Put your crocs away, but get your calculators out – we still need to talk about the deficit

Fashions come and fashions go, in politics as on the catwalk. One minute an issue looks like it’s the only thing that matters, and the next no-politician wants to mention it. As this general election rolls on the thing that is becoming ever clearer is that the fiscal deficit is the British political equivalent of crocs – all the rage once upon a time, but now just something to be embarrassed about.

Both the 2010 and 2015 general elections were dominated by debates about the deficit. In 2010 the Conservatives manifesto opened by declaring that “our economy is overwhelmed by debt” and argued that immediate action to cut the deficit faster was a national priority. Meanwhile the Labour Party said a steady approach to halve the deficit by 2014 was more sensible and that the Conservatives would undermine the nascent recovery by cutting too fast. The country plumped for the former, but broadly speaking got the latter in terms of the scale of deficit reduction that had taken place by the 2015 election. The fact that a substantial deficit still remained gave the country the pleasure of a groundhog day election in 2015, with George Osborne now promising to eliminate all borrowing by 2020 while the Labour manifesto set out a “Budget Responsibility Lock” even before it got to the contents page.

Just two years on we face another, but very different, election. This time no-one wants to mention the deficit. Theresa May wants to talk about Brexit, and the ‘strong and stable leadership’ it requires, while doing everything possible to show that she is very different to the deficit obsessed David Cameron and George Osborne. Meanwhile the only thing Labour wants to talk about less than Brexit is the public finances.

This obviously comes as a relief to deficit fatigued voters and journalists. Everyone likes a change, and on the substance the scale of UK borrowing is now approaching that seen before the financial crisis.

But, like a relationship on the rocks, the public finances don’t go away as an important issue in elections just because we don’t really want to talk about it. There’s a strong case for eating our greens.

First that’s because it matters for the policies you actually get from the next government, with big implications for our living standards and public services. That doesn’t mean taking too literally promises of reducing borrowing to a particular figure in pounds and pence, but it does mean knowing what the fiscal background is likely to be for a future government. Brexit may have knocked Conservative plans for reaching an absolute surplus back at least a Parliament, but that 2015 election promise still mattered hugely.  The £12bn welfare cuts that were included to make the numbers behind the 2015 fiscal target add up have outlasted the target itself and, without big welfare announcements in the Manifestos next week, risk causing the biggest rise in inequality since Thatcher was in Downing Street.

Secondly, there remains huge uncertainty about the different parties’ election plans that deserve greater scrutiny before the public are asked to vote. The big picture of course is a Conservative Party aiming to deliver another Parliament of fiscal consolidation, with spending cuts and net tax rises, while Labour intends to reduce the current deficit by less, borrow more for investment and fund higher spending in some areas with higher taxes (including corporation tax). But underneath those headlines big uncertainties remain.

Philip Hammond has both retained George Osborne’s ultimate “fiscal objective” of an absolute surplus in “the next Parliament” (now meaning by 2021-22) while adding a more immediate (and much looser) ceiling for fiscal policy with his “fiscal mandate” to reduce cyclically-adjusted PSNB to below 2 per cent of GDP by 2020-21. The two rules now provide totally different guides to Conservative fiscal policy – requiring £17bn of additional fiscal tightening in the former case, but allowing up to £30bn of loosening in 2020-21 compared to the OBR’s March 2017 projections if the ‘mandate’ is the dominant rule. Those kind of margins really mean for the Conservatives at least fiscal rules no longer provide a real guide to the actual intended path of fiscal policy.

Labour, as we know from its leaked Manifesto, has set out a ‘Fiscal Credibility Rule’, promising to eliminate borrowing for current spending over five years. Assuming no change on investment spending this rule would provide the party with potential headroom of £37 billion by 2021-22 relative to current projections – closely matching the headroom available under the Conservatives “Fiscal mandate”. But Labour has not set out how much of that headroom it would use to avoid welfare and departmental spending cuts currently pencilled in. There is also significant uncertainty over how much use it would make of the flexibility to borrow for investment spending relative to current plans, as part of its aim of creating a £500 billion investment fund. We might not want to talk about the deficit, but not doing so reduces even further the chance of getting more clarity from political parties on their plans.

The third reason that fiscal policy is worthy of some attention in this election, with most long lasting importance, is that yes the deficit may be heading back to something like normal territory, but at nearly 90 per cent of GDP our stock of debt is much higher than seen pre-crisis (although still much lower than the post-World War II period). Indeed the real debate that should be driving Britain’s fiscal policy in the decades to come is what level of debt we should be targeting – something neither main party has set out its thinking on. Reasonable people can come to different conclusions on that – reinforcing the fact that there are some big decisions to be made as a county. We should be debating how we balance the fact that as a country we have areas of major need for public investment at a time when very low borrowing costs reduce the price of elevated debt levels, with the economic reality that there will be future recessions, bringing with them further increases to our debt stock. That balancing act should also include consideration of the fiscal pressures coming down the track from an ageing society. These are big questions where Britain could end up in a very wide range of possible futures but which are receiving no debate in this election campaign. As the chart below shows different approaches to the deficit can lead to very different levels of debt over time.

Inevitably this election will be dominated by Brexit, but that doesn’t mean it won’t matter a great deal on a host of other areas. High up on that list are what it means for the public finances, an area that both main parties have left huge amounts of uncertainty around their plans. So while there is no excuse for bringing your crocs out of the back of the closet, as a country I’m afraid we do still need to talk about the deficit.