Enough Brexit fairytales. In the real world spending must increase

Theresa May has spent the weekend trying to convince people that there is such a thing as a “Brexit dividend” with the dead-eyed look of a minimum-wage sales assistant trying to get you to sign up for the extended warranty. It’s obvious nonsense even she doesn’t believe in, but her job depends on going through the motions, so go through them she will.

May’s newly announced NHS spending promises come with the vaguest funding plans possible. She announced yesterday that “as a country taxpayers will need to contribute a bit more, but we will do that in a fair and balanced way,” which could mean almost anything. Mostly, though, she is relying on the notion that money we used to send to the EU will be freed up for other things. This claim has been comprehensively, utterly debunked ever since it first appeared on the side of Boris Johnson’s infamous bus. The Office for Budget Responsibility and the Institute for Fiscal Studies have both pointed out, again, that it won’t happen and has no relationship to reality. It’s a lie, and at this stage it’s not even a very good one.

We should not fall into a false binary trap, though. The absence of the mythical dividend does not mean we will not be able to fund the NHS.

Without the Brexit dividend, the other funding options are taxes or deficit spending, and the government can’t deficit spend unless it abandons its fiscal targets. But these targets are not an immutable fact of economic logic. They are policy positions the government made for political reasons. These targets have done immense damage to the real economy of the UK, and will continue to do so while they remain in place. They can be abandoned, and they should be.

The argument for austerity is even more threadbare than it was when Cameron and Osborne pulled their con in 2010. As a new working paper from the International Monetary Fund points out, and as heterodox economists have been saying for years, the standard assumptions about the sustainability of government debt are wrong. The UK can deficit spend and issue gilts to invest in the NHS, and the country will not collapse around our ears as a result.

During the 2007-08 financial crisis the real economy took a hit, with people losing their jobs and businesses losing revenue. This meant tax revenues decreased and spending on unemployment benefits increased, and so the government budget deficit increased. Very serious and sensible people told us this meant that we had to cut spending to get the deficit under control, on the basis that this would somehow fix the economy.

This was a mistake. When the economy goes into a downturn, it is necessary for the government to increase spending and run a deficit. If it does not, as our government did not after the financial crisis, then government policy compounds the problems of the private sector, stifling growth and strangling economic recovery.

After Brexit we will also most likely see a downturn in real economic activity. Imports and exports will take a hit, which will lower productivity and raise prices. The extent of this hit depends on where Brexit falls on the hard/soft spectrum, and on the degree of additional border friction, but nobody credible believes it won’t happen at all.

This will lower tax revenues and so, just as after the financial crisis, the deficit will rise. However, arguing that this will necessitate a cut in public spending is to accept the logic of austerity. The government can run a deficit after Brexit just as it should have run one after the financial crisis. The people who argue that economic downturns make public services unaffordable were wrong then, and they are wrong now.

Those who oppose Brexit will be tempted to play up the potential downsides, but by arguing that Brexit will constrain fiscal policy to such an extent that the government will have no choice but to cut public services, they risk making their warnings into a self-fulfilling prophecy. Such arguments would give an ideologically driven Tory government the cover for further cuts, or could be used to try to argue a Labour government’s policy of increased spending was unaffordable. After years of public sector cuts, we will need to increase spending whether Brexit happens or not. Given that the most likely outcome is that some kind of Brexit will happen, it seems unwise to spend the run-up to it talking about how it’s going to mean we need to cut funding for public services, even for short-term strategic reasons.

This is not to say that we should be sanguine about the impact of Brexit. Border friction and inflation will have real effects. The stimulative impact of deficit spending will be absorbed, to a greater or lesser extent, by weakening trade and inflation. We cannot simply say that Brexit difficulties can be fully countered with active fiscal policy and leave it there. But we need to be having the discussion, in a realistic appraisal of what will happen and what we can do about it – not in a simplistic binary world where the only two choices are “all the money we get back from the EU will pay for magical ponies for all” or “Brexit means we have to sack all the nurses”.

Let’s try to learn some lessons from the last decade rather than blindly repeating the same mistakes. Making up economic fairytales for partisan advantage won’t do anyone any good.

• Phil McDuff writes on economics and social policy