Johnson and Hunt will turn the spending taps on, but austerity is far from over

There is a school of thought that maintains that the size of national debt does not matter, or at least not as much as people think. It goes under the general title of new monetary theory. But it is untested, especially at a time of rising interest rates

The spending taps will be opened – for a bit. Both contenders for the Tory leadership have started to make promises about ending austerity. For Jeremy Hunt it is spending more on defence, cutting corporation tax and so on. For Boris Johnson, it is more – or at least seems to be – a promise of tax cuts for the rich.

It is a familiar feature of the democratic world that politicians seeking election should make promises they will find it difficult to fulfil. But in this instance, there is a twist. Even the outgoing prime minister, Theresa May, wants to spend money to create a legacy of her period of office, though this is opposed by the chancellor.

So is austerity dead? Has it taken the toppling of one PM and the election of another to kill it? Or is this just the usual noise of politics at a particularly chaotic time?

First, a political observation, then some maths.

The observation is that there is massive pressure across the developed world for governments to ease their fiscal stance. In the US the reaction has been the Trump tax cuts, but note that the Democrat contenders to challenge him are all coming up with spending plans. In Italy the government is challenging the European Commission with a budget plan that would increase the deficit, and the response is unclear. In Germany, which has the strongest fiscal position of any developed country bar Norway, there is pressure to ease up. In France, Japan and even Canada, the pattern is the same. There are few votes in fiscal rectitude.

Now the maths. It has been a 10-year slog, but the developed world has with one exception gone some way to repairing the damage done to national finances by the 2009 recession. The exception is the US, where the deficit has ballooned in size. But the legacy of the recession is much higher national debt relative to GDP. That goes for the UK, for while the annual fiscal deficit is now down to a little over 1 per cent of GDP, the stock of debt is just under 90 per cent of GDP, more than double the level of 20 years ago. Most other countries, with the exception of Germany with much lower debt, and Japan and Italy with much higher debt, are in pretty much the same boat.

There is a school of thought that maintains that the size of national debt does not matter, or at least not as much as people think. It goes under the general title of new, or modern monetary theory. But it is untested, and when global interest rates rise (and they are the lowest they have ever been in human history), common sense says that interest payments on high national debt will be a burden on governments’ finances. The maths are that money spent on interest is money not available to spend on other things.

It gets worse. There is a cyclical problem and a structural one. All governments’ fiscal positions vary with the economic cycle. We must be close to the top of this cycle, so finances should be strong enough to withstand a downturn. And all developed countries face the structural pressures from their ageing societies. The tensions from the latter are all too obvious: the young have to do the work and pay the taxes, but the old have the votes. The tussle over the BBC free television licence for the over-75s is a foretaste of things to come.

And that is surely the most helpful way to see the promises the two Tory contenders are making. Politics requires them to respond to voter concerns about the decade-long squeeze on spending. There have to be sweeteners, even in the context of the cyclical and structural pressures noted above. So you hand out the sweeteners to the people who will give you votes to get you into office. You cannot change the maths but you hope that a few high-profile actions will get you over the line. It is not edifying, but it is politics.