Were the Brexiteers right?

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.

Comments

[TickyW]

"I can’t be bothered to check Leadsom’s position: she probably claims to have invented Keynesianism."

If she did, then perhaps she could explain chapter 6 of his General Theory to me!

It's a mess as far as I can tell :-(

[Donald]

Surely it doesn't "allow" the government to spend more on the nhs. They could have done this anyway?

[chris]

@ TickyW - Yes. The General Theory is like Marx's Capital: you should start in the middle and save the early chapters for last.
@ Donald - of course they could. But they wouldn't have done, had Remain won, as that would have bolstered Osborne's standing. Sure, they're abandoning austerity for the wrong reasons - but it's too much to ask of a politician today that they'll do the right thing for the right reasons.

[rogerh]

After burning down one's house there is generally no shortage of charcoal.

Many sacred cows and daft policies will get dumped as the cry 'all hands to the pumps' goes up. We now have a period where damage control teams attempt to stop the ship sinking and re-trim the sails. A new captain is being chosen - but a good number of the crew are looking to jump ship. Meanwhile the merchants look on deciding which fleet to sail with next year.

What bothers me is that no-one seems to have a credible plan or even a theory from which to derive a plan. The Remainers were sailing along hoping something would turn up whilst the leavers claimed there is a land of milk and honey just over the horizon but they lost the map.

One captain may decide to head back to port whilst the other has never yet been to sea. Neither has a map and neither knows whether the new economic world is flat, spherical or some more complicated shape. Heaven help the passengers.

[Ralph Musgrave]

Chris Dillow above makes the mistake that led George Osborne and numerous other twits in high places around the world to impose unnecessary austerity in recent years: that’s the idea that there is some sort of limit to the amount of fiscal stimulus imposed by the national debt (Chris’s four paras starting “This raises the possibility…”). Or at least I think Chris is much too sympathetic towards that idea.

To explain, the idea is that if government borrows and spends more with a view to implementing stimulus, that might push up the rate of interest demanded for holding government debt, and that thwarts further stimulus. The answer to that was given by Keynes in the 1930s, namely that instead of “borrow and spend” government can perfectly well just print money and spend it. Indeed the latter is the option advocated by Positive Money and advocates of Modern Monetary Theory.

Of course as soon as the words “print” and “money” appear in the same sentence, hoards of no too clued up individuals appear from the woodwork chanting “inflation”. However, assuming there really is excess unemployment (i.e. spare capacity), “print and spend” will not be inflationary.

I.e. the whole “fiscal space” idea is complete nonsense.

[BruceMcF]

That's what abandoning Austerity allows. But the UK is not in the Eurozone, so #Brexit was not required to abandon Austerity: all that was required is the decision to do it. Indeed, if #Brexit was required to allow Austerity to be abandoned, then it would not NOW be possible to abandon Austerity, because #Brexit has not yet been completed.

[Magnus]

This is right. This is more than just a silver lining to the Brexit cloud. The end of austerity really is good news.

What I found interesting about it was the ease with which George Osborne ditched his flagship. For sure it is good economics (to ditch austerity), but it was equally good for the past six years.

The Tories value power above their ideology. Yes the ideology is to shrink the state, but only when they can get away with it. I think post-Brexit they know their flush is busted. They'll need some growth for the next general election else their number's up.