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Thatcher’s Household Fallacy Led to Austerity and Killed Thousands – What was the Point of it?

Stephen Colegrave delves into the real reasons behind austerity and considers whether it was just a political fallacy.

Stephen Colegrave delves into the real reasons behind austerity and considers whether it was just a political fallacy.

Austerity didn’t end when Theresa May first announced its demise at the Conservative Party Conference in October 2018.

Many public services were still starved of budgets and local councils were unable to reinstate important services after a 60% decrease in Government funding. When Sajid Javid, nearly a year later, said that the Government had “turned the page on austerity”, millions of people on benefits had not seen their payments rise in four years.

This General Election looks likely to finally kill austerity, with both Conservative and Labour economic plans overturning its principles. But, what was the point of it in the first place?

It certainly doesn’t appear to have contributed to the economic well-being of the country. The New Economics Foundation estimated that the UK economy was up to £100 billion smaller because of the policy of austerity. Apart from hedge funds, bailiffs and pay day loan companies, we all suffered the effects of austerity – but some much worse than others.

The impact was brutal and deathly. Following the Welfare Reform Act in 2012, the number of children in relative poverty rose by 650,000 in 2019. In 2017, The Royal Society of Medicine stated that austerity measures were likely to have been responsible for 30,000 deaths in England and Wales just in 2015.

 On this basis, it is not outrageous to estimate that austerity killed more than 100,000 people and probably more if researchers at UCL are to be believed – in 2017 they estimated that more than 150,000 deaths would have occurred between 2015 and 2020.

If anyone tells you that austerity was essential, ask them if 100,000 deaths were necessary for an economic theory. Didn’t John Maynard Keynes debunk all of this in the 1930s? Why an earth did we inflict self-harm on such a huge scale? Was it simply a political conceit?

The ‘Wisdom’ of Housewives

People will say that it all goes back to the 2008 banking crisis. However, I think it goes back to Margaret Thatcher and her corner shop upbringing.

It was her over-simplification of economics and her appeal to the middle-class housewife that led to a perversion of economic theory that cast a long shadow over Conservative policies and even aspirant Labour Governments which wanted to be fiscally responsible.

Historians will see this as a battle between the economics of Keynes and Milton Friedman – or a British version of the classic Democratic large government and Republican small government divide.

Some of this may be true, but it is not enough to push us all like lemmings over the austerity cliff.

Sadly, I believe that the real reason for this was ‘the household fallacy’ – a phrase coined by Roger Farmer and Pawel Zabczk in their NIESR report of 2018, and its chief and charismatic promulgator, Mrs Thatcher. She was a great advocate of the ‘household fallacy’, even right at the beginning of her career.

“The Government should do what any good housewife would do if money was short,” Thatcher told her adoption meeting as a Conservative Candidate for Dartford on 28 February 1949. “Look at their accounts and see what was wrong.”

Even if it just started as a great way to connect with her middle-class voters, the problem was that the rhetoric soon infiltrated policy.

“I can’t help reflecting that it’s taken a Government headed by a housewife with experience of running a family to balance the books for the first time in 20 years – with a little left over for a rainy day,” Thatcher told the Conservatives Women’s Conference in 1988.

This way of running a country went out with Henry VIII, when bankers were needed to finance wars. The ‘household fallacy’ is a like holding on to the Gold Standard, which even Churchill couldn’t defy economic realities to retain.

The reality is that a household does not have to invest in jobs, pay for the sick and maintain infrastructure like governments do. Unfortunately, however, the fallacy was used to justify austerity.

It even affected Gordon Brown, who accepted the 1997 spending limits he inherited from Ken Clarke, and continually talked about “economic prudence”. Admittedly, prudence wasn’t austerity and New Labour did finally give the NHS the money it needed. But, Blair and Brown continually needed to show prudence because the British public had been told that the national economy behaved just like that of a household.

Austerity Trumped

In 2010, the year of the General Election that would end Labour’s power, the Chancellor Alistair Darling admitted that his planned cuts in public spending would be “deeper and tougher” than Margaret Thatcher’s in the 1980s. It was another example of the long shadow of Mrs Thatcher.

This added to the Coalition Government’s blatant policy of confusing the electorate about the deficit and debt. Most of the electorate thought that the deficit was as real as debt, but the deficit is always only a forecast of spending and expected revenue. Of course, the less you plan to spend, the less activity there is and the less tax revenue you expect to earn so the deficit expands and you need to cut more drastically.

The Government apparently never played around with the forecast to see what happened if you invested and increased tax revenues because that would ruin the austerity story. It even set up the Office for National Statistics to add a stamp of approval.

So, like the ‘household fallacy’ 30 years before, austerity was a political construct. It was a great way to talk to voters and appeal to their personal finance experience. We were all made to feel excited because Moody’s gave us an AAA rating – but at what price?

In 2018, the UK ranked 24 out of 32 OECD (Organisation for Economic Co-operation and Development) countries, with public investment at 2.6% of GDP – 0.6% lower than the OECD average. It is no coincidence that our transportation infrastructure is crumbling, especially in the north, as now identified in the Northern Powerhouse proposals from the Conservative Party.

It is interesting that the Tories were only prepared to drop one policy of self-harm based on fallacy because it has been trumped by another – Brexit.

Suddenly, the fundamentals of austerity have been wiped away in the face of recruiting potential northern Labour leave voters. It is almost as if shrinking the economy by £100 million is not enough and another 2.5% is just enough to teach us all a lesson in economics and politics.

It is ironic that the Conservative Party, which has prided itself on not being taken in by political dogma like the Labour Party, has been responsible for the two biggest political conceits for the past 100 years: austerity and Brexit.

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