What will deficit politics look like?

Even the keenest, most aggressive deficit-cutting rhetoric used in any of the main political parties still envisages a large deficit for many years to come. Politics over the next decade is likely to be hugely shaped by this backdrop. It won’t squeeze out all other issues but, just as the 9/11 terrorist atrocities caused civil liberties and foreign affairs to dominate much of the political debate in subsequent years, the deficit is likely to dominate over the next few.

What will the practical consequences of that be? What issues may come to dominate political debate?

Privatisation returns

How to cut debt? Selling off assets is one option. For the last few Parliaments, privatisation has been mostly off the political agenda, and where it has been pushed – as with Royal Mail – it has been a matter of arguing over how the service can survive, rather than any particular need for revenues from the sale. Expect that to change as more sell-offs are pushed simply to pay off debt.

Inflation looks less bad

The idea that low inflation is good, achievable and sustainable has become such widespread conventional wisdom that the question of the Bank of England having an inflation target is almost never discussed, nor even is the level at which it is set.

Yet in the past inflation has played a major role in tackling large government debt – eroding its real value year after year.

Low inflation brings many benefits, but it would be surprising if no-one starts being attracted to relaxing a bit on inflation in order to speed up the reduction in debt.

Where will growth come from?

Debates about export-led growth or growth driven by consumer consumption have had a low profile in Britain in recent years. The balance of payments statistics get almost no coverage and the edge has come off debates amongst domestic economists on the causes of growth. With many firms and consumers laden with debt and with a public sector overall having to prune rather than splurge, the question of what drives economic growth is likely to move centre stage, not just in terms of tax cuts or not but also in terms of how the economy should be structured.

Should profits flow overseas?

Britain has benefited massively from having an open economy over the previous decades and even centuries. But when companies such as Google dominate certain sectors, earning large profits and paying taxes on much of them to other governments, will that historical record be able to sustain the immediate demands that foreign companies should pay more tax in the UK rather than UK residents having to pay up more in tax in order to cut debt?