Britain Isn't Greece, Prime Minister

Enough austerity. The government can afford to raise spending where that would help the economy.
By The Editors
7 Ιουλίου 2017, 9:39 π.μ. EEST
Bloomberg
Britain’s government isn’t due to announce a new budget until the autumn, but debate is already raging over public-sector pay. With Brexit bearing down, the embattled prime minister, Theresa May, will have to choose between making another embarrassing U-turn and defending a policy that is both unpopular and unnecessary.

Sadly for May, the U-turn makes better sense.



For years it was an article of faith among Britain’s Conservatives that the budget deficit had to be eliminated -- by 2020, if not yesterday. Some Tories are now ready to abandon that line of thinking; others still hold the principle, if not the timetable, sacrosanct.

Speaking in Parliament on Wednesday, May came down firmly on the side of austerity: Greece shows you where fiscal indiscipline leads, she argued. Labour leader Jeremy Corbyn was unmoved. He decried the “low-wage epidemic” and argued that the 1 percent cap on increases in public-sector wages should be removed.

Corbyn has a point. Britain’s workers are getting squeezed, especially in the public sector, thanks to rising inflation caused in part by the Brexit-induced fall in sterling. But he’s wrong to look at wages in isolation. Public-sector pay is only one of many claims on the government’s budget. The National Health Service, for instance, is in a state of permanent crisis; spending on care for the elderly and other needs is woefully inadequate. The list of other worthy expenditures is endless. Trying to meet all such claims would indeed be a formula for fiscal collapse.

The government has to prioritize. Where higher wages are needed to recruit and retain workers for essential services, raise them. Where additional public spending is needed to provide vital infrastructure, spur productivity, and support growth, make the investment. In such cases, higher taxes and/or higher public borrowing can be justified. If caps and ceilings are used in a way that makes this necessary flexibility impossible -- not as emergency measures, moreover, but as a system of long-term control -- they’ll do more harm than good.

May’s embrace of blanket austerity, by the way, is bad politics as well as bad economics. Most British voters have forgotten, or never experienced, the ruinous consequences of profligate public spending. That’s why Corbyn’s expansive promises are more popular than you might expect -- and why there’ll be greater support for fiscal control if it’s seen to be smart and discriminating, rather than an act of blind ideological faith.

To be sure, the timing for a change of fiscal strategy is hardly propitious. Brexit has alarmed investors, giving the government less room for maneuver. Even so, the government shouldn’t be paralyzed -- and shouldn’t argue that cautious flexibility would make the country another Greece. That line won’t fly. Targeted spending to improve vital services and drive future growth is good policy, and Britain’s best buffer against the perils ahead.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net .