Was Vote Leave right after all to claim that leaving the EU would allow us to spend an extra £350m per week on the NHS?
From one point of view, this was an obvious lie. As Tim Harford says:
The Leave campaign’s most prominent claim — “We send the EU £350m a week, let’s spend it on the NHS instead” — was untrue and exposed as false repeatedly by the head of the UK Statistics Authority.
From another perspective, however, it might not be so wrong. This is because one effect of Brexit has been to kill off Osborne’s aim of a budget surplus by 2020: Both he and (more relevantly) Theresa May, have abandoned that target*.
This raises the possibility that Brexit will allow an extra £350m per week to be spent on the NHS not because we’ll save on contributions to the EU, but because we will now have a looser fiscal policy.
And there is substantial space for this. 20 year index-linked gilts now yield minus 1.4 per cent, which means that, left to itself, government debt will fall over the long run. To put this another way, it implies that the government could run a significant budget deficit and still stabilize the debt-GDP ratio.
The maths tells us that, if we assume a trend real GDP growth rate of 1.5 per cent and real yields of minus 1.4 per cent we could stabilize the debt-GDP ratio at its current 88 per cent with a primary budget deficit of 2.5 per cent of GDP. This contrasts to a surplus of over two per cent of GDP in 2020 foreseen by the OBR in March. That allows a fiscal easing of 4.5 percentage points of GDP.
In this sense, the government could increase spending on the NHS by around one per cent of GDP – roughly £350m per week – and still stabilize public debt.
Now, I must caveat this hugely. Some of the fiscal space created by the abandonment of Osbornomics will be eaten up in the near-term by a counter-cyclical rise in borrowing as the economy slows. Rick is right to say that, in the very long run, the fact that GDP will be lower means we have less to spend on anything than we otherwise would. If bond yields rise then the maths because less nice. And if our big current account deficit causes a “sudden stop” then all bets are off.
Nevertheless, it’s possible that the abandonment of austerity will allow the government to increase spending on the NHS. I would expect the next Chancellor, especially if s/he is a Leave sympathiser, to do this just this and claim that the Brexiteers’ assertion was correct.
This would, of course, be disingenuous. Brexiteers didn’t say that Brexit would allow us to spend more on the NHS because it would mean the end of Osborne’s sado-austerity.
And there is a paradox here. Increased spending on the NHS, when accompanied by the weaker private sector capital spending which Brexit is likely to cause, means that the share of government spending in GDP will be higher than it otherwise would. I’m not sure if this is what the free market Leavers intended.
* I can’t be bothered to check Leadsom’s position: she probably claims to have invented Keynesianism.