and the end of June and a rise in unemployment to at least 10%.
The cost of measures such as the Treasury’s furlough scheme, which has paid employers to send home over 7 million workers, will send the public spending deficit above 15% this year, 50% higher than the worst period following the 2008 crash.

Left-leaning thinktanks and academics have lined up to condemn plans for a return to austerity, saying it would harm the recovery, and adding that further government borrowing would be needed to secure a return to growth after the virus-induced mothballing of the economy.

During the last recession, most free market thinktanks buttressed austerity measures imposed by the then chancellor George Osborne, arguing that the public sector deficit should be quickly reduced.

Warwick Lightfoot, chief economist at Policy Exchange, said: “I don’t think anyone is arguing for a relaunch of austerity. Even an austerity hawk believes it is different this time.
“The last thing you want to do is amplify the prospects of a full-blown depression,” he added.

Policy Exchange, founded in 2002 by Michael Gove, the Cabinet Office chief, Tory peer Francis Maude, former MP Nick Boles and businessman Archie Norman, has a loyal following in the cabinet and has claimed to be behind several recent Tory policies.

Lightfoot said low interest rates meant the government could borrow cheaply to invest in infrastructure to get the economy back on its feet.

Matthew Lesh, head of research at the Adam Smith Institute, founded in the 1970s to promote free-market policies, said: “Even fiscally hawkish people have less of a problem with the current increase in debt levels.”

Tom Clougherty, head of tax at the Centre for Policy Studies, said: “I’d usually be wary of big public investment schemes In the current circumstances, though, with borrowing costs very low and little prospect of crowding out private investment, I think the pros outweigh the cons.”

The CPS was founded in the 1970s to combat socialism by former MP Keith Joseph, a close friend and supporter of Margaret Thatcher.

Echoing left-leaning economists, Lesh said the Bank of England should support the government with loose monetary policy, allowing it to borrow at low interest rates.

Julian Jessop, an economics fellow at the Institute of Economic Affairs – a thinktank founded in the 1950s with the support of free-market economist Friedrich Hayek – said that he was relaxed about the debts built up during the worst of the lockdown. “There are obvious risks that austerity will restrict growth,” he said.

But he was concerned that the government would harm the economy by keeping restrictions on business activity for much of the year, which would delay a bounce-back in economic growth.

“The longer the economy is kept shuttered, the greater the risk that more of the damage will be permanent, making it that much harder to pay for better public services and infrastructure in the future,” he said.

The four thinktanks continue to believe the Treasury should examine tax-cutting measures to promote innovation and entrepreneurial activity, saying that over the longer term, Whitehall was poor at allocating funds to the economy in the most effective way.