We still hear a good deal about John Maynard Keynes. The many experts who believe that by cutting the deficit to more-or-less zero by 2015-16 the government is risking a double-dip recession continue to cite the eminent economist (and the experience of the Great Depression) as their rationale for preferring to take a slower approach to balancing the books.
But Keynes’s theory amounted to rather more than borrowing to pump cash into the economy during a recession. He proposed that governments should indeed expand public expenditure to counteract the effects of economic contraction. But there was another side to Keynes, namely that in times when the economy was growing strongly the government should reduce demand and, in effect, save up for a rainy day.
In Britain, we only hear about Keynes during a recession. Once it is clear the economy is about to go into reverse, economists and commentators rush into print to suggest the government should borrow money in order to increase public spending. At the very least it is proposed the Treasury should push up borrowing so as to mitigate the loss of revenue resulting from the inevitable fall in tax revenues which accompanies a downturn. The previous government pushed up borrowing from £30bn to £160bn in order to soften the impact of the 2008-10 recession.
But think back to 2004, 2005 and 2006. Was anyone proposing a ‘Keynesian’ reduction in the rate of public expenditure growth so as to ‘manage down’ the frothy boom and build up a budget surplus and thus create a store of cash to have ready for the next recession? At the time, ministers wanted to cash in on the rapid growth in GDP and tax yield to fund a massive programme of public investment.
Of course, back in the mid-2000s Gordon Brown believed he had put an end to ‘boom and bust’. In much the same way most commentators now speak as if the recession will never end, five years ago it was possible to imagine there would never again be a recession. ‘This time it’s different’ appears to be an instinctive human response to any dramatic change in circumstances.
In the years from 1997-98 to 1999-2000, Labour did indeed run a budget surplus. UK government debt tumbled. But from 2000-01 onwards spending increased faster than revenues, inevitably leading to a shift from surplus to deficit. Throughout the period from 2000-01 to 2010-11, spending has risen in real terms and as a proportion of GDP. But if Keynes were to have guided the actions of the government far greater attention would have been paid to reducing the UK’s debt.
By comparison with many other countries, Labour left Britain with a relatively low level of indebtedness. Even after the surge in borrowing from 2008-09 onwards, the country’s outstanding debt has remained manageable. The difficulty now facing the Conservative-Liberal Democrat government is how to stop the rapid accretion of additional debt. Even if the annual deficit is reduced to zero by the end of 2015-16 the total of government debt will have risen to 70 per cent in 2013-14. Thereafter, if there is no return to borrowing, debt will fall as a proportion of GDP, though it would take a number of years of constrained spending for debt to return to the levels of the early-2000s.
Thus, the next UK government, and possibly the one after that, will be faced with a difficult question. If the deficit can be reduced to zero by the end of 2015-16, for how long after that will national politicians want to hold down spending so as to become genuine Keynesians? On the assumption that growth returns from 2011-12 onwards, it is inevitable there will be another recession at some time in the intermediate future.
If the Exchequer is to be ready to cope with a downturn in, say, 2018 or 2019 it will want to reduce the scale of UK national debt from the figure reached in 2015-16. For this to occur, there would need to be budget surpluses for several years from 2016-17 onwards. On this basis, it is hard to see any room for more than paltry real growth in public spending till the end of the current decade – or later if there is another downturn. It is possible public expenditure will not grow strongly again, or even in line with growth in GDP till some time after 2020.
Tony Travers is director of the Greater London Group at the London School of Economics
