The Daily Telegraph - 24.07.2019

32 ***^ Wednesday 24 July 2019 The Daily Telegraph

G

oodbye “fiscal

conservatism”, hello a

potentially irresponsible

plethora of tax cuts and

spending pledges. In some

sense, the pivot we are

about to see in UK economic policy is

an inevitable consequence of the

challenges of Brexit.

The abrupt, no-deal exit now being

contemplated is likely to require a

degree of fiscal and monetary support

not seen since the immediate

aftermath of the financial crisis.

If Boris Johnson, the new Prime

Minister, is serious in his “do or die”

call to arms, he and whoever he

chooses as chancellor must break free

of the self-imposed fiscal constraints of

the past 10 years. The disciplinarian

rules that have governed the public

finances will have to be thrown out of

the door.

Mr Johnson will

also need an

ultra-dove at the

Bank of England,

willing, at least

temporarily, to

abandon money

orthodoxies and

bend to the

immediate

purpose of

keeping the economy afloat. To carry

this off will require someone with

established international clout and

authority; opposed to Brexit though he

undoubtedly is, Mark Carney is in this

regard a far more worthy occupant of

the role than any on the somewhat

underwhelming shortlist of possible

replacements.

An attempt should be made to have

him stay on for at least a further year.

Conservatives are normally fiscal

and monetary traditionalists, whose

mission it is to correct the profligacies

of Leftish predecessors. But the times

have given licence to a different

approach and, for now, Johnson has

been anointed as the man to deliver it.

This is more than just a Brexit-

related change. In Britain, many seem

to have undergone a kind of

An age of fiscal populism dawns

as Johnson sweeps into No 10

The voters, unlike Mark Lester, above in the 1967 film Oliver, are tired of thin gruel

JEREMY

WARNER

W

ander around

Birmingham and you

are hit by the sheer

amount of building

work the city has

seen in the past

decade. But among the new towers sits

a forlorn Victorian cube, the former

Curzon Street station, isolated on a

tract of empty land and waiting for the

future to catch up with it.

The site has been earmarked for the

Birmingham terminus of High Speed 2,

a gleaming new train shed; the old

Curzon Street, which last saw off a train

in 1966, will become a visitor centre.

Reports that Boris Johnson, the new

incumbent of No 10, is going to review

HS2 will have caused Birmingham

some unease. Johnson is apparently

contemplating building the northern

stretch of HS2 first, believing the

southern leg, from London to

Birmingham, doesn’t offer good value.

Well, good. Any review of the

financial black hole that is HS2 must be

welcomed. The budget has officially

been set at £56bn

but there is now

talk of £30bn on

top of that.

Johnson – an

equivocal backer

of HS2 – has

suggested it could

top £100bn.

Infrastructure

projects have a

habit of getting

away from you.

Indeed, if it weren’t for Brexit, we’d all

be talking about what a disaster major

projects in this country have become.

Take Crossrail, the cross-London

tunnel labouring with a two-year delay.

The project was allocated £14.8bn in

2010, but the estimated cost has now

swollen to £17.8bn, according to a

written statement yesterday from Chris

Grayling, the Transport Secretary.

Or Heathrow’s third runway, backed

‘People only

commute if

wages are

higher at the

other end of

the line. As

in London’

The case

for HS2

has been

derailed

Jon

Yeomanss

by the Government, and by the

airport’s owners (most recently

yesterday), but likely to run into myriad

challenges. Many believe HS2 is a done

deal. The building work has begun at

either end with a completion date of

2026 for the first section. But the

debate is not dead. There are solid

arguments in favour of less flashy

projects, such as overhauling the

rickety Transpennine route.

The case for such projects must start

with the data. On Transpennine,

studies have questioned how many

people commute across the region.

Huddersfield, for example, is ideally

situated between Manchester and

Leeds but passenger stats suggest the

flow of commuters going either way is

small. Most northerners work and live

within the same metropolitan area.

But surely if the trains were better

people would commute further? Not

necessarily, according to a new report

from the Centre for Cities think tank,

out next week. Champions of the

“Northern Powerhouse” point to

Holland and Germany to show the

benefits of good infrastructure. Yet

here too the figures show people do not

commute heavily between cities;

intra-city transport is more important.

Moreover, the “push-pull” effect of

high wages found in the South-east

isn’t much of a factor in the North;

people only commute if the wages are

higher at the other end of the line, as

they are in London.

So, if Johnson wants to move the dial

on the nation’s productivity, he could

look at building trams and metros in

major cities of the North. An even

cheaper option is to hand elected

mayors more control of bus services to

make them more frequent and joined

up. This would go some way to reverse

the long-term decline in bus use

outside London. All of this will help

businesses, because it boosts the pool

of people from which they can recruit.

None of this is particularly

eye-catching stuff. It goes against the

politician’s natural instinct to want to

cut ribbons on giant projects. Johnson,

who once admitted “it takes an awful

lot to put me off a jumbo infrastructure

project”, would have to draw a line

under his championing of the wasteful

and wacky schemes that have defined

much of his career, from garden

bridges to island airports. One

characteristic of a Johnson premiership

will be this fight against his better

nature; the Churchillian yin battling

the more familiar Boris yang.

But it could be politically expedient,

helping Johnson build bridges in the

North and redressing a London-skewed

economy. And let’s not forget that he

likes buses, too, declaring during the

leadership campaign that he paints

them on wooden boxes. Though the

less said about Boris Buses in London,

the better. When it comes to transport,

Johnson may have to learn that a little

goes a long way.

Damascene conversion since the

referendum; some of the fiercest

one-time fiscal hawks have been

turned into magic money-tree

spendthrifts. Yet their change of heart

is very much part of a global

movement. Brexit provides the excuse

for conservatives to adopt a new form

of economic populism that promises to

sweep all before it.

Led from the front by Donald

Trump’s fiscally incontinent America,

the age of belt-tightening, fiscal

austerity is fast giving way to let-rip

expansionism. In part, this is merely

cyclical. Voters are weary of the thin

gruel of recent years; they demand a

period of feasting. Whether of the Left

or the Right, the politicians dare not

deny them.

Out goes Rogoff and Reinhart’s

“Growth in a time of debt”, one of the

most influential polemics of its time

arguing that growth prospects decline

dramatically when public debt reaches

90pc of GDP; in comes a growing body

of research to argue that at a time of

persistently low inflation and interest

rates, debt no longer matters. The idea

that we can run big deficits for longer

is becoming as much part of Right-

wing as Left-wing thinking.

In this sense, it seems finally to be

true; we are all Keynesians now. There

is an emerging political consensus

around the idea that something radical

must be done about the sub-par

growth of Western economies.

Nothing else is working; time, then,

to take risks by firing up the fiscal

cannon anew.

The one notable exception to this

change is Germany, which has legally

bound itself in with balanced budget

rules, both at local and federal level.

One can only admire Germans for their

self discipline, but in so behaving they

have created a rod for both their own

and the rest of the eurozone’s back.

An old joke about the dismal science

has it that economics is not rocket

science; if it was, the Germans would

be much better at it.

The Bundestag seems to have learnt

nothing from the traumas of the

eurozone debt crisis. Sustainable

monetary union requires that those

with the fiscal space for stimulus

should provide it so as to support those

without it. As long as Germany

continues to resist this obligation,

break-up of the single currency

remains an all too likely prospect.

In any case, those unbound by such

constraints are taking matters into

their own hands. Historical parallels

can be misleading, but here’s one

worth noting – Japan’s experiment in

the interwar years with “Takahashi

zaisei” (Takahashi economics), after

the veteran Japanese finance minister

Korekiyo Takahashi. A three-pronged

raft of macroeconomic stimulus

measures was introduced to help Japan

escape the ravages of depression,

including devaluation, deficit

spending and outright monetisation by

the Bank of Japan of public debt. It

worked, but its success is as much a

warning as an inspiration.

High growth re-established itself

with none of the hyperinflation that

might have been a consequence of the

Bank of Japan’s undisguised money

printing. Unfortunately, the only

constraint on fiscal expansionism came

to be the authority of Takahashi

himself, and after a while, even he

could not control it. Pressure for

ever-greater military spending, which

he tried to resist, eventually resulted in

his own assassination.

I don’t want to stretch the parallels

too far, but we see some of the same

pressures today. Defence spending in

the US is strongly on the rise, and is

very much part of Donald Trump’s

“America First” plan for economic

regeneration. The US Federal Reserve

is meanwhile under relentless pressure

to do Trump’s bidding. Boris Johnson

will similarly want to open the fiscal

spigots. The debacle in the Gulf has of

itself made the case for much higher

military spending.

The idea that the welter of spending

and tax promises Boris Johnson has

made in recent weeks can be

accommodated within existing fiscal

rules should be seen for what it is – “an

inverted pyramid of piffle”, to use one

of the expressions that made the new

PM famous. The supposed £26.6bn of

headroom in the public finances

identified by the Office for Budget

Responsibility is little more than an

illusion that would disappear like snow

in summer in the event of a downturn.

“This agreement is a total abdication

of fiscal responsibility by Congress and

the president,” said Maya MacGuineas,

the president of the committee for a

responsible federal budget, a

Washington advocacy group, in

response to the agreement this week to

lift the US debt ceiling to accommodate

Trump’s deficit financing. She’s

probably right, but does anyone care?

Voters are in no mood for further

medicine; it’s time to play.

‘The idea that we can run

big deficits is becoming as

much part of Right-wing as

Left-wing thinking’

Business comment

BUSINESS

OF BORIS

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