While Austerity is Intellectually Dead, it is Far from Over in Reality

While Austerity is Intellectually Dead, it is Far from Over in Reality

Jonathan Portes explains why ideology, short-termism and a relentless focus on Brexit, is resulting in economic hardship continuing in the UK

Last week, government borrowing increased sharply as spending rose and tax revenues disappointed. 

Public sector workers have been awarded an above-inflation pay increase and the main feature of the Conservative leadership election, apart from Brexit, has been both candidates’ willingness to promise tens of billions of pounds of tax cuts and spending increases, to be funded by extra borrowing.

So, is austerity finally over? And was it worth it?

The Conservative argument, often echoed even in the supposedly serious press, essentially boils down to “austerity was painful but necessary, but now we can afford to relax and spend a bit more”. But, from an economic perspective, this argument makes almost no sense, for at least three reasons. 

First, it is no longer credible – if it ever was – to claim that the UK was on the verge of bankruptcy in 2010 and that there was no alternative to austerity.

Not just the UK, but almost every other developed country, has seen high deficits and very large increases in public debt at the same time as long-term interest rates have remained at the lowest levels in recorded economic history – going back to the Babylonian Empire. Arguments, whether from the left or the right, that financial markets will somehow punish governments which run persistently large deficits are political rather than economic in origin. Austerity was a political choice, not an economic necessity.

Second, even if you accept that, over time, the deficit did need to come down, the claim that we have made sacrifices which now enable us to spend more (or tax less) is internally contradictory.

For example, Boris Johnson has proposed reversing the Cameron-Osborne cuts in police numbers. But, if it is sensible and affordable to pay for a decent level of policing next year, then it was sensible and affordable to do so last year – the impact on the Government’s long-term fiscal position would essentially have been zero.   Government which, like the UK’s, can borrow easily at low interest rates, can and should take a long-term view – we neither need to nor should we decide how much to spend on vital public services by reference to this year’s deficit.    

Austerity was a political choice, not an economic necessity.  

And, third – and perhaps most importantly – the current consensus that we need much more public spending on everything from the NHS and social care to policing and defence illustrates that, reducing the deficit simply by cutting public services is economically, politically and socially unsustainable.  

Over the next few decades, as the UK grows older and richer, and technology progresses, we will both need to and want to spend more on health, education and pensions. If the Coalition Government had genuinely been serious about setting the UK’s public finances on a sustainable footing for the long-term, it would have worked out what that meant – either in terms of increased taxes and spending, or by requiring individuals and households to pay more out of their own pockets.

Instead, it did exactly the opposite. It reaffirmed the broad political consensus around good quality healthcare provided free at point of use – but made unprecedented cuts in NHS spending as a share of national income. It continued to dodge difficult choices – most importantly, who pays and when – on social care. And it cut broad-based taxes on middle-earners, by raising the personal allowance, while allowing council tax to become steadily more regressive. 

---

Running Out of Road

Every year the independent Office of Budget Responsibility points out that this short-termism can’t last for ever – that either taxes will have to go up or the Government will not be able to deliver the services that it has implicitly and explicitly promised. And, every year, the Government ignores this. At the same time, it trumpets its success in reducing the deficit over the short-term, perhaps the least important fiscal indicator from an economic perspective. 

Both the direct connections and the time lags between cuts to council funding, schools, welfare benefits and police on the one hand, and increased rough sleeping, food banks, hunger and crime on the other can be complex, long and sometimes obscure. The Government took full advantage of that, and succeeded for a while in blaming others – its predecessors, wasteful councils, scroungers and immigrants. By focusing the cuts on those who have the least power and voice – benefit claimants, especially the disabled, lone parents, and so on – it avoided alienating its core constituencies. 

It is no longer credible – if it ever was – to claim that the UK was on the verge of bankruptcy in 2010 and that there was no alternative to austerity.

But, that approach has now run out of road. As the impact of austerity has become more and more obvious, public opinion has moved decisively in favour of higher spending on public services and a more generous approach to welfare benefits. Unfortunately, however, while austerity is intellectually dead, it is far from over at the sharp end. The Government has applied a sticking plaster to the NHS, but the squeeze on other services continues.  

In an alternative political universe, we’d be having a serious debate about what the priorities are for repairing the damage, who’s going to pay and over what timescale, what the balance should be between investing for the long-term and helping the neediest in the short-term, and so on.

Instead, the entire British political debate is focused on Brexit. Indeed, Boris Johnson has made clear that, if the choice is between the British economy and the purist version of Brexit favoured by some sections of his own party, the latter takes priority.

It’s not too late to change course. But, it will require a level of seriousness from the British political class which, at least over the last nine years, has been sadly lacking.