Britain's austerity has millions of losers
While a new report shows wealth of Britain's winners has trebled by £7 trillion
Prospect magazine editor, Alan Rusbridger invited me the other week to a debate with Lord Nicholas Macpherson - top civil servant at the British Treasury from 2005-2016. The subject was ‘Austerity - Past and Present’, with the past including Lord Macpherson’s spell under Chancellor George Osborne. It was, as you would expect, a lively exchange. To read about it look out for the transcript which will appear in the April edition of Prospect. There may also be a podcast… I will keep subscribers posted, and provide links.
But that got me thinking - yet again - about the economic ideology behind austerity, and its impact. The fact is the debate is now settled. Austerity has inflicted “vast damage on public services and the public sector workforce” as we first argued in PRIME’s The Economic Consequences of Mr Osborne (2010 and 2016).
But while the economic debate is settled, austerity is not. A new report from the New Economics Foundation: - Austerity by Stealth - reminds us that austerity is still embedded in Britain’s political discourse and is still a threat to Britain’s social infrastructure.
Since 2010, the impact of austerity on public services has been devastating. Suppressed public sector pay has caused a crisis in recruitment and retention, leaving public services critically understaffed. Cutting corners on investment has left nine in ten schools in need of repair and a £10bn backlog of repairs in the NHS.
And as NEF’s Alfie Sterling shows, in a more plausible scenario for inflation than that currently chosen by the UK Treasury, the unrelenting cuts to public spending are baked in, if inflation is taken fully into account. Then
real spending on public services in 2027/28 [can be expected to be] £28bn lower than the government’s current projection, £8.9bn below spending today, and £24.9bn below 2009/10 levels
British workers (the 99%) have already lost out badly both in terms of income and public services, no doubt as intended. Average real wages for British workers are not expected to return to their 2008 level until the end of the 2020s!
And one in four British children now live in poverty.
Words have not been eaten, policy has not been reversed, and because of inflation and without a change in course, austerity is set to bite even harder.
Which is why the forthcoming Prospect debate is still so important.
Orthodox economics discredited
The economists that called austerity “expansionary fiscal consolidation” – in an attempt to fool us all – have been discredited, and laughed out of court. That is in part because on their own terms austerity did not stimulate the wider, private economy. Instead it has caused the British economy to lose around £400 billion of GDP compared with what the OBR forecasted in 2010.
As the TUC’s senior economist, Geoff Tily explains in his 2023 report: From the Doom Loop to an Economy for Work, not Wealth - compared with pre-1979 trends, GDP has fallen short by £2 trillion or nearly half. Over the same time period those with wealth have seen their wealth (household net worth, adjusted for inflation) treble by £7 trillion.
The destructive impact of the 2007-9 Great Financial Crisis was deepened and exacerbated by austerity. Contractionary policies were advocated initially and albeit tentatively, by the Labour government’s Alastair Darling and then by Conservative Chancellor George Osborne. Lord Nicholson was the civil servant directed to implement these policies. As a direct result, public debt rose from 56.6% of GDP in July, 2009 (i.e. after the financial crisis) to 90 per cent of GDP in 2013.
Britain’s rising public debt can therefore be attributed to the 2010 Conservative-Liberal Democrat coalition government’s determination to worsen the crisis by making the biggest cuts to state spending and investment since the Second World War. They actively planned to amplify unemployment by adding the loss of 900,000 public sector jobs between 2011 and 2018. As a result, the unemployment rate remained above 7 per cent after 2009 – including youth unemployment and long-term unemployment and both absolute and relative poverty increased.
As a result we now live within an economy designed to serve the interests of the wealthy - not workers - or indeed the climate, as the TUC correctly argues.
Worse, British society has not been prepared for, and protected from imminent threats posed by rising global temperatures and associated biodiversity losses. Austerity prevented - and now continues to dog - urgently needed investment in the public infrastructure needed to protect us all from coming climate shocks. There is a clear question of whether the goal of keeping the global temperature rise below 1.5C – is still ‘alive’.
Public debt as a consequence of economic policy failure
Having noted these dismal economic facts we must avoid falling into the trap of arguing that public deficits and public debt do not matter.
The fact is high levels of public debt are a consequence of economic policy failure, not a cause.
British government debt has risen because the economy - and in particular employment - was plunged into a slump by those who caused the Great Financial Crisis, and then weakened the economy by austerity.
At times of economic weakness, when unemployment is high and employment is low-paid and insecure, tax revenues fall, as night follows day. The fall in tax receipts causes public deficits and debt to rise.
In short, public debt rises because of a) the impact of crises in bankrupting firms b) the resulting fall in employment and therefore tax revenues and c) the rise in welfare spending on e.g. unemployment benefits.
“Follows” is the operative word.
Contrary to much commentary, tax revenues do not and will not finance investment in economic activity or in green infrastructure.
Investment is financed by credit or borrowing.
Tax revenues are a consequence of that investment in economic activity. As we all know from our own experience. We pay taxes at the end of the month or year - after we have earned income - not before.
When investment in social and physical infrastructure and employment is low, tax revenues fall, naturally. When the economy enjoys investment in full, skilled and well-paid employment, tax revenues rise, and the government budget is restored to balance.
As night follows day.
In a debate on the austerity of the 1930s, Keynes in a radio interview famously rebutted the age-old argument for austerity made by the Conservative, Sir Josiah Stamp, ex-Director of the Bank of England.
“But Stamp” said Keynes
“you will never balance the Budget through measures which reduce the national income… it is the decline in national income which is upsetting the Budget.”
Taxes do not pay for public spending
When politicians of both the left and right tell us that to pay for this or that public service, they will, and they must, raise this or that tax, they are deliberately misleading the public.
As noted above, and to repeat: taxes do not pay for services and infrastructure.
While it may be important for re-distribution reasons to tax the rich, it is not necessary to raise taxes for investment or spending.
Credit or borrowing pays for the initial investment in, and spending on, both the social and physical infrastructure of the economy.
That social and physical infrastructure investment creates jobs - in both the public and private sectors. Employment generates income – wages, salaries, sales income and profits - for the individual, for households and for firms.
That income in turn generates income (tax revenues) for government. Higher tax revenues from employment help to “balance the books”.
That is why it is an economic imperative for the Conservative government to reverse austerity. To increase investment in both social and physical infrastructure, and in the pay of public sector workers.
By that means to reverse the long-term decline in real pay, and thereby help restore balance to the public finances.
If government fails to do so, our social and physical infrastructure will not be resilient, and will fail to meet the crises of the future. Real incomes relative to inflation will continue to fall; families will snap their purses shut; firms will make losses; tax revenues will fall; public and private debt will rise, and the economy will continue to fail the people of Britain.
Yes, yes, yes, . . .
I also suspect that without that wage & service shrinking austerity the Brexit vote would not have resulted in a 'leave' - that was like the roof falling in on the emptied house.