Thread by @sjwrenlewis

I have been puzzling over why none of the commentariat has called this budget out for what it is: an austerity budget. Let me first justify why its an austerity budget. 2010 austerity had two aspects. The first was shrinking the state: a large squeeze in public spending 1/13

The second was macroeconomic illiteracy. In a recession where interest rates are stuck at near zero you should use fiscal policy to stimulate the economy, not to shrink it. The aim is to expand the economy so that interest rates rise to more normal levels. 2/13

On shrinking the state, many confuse changes with levels. They think that because the government is not shrinking the state still further, its not austerity. But it is virtually impossible to shrink parts of the state any further. Local authorities would go bankrupt. 3/13

The pandemic apart, in hardly any cases has this government expanded the state compared to the first austerity period (defence, police numbers). Waiting lists for operations remain far too long. Local authorities (therefore social care) remain squeezed close to bankruptcy. 4/13

Delays for court cases keep rising, and so on. The smaller state remains, with the big exception of defence. In macroeconomic terms this is an austerity budget. The clearest indication of this is we have large tax rises when interest rates are forecast to be below 0.6%. 5/13

So what, you may say. This provides a clear indication that, according to the OBR, the economy is below where it could be for all the forecast period. We are wasting resources because demand is too weak, and the Chancellor has done almost nothing about it. 6/13

So we have the state largely remaining squeezed, and a failure to stimulate the economy in the short term, and a major tax squeeze in the medium term. That to me sounds like an austerity budget. Maybe not on the scale of 2010, but in the same character. 7/13

So why has this not been called out. On the size of the state, I think there is a levels versus change problem already noted, but also the aggregate numbers suggest the state is expanding. That partly reflects defence, but mainly that health has to expand to cope with 8/13

an ageing population, growing ability to solve problems and so on. You measure whether health spending is squeezed not by the size of the budget but whether waiting times are rising. The idea that fixing the NHS budget is protecting it is the biggest con ever. 9/13

The misleading aggregate numbers and the levels/changes confusion partly explain why keeping the state shrunk has not been called austerity. On the macro side Sunak was clever. The budget had one big expansionary measure, a large two year investment incentive. 10/13

But there are two problems with this. First, as the OBR shows, in good part any extra investment over the next two years is matched by lower investment in later years. Its a very costly way of bringing forward investment. 11/13

The second is that it has to be set alongside various measures that dampen demand during the recovery: cuts in universal credit, and frozen public sector pay and a derisory 1% for NHS staff. The net result, if the OBR is right, is a recovery over the next two years that 12/13

fails to close the output gap and therefore keeps interest rates at their floor. In other words over five years we have fiscal contraction when we should have stimulus, which is macroeconomic illiteracy. Add to a shrunken state and you get austerity once again. /end