Thursday, 26 May 2016

Why Brexit should not blind us to the errors of current macroeconomic policy

The Institute for Fiscal Studies is the latest body to highlight the costs of Britain leaving the European Union (EU). It has warned that austerity measures would be prolonged by two years in the event of Brexit.

The independence of the IFS adds credibility to the case for Remain and its intervention has provided valuable ammunition to the government against the vote Leave campaign.

Yet, beneath the blur of claim and counterclaim over Brexit, there is a broader critique to be made of the present government’s policy position and of austerity more generally. This critique remains valid, regardless of Brexit. It also feeds into considerations around the need for reform in the EU that go beyond the current debate over Brexit.

The sad reality is that neither the Remain nor Leave side in the Brexit debate is offering any real alternatives at the level of economic policy – indeed depressingly, both sides seem to be taking austerity for granted. This needs to change.

The IFS suggests that lower GDP growth and extra borrowing costs caused by Brexit would worsen the public finances. The effect would be that the government would only be able to achieve its self-imposed target of a budget surplus by 2022, rather than by 2020. If Britain votes to leave the EU, then it faces two more years of higher taxes and/or spending cuts – a dire prospect.

The forecasts of the IFS assume continuity in government policy – in effect, they accept the continued commitment to a budget surplus target and with it a programme of austerity.

The criticism here is that the budget surplus target is arbitrary and self-defeating. There is no justification (other than naked ideology) for such a target at the present time – rather, under present circumstances, with a large trade deficit and weak private sector investment, there is a strong case for maintaining a budget deficit. Indeed, given the above circumstances, the government risks jeopardising recovery by sticking to its surplus target. It creates this risk by taking demand out of the economy at a time when growth is being propped up by households spending and borrowing beyond their means.

The point is that, Brexit or otherwise, the government’s current pro-austerity policy stance needs to be reversed. The danger is that the government is buying support for its own flawed economic policies by citing the costs of Brexit. In effect, it is seeking to cultivate a commonsense around the legitimacy of its macroeconomic stance, stifling critical debate. We should be wary of the diversion tactic and keep our sights on the errors inherent in present macroeconomic policy.

This is not a coded appeal to the Leave side. The latter are seemingly just as committed to the folly of a surplus target and austerity as many on the Remain side. Rather it is an attempt to cut through the rhetoric of Brexit and to promote the case for alternative economic policies (from a renewal of publically funded infrastructure investment to a revived industrial policy). These alternatives, it should be said, are ones that the electorate can potentially vote for at the next general election.

One further point can be made here. This relates to the polarisation of the Brexit debate. Either you believe in the EU or you reject it. That is how the debate has been framed. Missing is any wider awareness of the need for a reformed EU. The idea of an EU that supports greater cooperation between nations, say via an expanded EU-wide fiscal and regional policy and stronger labour rights and protections, has yet to be fully heard (though the barriers, economic as well as ideological, to reform remain formidable). This positive and progressive vision of a reformed EU indeed is in danger of being crowded out by the promotion of a commonsense that takes austerity for granted.

The choice for the electorate in the referendum is between austerity and more austerity – no other alternative is on offer. This sorry state of affairs reflects badly on the state of economic and political debate in Britain. It highlights, in short, the way in which such debate is hemmed in by a narrow agenda that is ultimately supportive of the status quo.

The referendum should be an opportunity to challenge conventional wisdom including current macroeconomic policy in Britain. In reality, it provides the opposite – a vote for continuity, and with it, an austere future. The people of Britain, and of the EU, deserve better.

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