History tells us to brace for 1990s-style tax rises rather than spending cuts

A common human flaw is to believe the future will look like our immediate past. If something unusual has happened we conclude it’s likely to happen again. The person unlucky enough to be struck by lightning spends more time than the rest of us worrying about storms. That a lucky gambler thinks they’ll get lucky again is the basis for an entire industry.

This tendency to look at the immediate past is particularly true when it comes to how we think about economic crises. Everyone spent the 2010s predicting another financial crisis because they’d just lived through one, ignoring regulatory changes that saw banks’ capital buffers increase three-fold. And while we were busy predicting another banking bust, we clearly weren’t preparing adequately for a pandemic.

This tendency doesn’t just apply to the causes of economic crises, but also their nature. In the Treasury during the financial crisis we all expected unemployment to return to the 3 million seen after the 80s and 90s recessions and for repossessions to soar again. Neither happened, as an unprecedented earnings squeeze and near zero interest rates meant the crisis played out very differently to its predecessors.

This time the danger is that policy makers are taking a big gamble by dialling back economic support and hoping that very high unemployment doesn’t turn up, partly because it didn’t last time. But there are good reasons for thinking this isn’t a rerun of the financial crisis unemployment wise, not least given that economic damage is focused on big employing sectors like hospitality.

The same myopic focus on the immediate past dominates debates about the future of the public finances, focusing on whether we’ll see a repeat of the 2010s public spending austerity. We won’t. In fact we won’t precisely because 2020s Britain is the same place that went through that previous bout of austerity.

That’s true on the substance: cutting spending was a much easier task post-2010 when public services had just experienced a decade of rising spending, than it would be today when spending has come down 6 per cent of GDP from 2010 to the eve of the crisis.

It’s also true on the politics. Public support for extra spending has almost doubled since 2010, with 57 per cent of adults now in favour.  People see the strain public services have increasingly been under (the proportion of accident and emergency attendees not seen within four hours has soared from 5 per cent in 2011 to 24 per cent in 2019) and know that the country can’t pull off the same trick twice.

The Chancellor knows all this. There’s a reason why the same Rishi Sunak who in 2015 said that “public spending should not exceed 37 per cent of GDP”, as Chancellor set out plans in March for major spending increases that would have seen spending rise to 41 per cent of GDP – higher than at any point under Tony Blair. And even these increases would only have been sufficient to reverse around a quarter of the real cuts per capita to unprotected departments (outside the likes of health) since 2010.

A longer view of history of course shows that public finance consolidations aren’t just about public spending. Tax rises are often centre stage, as they very much were with the two tax raising budgets of 1993, each seeing bigger tax increases than any Budget after 2010.

So with spending cuts hard technically and politically, and the pandemic likely to leave the UK with a lasting deficit, the years ahead are much more likely to see a rerun of the tax rises of the 1990s than the spending austerity of the 2010s.

The bigger lesson here is that while history does often repeat itself, it doesn’t simply replay the most recent episode. With schools reopening next week, the country’s youth can get back to some proper history lessons. Maybe we could all do with some.

This article originally appeared in The Times