Tory and Labour fiscal promises: Fantasy economics or Fantasy League?

This chart from the IMF shows the UK has been at the bottom of the G7 growth rates (remains true today in 2019). Remain is the best pathway to sustainable growth and resumption of “fiscal space” for both a rise in current expenditure (wages & salaries) and capital expenditure.

2. The UK’s economy is approx. £2.5 trillion (£2500 bn). A clear REMAIN decision or revocation of Article 50 would have the following macroeconomic effects:

  • A fall in country risk for the UK, even cheaper borrowing costs and a stronger pound
  • Higher GDP both in the short and medium-terms by at least 1% GDP every year on average (reversing the situation in the figure above)
  • Driven by resumption in private investment that has been falling in every quarter since 2018 Q1 with a likely massive spike up in the short-term that will turbo charge GDP (could be 1% of GDP alone).
  • Increased private consumption and a resumption of the currently stalled exports to EU – given lifting of uncertainty and costs related to exports to the Single Market (eg cars) – meaning higher net exports
  • Consequently, significantly higher nominal income for UK and thus higher tax receipts

3. Fiscal promises without clarity on the Brexit question would simply lead to a massive acceleration in budget deficits and UK debt without the other anchors of growth. Whilst we support the idea of higher capital expenditure for infrastructure, schools and hospitals etc. it needs to be sustainable and avoid a return to the 1970s and IMF bailouts.

4. The Chancellor’s promise to shelve the existing fiscal rule of limiting borrowing to a maximum of 2% of GDP in favour of “a new fiscal rule” allowing him to invest 3% of GDP on infrastructure projects is, to use his words “fantasy economics” absent clarity from the OBR on the current situation, the Brexit (negative) impact on growth and public finances and evidence based costing. Also shovel-ready projects don’t exist.

5. Simple point to make: Min 1% extra growth = £25bn which is greater than the promised £22bn extra Tory public investment (from loans)! We would argue that in the short term the Remain premium would be possibly 2% of GDP ie £50bn.

6. Labour’s promise of additional £50bn a year spending would endanger the macro-fiscal stability of the country: possible run on the pound, a steepening yield curve ie borrowing costs and higher imported inflation. Labour plans for limits on debt service to 10% of tax revenue appear to be “fantasy economics”. The IFS has also flagged the Labour numbers as dodgy.


Both the Tories (£100bn) and Labour (£350bn) promise a major fiscal shift from austerity to a massive scale-up of capital expenditure. Mr Javid refers to Labour’s “fantasy economics”. We can claim both are in a “fantasy league” and that the LibDems are now, de facto, the only party of sound economics and business and that the end of Brexit is the 1 and only true path to both higher growth, higher spending without excessive borrowing: (i) end of uncertainty would unlock pent up Private Investment and improve net exports (ii) international co-operation at EU Level remains the only credible pathway for sustainable and equitable growth.

* With experience across academia, think tanks, central banking, EU Accession and reforms across 40 developing and transition countries, Dr Rupinder Singh works with multilateral organisations and governments as an independent adviser. He is an Executive member of Liberal International (British Group).

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  • “Remain is the best pathway to sustainable growth and resumption of “fiscal space” for both a rise in current expenditure (wages & salaries) and capital expenditure”.

    That may well be the case…… but could the author explain how this squares with global warming and massive in-work inequality and poverty ?

  • Peter Martin 12th Nov '19 - 12:31pm

    If “the UK has been at the bottom of the G7 growth rates” and this “remains true today in 2019”, how is it that Germany is doing even worse than us? Aren’t they in the G7 too?

    I know you desperately all want to stay in the EU but can’t you, at least, manage to avoid the temptation to fiddle the data to suit your case. Not everything that is bad in the world economy is due to the UK leaving the EU. Australia is having big problems too. Are the negative effects of Brexit, which hasn’t happened yet, so pervasive?

    I don’t know where you get your Labour’s £350 billion from. I’m surprised you aren’t quoting the right wing presses £1.2 trillion! The use of interest rates to regulate the economy has reached the end of the road. It’s been an over reliance on interest rate adjustments, aka Monetary policy, which has been the real “fantasy economics” of the past 30 years or so. All it has done is shift the debt burden from Government to the private sector and priced our young people out of the housing market in the process.

    So that particular fantasy is no more. Interest rates can’t be further reduced. Like it or not, fiscal regulation of the economy will be the only game left in town. How much more Govt spending will be required? £50 billion, £100 Billion ? It’s impossible to say right now. Govts will know they’ve overdone it if the economy starts to overheat. Then they will need to be a choice made between cutting back spending and/or raising taxation.

  • If you print to much money you destroy the credablity of the currency and you end up with its value dropping. You cannot therefore print more to make up for the lost economic growth Brexit has cost us and will cost us without risking a major devaluation. Now Peter is will to take the risk, but then he thought Brexit was a good idea so risky behaviour is pretty much his default. Hard times await and Peter and Co easy solution of print more money will only work in the near term but then long term thinking really isnt a requirement for Brexiteers as every solution is easy ” Tis someone else’s fault”.

  • Arnold Kiel 12th Nov '19 - 6:46pm

    Hard to argue with the IMF-analysis, and the only logical explanation: Brexit.

    I would not linearly extrapolate this trend: so far, private investment has been cut, but the UK’s industrial footprint is essentially unaltered. If Johnson’s Brexit-plans go ahead, the UK’s industrial infrastructure will quickly become obsolete, and a quick succession of inflection points will accelerate job- and productivity-losses. Under Labour, even if their second referendum cancels Brexit in 2020, their excessive tax- and spending plans might still trigger many by now ready industrial relocation plans. At that point, all Lab/Tory spending plans will come to an abrupt halt. Public finances will quickly deteriorate and all kinds of public investments will become uneconomical for a dangerous combination of reasons: supply-problems caused by a shortage of immigrant labour and the erosion of foreign currency purchasing power and the loss of private-sector multiplier-effects of state-provided infrastructure.

    Public investment works if it triggers the deployment of private capital, but not as its substitute.

  • Peter Martin 12th Nov '19 - 8:28pm

    “Public investment works if it triggers the deployment of private capital, but not as its substitute.” ???

    Private capital comes from public investment.

    If you have £5 in your wallet, that is because, at some point, the Government spent it into existence and hasn’t yet destroyed it after catching it in its taxation net. The principle is exactly the same for any other sum too. £50 or £50 million. It is all originally the creation of government.

  • Peter,
    Just answer the question ” What value has a currency have when people lose faith in it”. When you’ve worked out that simple question perhaps you’ll stop claiming we can print yourself out of trouble. Tis the gaping hole in your plan but one you ignore because let’s be honest you can’t answer it and continue to push your tinfoil agenda.

  • Peter Martin 12th Nov '19 - 9:24pm


    OK This is your last chance.

    You probably think my business cards aren’t worth very much. You won’t have any “faith” in them as a currency. But imagine I’m the king and I can put you in the stocks, or worse, if you don’t pay your taxes. That’s a nice thought BTW. Even if you do cough up! 🙂 Your tax bill for the month? 7 of my business cards.

    Now you need to get hold of them. So I offer you a job in the palace kitchen at the rate of one business card per day. That means I get my food cooked and washing up done for a whole week! If you stay for a month you can swap the other 23 or so you’ve earned for food produced by someone else who needs them to pay their taxes.

    Are you starting to have more “faith” in the value of my business cards yet?

  • Joseph Bourke 13th Nov '19 - 12:07am

    Arnold Kiel gets to the crux of the matter when he writes “Public investment works if it triggers the deployment of private capital, but not as its substitute.”

    The state as an institution faces not wholly dis-similar constraints to major multi-national companies in this respect. The giant multi-nationals have virtually unlimited access to capital in the form of share or bond issues. It is not access to money that limits their capacity to expand their activities. What limits their capacity to grow is investment projects that generate a return on investment.
    Governments use cost/benefit analysis rather than return on investment as the metric to determine the efficiency of public investment. As a rule of thumb investment projects need to be able to generate a minimum of £1.50 in the form of social benefits for every £1 of cost (such as increased employment) to justify state infrastructure investments such as HS2.
    Wasteful or inefficient state spending is a drain on the economy that hinders productivity improvement and wage growth. It is not the amount of state spending that is critical but how efficiently state investments are managed.
    Properly funded public services in the provision of security, health, education, social security, public transport and infrastructure are an essential foundation of a successful mixed economy.
    Treasury budgets that distinguish capital spending from current spending allow for reasonable forecasts of inflation effects by both government and external investors.
    With interest rates at historic lows this is a time for greatly increased capital spending. regardless of how the Brexit impasse is to be resolved.
    The Chancellors “new fiscal rule” allowing him to borrow 3% of GDP to invest in infrastructure projects is the minimum that should be deployed at this time. In addition to this central government borrowing; local authorities that are regularly placing tenants in temporary accommodation for extended periods of time should be freed from borrowing constraints to acquire land and develop social housing to meet local housing needs. Local authority social housing is far more cost effective than hugely expensive temporary accommodation. So too is local authority provided care homes and sheltered housing.
    We don’t need to be on the wrong side of debate. Fiscal prudence in insisting on efficient investment, YES. The false economy of under-investment in public sevices, NO.

  • Innocent Bystander 13th Nov '19 - 7:59am

    Nice try but you are wasting your time. What King Peter hasn’t spotted is that his is not the only kingdom. In fact, his is surrounded by 192 others who own all the fuel, food, weapons, medicines and everything else he wants and needs.
    All King Peter has is a “John Bull” printing set and when he asks his neighbouring kings whether they will accept his business cards in exchange for the things he wants they tell him where to go in two short words.
    And he starves.

  • True Innocent Bystander poor King Peter cannot envisage that people will use other people’s business cards but if he ruins the faith of people’s in his that is what they will do. Tis sad when he obviously has spent much time coming up with his cunning plan only to have it implode when someone points out ” One there are alternative currencies and two if no one has faith in yours no one will use or accept it”. I’ve often said his outlook is tinfoil based but then tinfoil based it is.

    Spot on Peter’s solution can only work in an isolated dictorial system or a one world government. Neither option is open to him so his cunning plan is doomed to failure. It won’t stop him pedalling the fantasy though, too much time and too much delusion has been invested for him to ever embrace reality again.

  • Doug Chisholm 13th Nov '19 - 8:17am

    “Private capital comes from public investment.”


  • Peter Martin 13th Nov '19 - 8:47am

    @ Martin @Innocent Bystander,

    If you think the system is “autocratic and dictatorial” you should have spoken up much earlier. I’m not proposing anything new. It’s been working like this since the last monetary connection to gold was removed by President Nixon in the early 70s.

    Neither do the individual national systems have to be isolated. Each one will create a demand for its own currency by demanding that its taxes are paid in that currency. It doesn’t change anything at all if any one wants to pay in a different currency, providing the government changes at least some of what it is offered on the forex markets.

  • Peter Martin 13th Nov '19 - 8:48am

    @ Joe Bourke,

    The big difference between a corporation and a currency issuing government is that one can be declared bankrupt but the other can’t. One has to be in permanent overall credit whereas the other can be in as much debt as it considers appropriate. Someone has to be in permanent debt for others to be in permanent credit.

    “Wasteful or inefficient state spending is a drain on the economy……”

    As Keynes put, it we would be better off trying to be as efficient as possible in our spending, but any sort of spending can, in the right circumstances be “better than nothing”

    A good example of this is the American economy in the immediate post war period. You can’t get more inefficient than spending money to devise more ways of killing people. Yet, It was much stronger in 1945 that it was in 1941. Wages were higher. The standard of living had improved. The USA became an active superpower whereas it was a slumbering giant previously. It was a similar story in Europe albeit with a time delay. Nevertheless by 1955 the living standards of most Europeans was higher than it would have been had the war not occurred. Most workers benefited from the “permanent arms economy” which continued with the cold war that followed.

    The war spending, including the cold war spending too, created a huge leap forward in technology. There would have been no space program without it. No-one bothered overmuch with “rules of thumb” such as $1.50 to the dollar or GDP deficits being less than some decreed amount. The downside to the way the “permanent arms economy” was run was that inflation was allowed to become too high.

    The challenge is to create something similar but not have to rely on a war time mentality to rid us all of the dead hand of the neoliberals with their rules of thumb and arbitrary and nonsensical “fiscal rules”.

  • Innocent Bystander 13th Nov '19 - 9:33am

    I realise that simple, harsh reality is too boring and simple for the MMT devouts who much prefer the mysterious and arcane but to claim that a currency issuing country can not go bankrupt is utterly bizarre when scores have managed to demonstrate exactly that.
    That is why MMT is dismissed. A refusal to concede the obvious.

  • Everlasting growth is impossible. Everlasting exponential growth is impossible but the end point is nearer because the rate of destruction of our environment is increasing.
    We as humans must learn to manage our planet. Otherwise the future is Not going to be pleasant for us as humans.
    But then the present is terrible for many on our planet now, but we continue to pretend that it is not our responsibility.

  • Peter Martin 13th Nov '19 - 10:03am

    @ Innocent Bystander,

    A currency issuing government can involuntarily default on a loan taken out in gold or another country’s currency. Maybe you are thinking Argentina in this context? It can voluntarily default on loan in its own currency. Maybe you are thinking the USSR/Russia?

    It can also create the conditions for high inflation. But it can’t be declared bankrupt.

    @ Doug Chisholm,

    You seem to have some reservations about State issued money. But if you were given a £20 note, as a payment, that someone had printed in their own basement I dare say you’d have even more reservations about knowingly accepting that!

    @ frankie,

    OK you’ve had your chance. Just go away and pester someone else. Stop saying I don’t answer your questions when the problem is you don’t understand the answer. I can’t do much about that.

  • Bless Peter I think we all understand the answer, hence why you are desperatly frailing around trying to ignore the question you can’t answer ” What do you do when people lose faith in your currency”. A very pertiant question and one faced by a number of countries in the past and at the present time by Zimbabwe and Venezuela ( with a hat tip to Argentina), the answer of cause is your currency becomes ” toilet roll” and your citizens use alternative currencies.
    I really think you need to find a hobby this obsession with ” tin foil economics” really isn’t good for you, especially as your reaction to reality is to double down on tinfoil.

  • Innocent Bystander 13th Nov '19 - 12:28pm

    The problem we have here is not a deficiency in frankie’s power of comprehension.
    Rather it is these endless attempts to deny the undeniable, refute the irrefutable and scorn the blindingly obvious in the defence of a discredited fringe theory.
    If you don’t understand the concept of national bankruptcy there are hundreds of millions of humans who would show you what it looks like.

  • Peter Martin 13th Nov '19 - 12:50pm

    Innocent Bystander,

    Ok give me an example of ” national bankruptcy” of a currency issuing country. That doesn’t mean countries that have suffered very high inflation. Yes that can be a catastrophe but that hasn’t meant that they’ve had to sell off all their possessions to cover their debts.

    It isn’t just frankie who struggles with very simple macroeconomic concepts!

  • Rupinder Singh 13th Nov '19 - 1:36pm

    Thank you all for your comments. I reply and react to the relevant ones addressed to the piece directly, below:

    @David Raw: the economy would do better and grow at a faster speed under REMAIN. This would mean higher tax receipts and therefore a higher potential to spend a larger cake on priorities including “measures” to use the jargon to meet the rising challenge of Climate Change and for the safety net. We have , as LibDems, need to really reflect more clearly on the 2 points you make and I see Paul Reynolds has started to do this in part today.

    @Peter Martin: the UK’s growth rate is lower than potential. The lower speed of growth in turn means that the effect of budgetary restraint is pro-poor biased in impact. So the fact that Germany is worse off now is true but somewhat irrelevant. Without getting into the granularities of data, you are implicitly confirming the point of the pre-election bonanza of promises galore and thus “fantasy economics”. I agree with your last para that in the monetary-fiscal mix to manage Aggregate Demand, that the monetary fire-power is largely expent – although I would argue that the settlement of the Brexit saga would in itself lead to a one-time massive pro-cyclical gush of economic expansion.

    @ Arnold Kiel: nothing wrong with the IMF analysis but they don’t conclude, nor immediately a corollary, that this implies or supports Brexit, rather the reverse, which I think is what you imply given the logic of your scenarios in para 2. Agreed on your last point re public investment…shovel-ready projects don’t materialise overnight.

    @ Joseph Bourke: I agree with your summary and would add a basic fundamental: the UK runs internal (budget) and external (balance of payments) imbalances and unlike the US, sterling is no longer the global currency as store of value. The US could, arguably, run larger deficits but if we do it then our ratings would dive and cost of funding rise. So fiscal prudence is a must.

    @Tom Harney: I would rephrase the challenge: how do we live in a world of 7,8,9, 10 bn people in a globalised system of travel and communication and where climate change has yet to be really felt in terms of the massive impacts ahead (water security, food security, migration flows etc.). No easy answers but international co-ordination is 1 avenue to deal with the issues and have common positions. Beyond Brexit, we as LibDems need to re-assess our policy priorities but bottom line, “no dosh no do”.

  • Peter Martin 13th Nov '19 - 2:48pm

    @ Rupinder,

    “The US could, arguably, run larger deficits but if we do it then our ratings would dive and cost of funding rise. So fiscal prudence is a must.”

    There are several points to make:

    1) A looser fiscal policy doesn’t necessarily mean a higher Govt deficit. A looser policy could promote more private and overseas sector spending too and therefore less saving.

    2) There’s nothing special about the US$. The Japanese have a much higher GDP/govt debt ratio and also low interest rates.

    3) How are “our ratings” calculated? Japan’s are all over the place! That doesn’t mean they pay high interest rates. This would indicate a lack of any rational process being involved at all.

    4) As we all saw after the GFC, Govts can have whatever interest rates, both long and short term, they like.

    5) “Fiscal prudence” is must because inflation can get out of hand if the Govt makes more demands on the economy than it is capable of supplying. That’s all there is to it.

  • Peter Martin 14th Nov '19 - 10:08am


    “The use of seignorage as an element of public financing has long been part of the state’s financial toolkit, but its use has to be very limited ….”

    This sentence doesn’t make any sense in the context of a modern fiat currency system.

    The term “Seignorage” goes back to the time of gold coins when the “seignor” or leader would only put a fraction of the gold required to make up the face value of a coin. The difference is the profit made by him. If he put in too much gold, and the price of gold subsequently rose then it would make sense for everyone to melt down the coins for their metallic value. So the motivation to avoid that wasn’t totally driven by greed.

    Now that nearly all pounds, or euros if you prefer, are created in a computer there is, by definition, always going to be 100% “seigniorage” in every created £. So how can it be “very limited”?

    We all agree we have to create some ££ otherwise there wouldn’t be any to spend in the economy. We all agree that government spending has to be tailored to suit economic conditions and prevent the possibility of high inflation. In other words we don’t create and spend too many ££. That’s all there is to it.

    “Seignorage” has nothing to do with where the balance should be set.

  • Joseph Bourke 14th Nov '19 - 12:14pm


    a simple explanation of seignorage is here

    The more technical aspects of central bank seignorage is discussed in this article

  • Peter Martin 14th Nov '19 - 12:30pm

    @ Joseph Burke,

    I’m perfectly well aware of what seignorage is. Thank you very much. As usual, you don’t seem to be capable of explaining yourself and think that throwing out a couple of links is an effective alternative.

    Money is the creation of government as it spends into the economy. It is simply impossible for it to collect all it has created in the taxation net. You can call the difference “seignorage”, if you like, but I would say that term is best retained in its historical context only. If the government always tries to cut its spending to match its always lower taxation receipts then we inevitably have an economy which spirals ever downwards.

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