Roughly two weeks into office, new ministers in the British government are seeking to overturn a central tenet of economics: constrained optimisation. Rather than maximising opportunities within set limits, ministers talk of “turbocharging” this or that, putting “rocket boosters” under the economy and letting it “go gangbusters”. The dismal duty of economists is politely to point out the constraints.
So when Rishi Sunak, the new chief secretary to the Treasury, says, “there is strong growth”, feel for the official tasked with informing him that the data published on Friday will show the opposite. Persistently weak growth over the past decade has curtailed the rise in tax revenues, preventing the last Labour government, the subsequent coalition, or the current Conservative government from splashing out despite full employment.
Leaving the EU without a deal does not help these calculations. The new barriers the UK would erect by leaving the EU’s single market and customs union would further undermine fiscal capacity. The difficult fact is that no deal reduces the scope to end austerity.
If those are the long-term limits of policy, the calculations over the next few months are different. Despite announcing increased public spending on preparations for a no-deal Brexit, Britain cannot guarantee free-flowing trade in goods and services because EU authorities will regulate the flow at the borders. Money does not buy control.
Some see falling sterling as a get-out-of-jail-free card. A weaker pound would offset some of the damage of EU tariffs for some exporters. But as the UK learnt after the 2008 and 2016 depreciations, the result of a weaker currency was higher import prices, lowering domestic living standards and spending.
Naturally, the government could also respond to a hard Brexit with a large fiscal stimulus, but it will need to remember that you cannot fight a supply shock with a boost to demand. Just as the Bank of England repeats that monetary policy cannot offset the real effects of Brexit on potential growth, government borrowing and spending can only help replace a temporary spending caution by the private sector. It cannot rescue businesses left stranded by a sudden exit from the EU’s trading regime.
Even if evidence of a downturn suggests there is a need for fiscal boost to demand, government should remember there is not much it can do quickly. Politicians are unlikely to be lightning-fast and most economic policy is beset by long and variable delays between action and effect. Infrastructure spending takes years to plan and the Treasury discovered in 2008 it would take months to deliver money to households through the social security system. It decided instead to lower the VAT rate because it was speedy even if it was not the most effective stimulus.
When seeking to impress, there is no point talking big and spending small. The public might be fooled initially, but people soon notice when the experience of public services fails to live up to the rhetoric. Boris Johnson has announced an increase in health capital expenditure, but the details show the new prime minister was accumulating spending over years to inflate its size and then comparing it with annual increases Theresa May announced last year. Much of this money was not strictly new either, further diminishing its impact.
Anyone highlighting these constraints is bound to get labelled as one of “the doubters, the doomsters, the gloomsters” Mr Johnson is confident will always be wrong. This is ultimately unconvincing: constraints are never right or wrong, they are just a reality that politicians need to acknowledge. They do not disappear if ignored.
So, if constrained optimisation is too technical, Mr Johnson could instead learn from a successful historical figure. Otto von Bismarck got it right: “Politics,” he said, “is the art of the possible”.
