The reasons for the failure of the Tory election campaign have been well rehearsed. They include the decision to make PM Theresa May the focus of their campaign while stressing the need for "strong and stable" government against the incompetence and extreme policies of Corbyn. But May lacks charisma, is unable to think on her feet and does not have a common touch. And the strong and stable mantra was an insult to the electorate's intelligence. In contrast Corbyn was grossly underestimated as it was forgotten he is a veteran campaigner and was very comfortable in the election campaign and able to convince a very impressionable younger generation of his supposed sincerity and caring for the poor.
This was reinforced by the respective manifestos, with the Tories being too honest of the challenges ahead but also failing politically to realise the electorate has had enough of austerity and desperately wanted change. They also failed to mention the need for social justice that May had dwelt on when elected Conservative Party leader. In contrast Labour judged the mood of the country better and got its populist, anti-austerity and generally more optimistic message over better - through social media in particular - that there was a way forward even if their sums did not add up. On top of this the reversal of the so called dementia tax did nothing for the Tories strong and stable message. Finally, Labour managed to sideline the issue of Brexit, the original reason for the calling of yet another election.
But the Tory manifesto also failed from an economic perspective. While the Tories were honest in acknowledging some of the key economic challenges ahead such as the need to tackle social care, the need to deal with an aging population and also to promote fairer intergenerational equity (see blog 22 October) it failed overall by not fully abandoning austerity (despite recent loosening of balanced budget targets) and promoting a fiscal stimulus.
In a previous blog on 10 October I talked about monetary policy having been overworked, of low interest rates providing the opportunity for fiscal stimulus and the positive side effect of increased government spending on aiding redistribution of income. It would also raise growth at a time when GDP growth is finally slowing without the risk of the economy "overheating", and by prioritising infrastructure spending boost the supply side of the economy and raise very low productivity growth.
International financial market developments are also very supportive of a good old-fashioned Keynesian stimulus. Global bond yields have dipped again leaving real bond yields of advanced countries in the US, UK, Eurozone and Japan low or even negative. The reason for this is attributed to the so-called "safe asset shortage". The idea is that there is a large excess global demand for safe, liquid and highly tradeable government debt for whatever reason. It is thus argued these countries can raise spending without pushing up their own government bond yields rapidly, a sort of " free lunch". Eventually though yields will creep up not least because the shortage will erode as bonds issued rise to fund higher budget deficits.
Another factor in weakening the case for continued austerity is the demolishing of the now-infamous 2010 economic paper 'Growth in a Time of Debt" by Reinhardt and Rogoff. It claimed that a 90% government debt to GDP ratio is a critical threshold at which a fiscal crisis like seen in Greece could occur. But the data was proven to be flawed and most now argue that Greece is a special case among advanced countries.
With a number of years fiscal austerity, front-loaded into the 2009-2011 period, the fiscal deficit was brought down to around a third of what it was in 2009 so that it stands today at some 3.5% of GDP. This has greatly boosted policy credibility and given the scope for significant fiscal easing without the need to raise taxes and so able to take advantage of favourable market trends. This may not last and certainly the UK must be cautious not to raise spending too rapidly or much on current spending which could damage credibility. It should be noted that the UK has not run a surplus since 2001 and it is much easier to raise spending than cut it. Remember also that the UK's debt to GDP ratio is still rising and approaching 90%, notwithstanding the improved debt maturity profile. While there are signs that the global economy is picking up, the next crisis or downturn may not be far away. For the UK the concern is the uncertainty of Brexit. However, for the UK and other advanced countries fiscal stimulus will give more scope to raise interest rates which will give space to cut rates in the next downturn.
So there is both an economic and political case for fiscal stimulus in the UK.
