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Tory Leavers have repudiated their own economic policy

An emergency budget statement will be necessary if the United Kingdom votes to leave the European Union

George Osborne and Alistair Darling have stated that if the United Kingdom votes to leave the European Union, there will need to be an emergency budget. Not surprisingly, their claim has been criticised by the Leave campaign, but the central point is surely correct whether or not we are adherents to the austerity cult. The government will need to demonstrate it will retain control of public finances. The Conservative Leavers have to explain why they have so easily repudiated an economic policy they have advocated for so long. Fundamental decisions have fundamental consequences.

The case for an emergency budget relies on figures from the Institute for Fiscal Studies. The IFS believes the consequences of leaving the EU amount to a £20bn to £40bn shortfall in the public finances compared to the government’s current plans. This could amount to a couple more years of austerity and still leave government debt at higher levels than otherwise, the IFS says. The decline in the public finances would arise from a hit to the growth outlook which would deplete tax revenues. The growth rate would be lower primarily due to the impact of a harsher trade environment outside the EU and a fall in foreign investment in the UK. The impact would not be cyclical but structural, meaning the damage to the public finances would be permanent.
Osborne and Darling argue that this will require tax rises such as 2p on the basic rate of income tax, and cuts to spending on the NHS, defence, and education. While they may differ on the precise mix required, they both agree on the need to take action to find £30bn, the figure in the middle of the IFS’s range.
Leave campaign leaders cast doubt on the economic projections predicting damage to the UK economy in the event of Brexit, but most admit there will be at least short-term disruption (implying some people will lose their jobs). There is no convincing case that leaving the EU will be harmless. The Financial Times, in a review of the forecasts, notes that the most significant pro-Leave growth projection, published by Economists for Brexit, relies on the UK opening itself to unrestricted imports (destroying our manufacturing base) and abolishing regulations on working hours, gender equality, and climate change. This is the picture of the future outside the EU. It is why Labour leaders need to be unequivocal and totally committed to making the case for remaining in the EU.
But what if we do not sign up to the austerity cult? There are good economic reasons for avoiding doing so. We are in an unusual economic world, in which interest rates and inflation have remained very low for a long time. Yet low interest rates have not driven investment and economic activity as much as expected or needed. Businesses lack confidence. In such circumstances, there is a strong case for governments stepping into the gap and powering investment spending. Indeed, partly due to fears over Brexit risks, global bond yields have fallen significantly in recent days as investors have tried to reduce risk. Governments can therefore now borrow extremely cheaply. The UK can borrow for 10 years at a cost just above 1.1 per cent pa, while Germany can borrow for the same period at no cost at all. Unfortunately, while borrowing for investment should increase, the resources for current spending would be diminished. The fiscal targets could be moved, but that would be another acknowledgement of failure. A further problem is that until the terms of an exit from the EU were known, forecasting would be difficult. Meanwhile, business confidence would likely be falling.
That points to what should be the main reason for an emergency budget statement, not explicitly addressed by Osborne and Darling. A decision to leave the EU would otherwise imply the UK’s fiscal policy was out of control. A government divided, facing an uncertain future and a leadership election, would appear to have abandoned its economic policy as well. This could lead to even greater financial instability and make it harder for the government to borrow. It would be unacceptable for the government to tell the country and markets to wait until an autumn statement or March budget to discover in which direction it was taking economic policy. It need not risk harming growth by imposing tax rises and spending cuts immediately, but it would have to show how public finances would be kept under control.
It is a symptom of the bizarre nature of the referendum debate that many of the Conservative politicians in the Leave campaign argued strongly in 2010 and subsequently that Britain needed austerity to avoid becoming another Greece. It is difficult to understand how they are now so careless about a home-grown risk. They have shot to pieces what economic credibility they had. Fundamental decisions, to Remain or to Leave, have fundamental consequences, for people’s jobs and for our long term prospects. A responsible government has to take action and exercise leadership. That is why an emergency budget statement would be necessary.

This article was first published by Progress on 16 June 2016.

Progress, 16 June 2016, 19/06/2016

Not an easy task given uncertainties, especially if energy and commodity prices do fall later in the year. Ultimately, radical economic reform required.
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.
The Bank of England has raised interest rates, but that does not mean it has been most effectively managing inflation risks.
The Bank should signal it will act if higher prices look likely to translate to higher inflation rate.
The IMF's Fiscal Monitor is actually quite radical.
Spare a thought for finance ministers, and the opposition counterparts who aspire to replace them. The conventional wisdom was that they should at least make an attempt to follow fiscal rules. Now, there are no rules.
My letter in the Financial Times on the need for a framework for economic policy decision-making.
Responding to Brian Griffiths' article in The Article on the risks of inflation.