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May promises end to austerity. But don’t get too excited

Alanna Petroff
·Senior Economics Correspondent at Yahoo Finance UK

Prime minister Theresa May proclaimed on Wednesday that the end of her government’s austerity push was coming in 2019, after nearly a decade of cuts to public services. But critics are wary whether that’s a promise she’ll be able to keep, or whether it’s even the right decision.

“A decade after the financial crash, people need to know that the austerity it led to is over and that their hard work has paid off,” May said in a speech at the Conservative party’s annual conference in Birmingham.

May said the government’s new multi-year spending plan due next year would continue to bring down debt levels but would see support for public services go up.

The announcement was met with cynicism.

“May’s claim that this is an end to austerity is a complete con,” said John McDonnell, the Labour MP and shadow chancellor, in a tweet.

May promised to end UK austerity in 2019. Photo: Jeff J Mitchell/Getty Images
May promised to end UK austerity in 2019. Photo: Jeff J Mitchell/Getty Images

The Brexit threat

A potentially disruptive no-deal Brexit could be around the corner in March 2019, threatening UK jobs, trade and even flights. That could force the government to rethink its spending plans as it faces the prospect of lower tax receipts.

May said the new spending plan would come only after the country had secured “a good Brexit deal”.

“This isn’t the end of austerity because we don’t know what Brexit is going to do for economic growth,” Capital Index research director Kathleen Brooks told Yahoo Finance UK. “Brexit is going to be key.”

Kallum Pickering, a senior UK economist at Berenberg bank, said a move to ramp up government spending was unwise. It goes against the age-old wisdom of being financially prudent during good times to prepare for bad times, he said.

“Now is not the time to step back from the current policy of gradually reducing the debt,” he told Yahoo Finance. “It’s better to be disciplined with fiscal policy during the good times.”

Plus, a potential government spending spree could inadvertently lead to higher inflation levels, forcing the Bank of England to raise interest rates to slow things down.

“When it comes to fiscal policy, there are trade-offs, not solutions,” said Pickering.

UK government finances are in much better shape now than they were, though the government continues to run a deficit. Britain’s budget deficit has been cut from nearly 10% of gross domestic product in 2010 to about 2%.

May’s finance minister Philip Hammond has said Britain’s public debt levels remain too high at more than 84% of GDP and he has vowed to bring down that ratio each year.

With files from Reuters