The best way to end austerity

Nurses demonstrating against austerity © Rex Features
Nobody likes to see their pay frozen forever

It is surprising how quickly the political mood can change. Only two years ago the Conservatives won a secure majority on a programme of maintaining austerity, keeping a tight rein on public spending, getting the deficit under control, and bringing the budget back into balance. Now, following the loss of their majority, and in the face of a resurgent Labour Party that has decided the magic money tree is a real thing, the government looks set to abandon that restraint, or at least ease up on it for a couple of years. All of a sudden, austerity is about as popular as clamshell phones.

The UK still has a debt-to-GDP ratio of 89%, and the deficit is running at more than £50bn a year, even in an economy that has been growing at a respectable pace for several years and is about as close to full employment as it will ever be. And there are big challenges to come: Brexit, rising interest rates, perhaps a recession. But if the politics dictates we should ease austerity, we can at least do it well. There is good and bad state spending. Inevitably, the public sector wastes a lot of money, which is one of the best arguments for keeping its size under control. It faces none of the market disciplines that the private sector does. That said, much of what the public sector does strengthens the economy, and welfare spending channels help where it is needed. If austerity is being relaxed, we might as well be smart about how we spend the money. So how should we?

First, raise public-sector pay. The 1% annual pay cap may have run on for too long, and created too much resentment among staff in health, education and the police force. Nobody likes to see their pay frozen forever. The public sector is far smaller now than it was under the last Labour government – at 17% of the workforce, it is down from 21% and at its lowest level since 1999. That makes a pay rise a lot more affordable. 

Second, upgrade our infrastructure. We need better roads, commuter lines, power stations, and most of all high-speed broadband. As we leave the EU, we need to be more attractive to business – and infrastructure is a big part of that.

Third, cut the outrageous interest on student loans. Rates on these have now hit 6.1%, at a time when the base rate is just 0.25%. “WTF”, as the millennial might put it. Why not cut the student loan rate down to 0.25% over base rate, and get the Bank of England to fund it through quantitative easing if necessary? And why not change the system so that loans only have to be repaid after you are above average earnings? That would make the system more fair.

Fourth, target help at exporters. Most companies won’t notice that we’ve left the EU as they don’t export there. But for the few heavily dependent on Europe, Brexit is going to be genuinely challenging. So why not set up a fund to help them cope with any tariffs they may face, and to switch production to alternative markets instead? At the same time, let’s spend some money tempting a few companies to leave the EU and re-locate to a lower tax, more liberal Britain – which will make up for those that inevitably move in the other direction.

Finally, keep raising tax thresholds. Since 2000 the government has made huge progress on raising the rate at which you start paying tax. From slightly under £7,500 it is now £11,500 with a target of £12,500 this parliament. Why not push that up to £13,000, or even higher? Nothing does more to help employment or to boost the real take-home pay of low earners. It would be great if real wages were rising faster – but you can achieve the same thing by raising thresholds and taxing people a bit less.