What is austerity?

 

A brief history of austerity

Over the coming months, we will be uploading more detailed informational resources on the UK’s recent experience of austerity, on how government deficits and debts really work, and on alternative ways of managing the economy to complement the brief overview below. To keep posted, sign up to our mailing list here.

Crisis hits

In 2008, the world entered its deepest recession since the Great Depression of the 1930s. A spree of financial deregulation and reckless lending had resulted in the Global Financial Crisis (GFC), and the world economy had been brought to its knees.

In the UK, as in most countries hit by the recession, this had implications for the public finances. As unemployment rose, for instance, income tax revenues went down while more needed to be spent on social security. The UK’s government deficit – the gap between government revenue and expenditure – widened as a natural consequence of recession.

This was still not enough to support the economy. As confidence plummeted, households and businesses cut back even more on their spending, further decreasing economic activity. In order to stop the downwards spiral, the government needed to stimulate the economy – “to spend money when no one else had money left to spend”.

Prime Minister at the time Gordon Brown recognised this need to intervene. He embarked on a stimulus programme and encouraged other heads of government to do the same, for which he received much international praise. The World Bank credited his international leadership in this area with “having broken the fall” of the global economy.

At home, on the other hand, he was attacked for having ‘maxed out the credit card’ with his reckless spending. Never mind that this spending was vital to support the economy, that the extent of government borrowing simply reflected the severity of the global recession. The political priority became ‘eliminating the deficit’ and ‘paying down the debt’ – the austerity narrative had taken hold.

The austerity experiment

One of the central motivations for austerity was the idea that our deficits and debts were so high as to inspire a lack of confidence in the economy. The narrative was always that we needed austerity to ‘bring the public finances under control’ – even as the government simultaneously cut corporation tax, inheritance tax and income tax for the highest earners. By making sharp public sector cuts, the government would restore confidence and the UK would move towards a swift recovery.

This did not happen. Austerity, as predicted by most economists at the time, nipped any chance of recovery in the bud, and the UK only narrowly avoided another recession (the dreaded ‘double dip’ recession).

Confidence was categorically not restored. In 2010, the Office for Budget Responsibility (OBR) predicted that business investment, buoyed by the government’s commitment to reduce the deficit, would grow by 67.6% between 2010 and 2016. In fact, it grew by only 25.5%, which failed to make up for the collapse in investment following the financial crisis. By international comparison our investment levels remain pitifully low to this day, reflecting an persistent lack of confidence in the UK economy.

Growth disappointed, making it impossible for the government to meet its debt and deficit reduction targets. As a result, government debt rose to approximately 80% of GDP.

This is not, in itself, a bad thing. It would have been disastrous if the government tried to meet its targets and cut spending even further. The issue is that this debt was incurred for no gain. The alternative – to keep government spending up as the economy found its feet again – would have led to increases in the debt, but without inflicting unnecessary economic and social harm.

Impact of austerity

Oxford University Professor and PEF Council member Simon Wren-Lewis estimates that austerity has cost the UK an average of £10,000 per household, while real wages are still below their 2007 level.

Nor has the burden of austerity been distributed equally. Cuts have disproportionately affected women, ethnic minorities, children and the disabled. Despite George Osborne’s promise that “those with the broadest shoulders would bear the greatest burden”, the tax and welfare reforms at the heart of austerity are set to impoverish the UK’s poorest households by over £1,000 per household per year, while the richest households on average either remain unaffected or gain.

This in turn has caused widespread social harm. Since 2010, homelessness has risen by 169%. Aggressive cuts to local council expenditure have included a 50% cut in funding for Sure Start centres, leading to up to 1,000 closures across the country. Public health experts writing in the British Medical Journal have linked cuts to health and social care spending to 120,000 excess deaths.

Hindsight, looking forward

As time has passed, the case for austerity has crumbled further. The ‘research’ that armed governments with the credibility they needed to embark on spending cuts proved error-ridden and shoddy. Senior researchers from the International Monetary Fund (IMF), which initially supported austerity, have admitted that the models they used to justify austerity were flawed. The UK was never close to a Greek-style crisis; austerity was an unnecessary evil.

But still, the hold of austerity persists. We commissioned polling firm Survation to ask the public about what they thought of public spending cuts, and over half of those asked believed that austerity in 2010 was necessary, while 44% believe that further cuts are still required.

We hope to change this. Over the coming months, we will be publishing a set of informational resources and training materials on the economics behind these important issues, and we hope to provide a truly progressive alternative to austerity economics. To keep up to date with our work, follow us on Twitter here.

For two excellent articles providing a more in-depth treatment of the UK’s experience of austerity, we recommend Paul Krugman’s The austerity delusionand Simon Wren-Lewis’ ‘The austerity con’.