The hard-headed case to end austerity now
As the parties prepare to unleash their manifestos on an unwitting public in the carnival of this spring’s General Election, one question will define all else: what position will they take on tax and spend? Or, put another way, will they continue the 7-year old policy of government retreat known glumly as… austerity?
Promises, promises
Even without the help of astrological charts, we can predict with some certainty what the major parties will say.
The Tories, only months after abandoning George Osborne’s phantasmic goal of balancing the budget by the end of the decade, will likely to stick to their current, vague pledge of bringing the budget into balance early in the 2020s.
The Office of Budget Responsibility thinks that will be hard under the Chancellor’s current spending plans — they’re predicting a deficit of 0.7% by 2021/22, stubbornly above target. But the target itself, a balanced budget, will remain.
We’re unlikely to hear about fiscal rules from Labour — no party wants to tie their hands if they can avoid it. But we will hear plenty from them about reducing the deficit, probably through higher economic growth.
Note that even Labour, the anti-austerity party, is still committed to deficit reduction. Their spending plans will rely on tax cut reversals and faster growth, not more borrowing.
The human case
But does tackling the deficit still make sense as a foundational assumption in British politics? It’s not a trivial question. If our only objective for the next 5 years was to keep the deficit as a percentage of GDP steady, rather than reducing it to 0.7% as the Tories plan to, we could spend £50 billion more per year by 2021/22. That’s about the size of the education budget.
The main argument you’ll hear for this is a human one. The cost of austerity is just too high for families made homeless, parents forced to use food banks, and the 1.2 million elderly and vulnerable people who don’t get the social care they need.
As the finance lead for a London council, I see the toll that government cuts have taken and I wish every day that it weren’t so.
But as long as the Prime Minister can argue that austerity is the sine qua non for a strong economy, progressive arguments will fall on deaf ears.
The fiscal case
That’s why we need a hard-headed look at the fiscal case for spending cuts and whether it still makes sense today. We start with a bit of deficit history.
The chart above explains why the deficit became such a dominant issue in the early 2010s. Tax receipts fell through the floor in the financial crisis, leading to a post-War high in the gap between government earnings and its outgoings. From 2010 onwards, the deficit fell as the Con-Lib Coalition applied the brakes — though they fell far short of their promise to balance the books by 2015.
But accepting the deficit as a major issue back in 2010 is no reason to believe it should be our overriding metric of success today.
In fact, the current deficit of between 2.5% and 3% of GDP is well within historical norms. The chart above shows that running small and stable deficits has been an entirely normal feature of fiscal policy for most of our post-War history.
It’s also within the bounds set by the EU for eurozone countries to stop individual governments “free riding” on German prudence to borrow cheaply (and excessively) in euro-denominated debt markets. Even hard-nosed Teutons would look at our deficit and say: Das ist ok.
One argument for persisting with the goal of deficit reduction is to reduce the size of the national debt.
Britain’s debt currently stands at close to 90% of GDP, a half-century high. But our debt-to-GDP ratio is as much affected by the size of the economy as it is by the sum of our outstanding balances — just as the absolute size of your mortgage matters less than how it stacks up next to the size of your paycheck.
In ordinary times, paying down the debt might be a sensible use of cash. We don’t live in ordinary times.
The risks to our economy over the next three years are intense, not least from the rollercoaster ride of Brexit negotiations. Business investment is falling. Consumers are being hit by rising prices. And exporters face the most uncertainty of all.
In short, this is hardly a time to withdraw large amounts of government spending from a fragile economy that is set to become even more fragile. You can fix the roof while the sun is shining — but it’s not much use if the walls are falling in from either side.
At a time of record low interest rates, lowering the debt is much less important than keeping government fuel pumping round the economic engine.
The economic case
The fiscal argument for continued austerity may be weak. But perhaps tackling the deficit is still a worthy goal on prudential grounds — a sense that it’s better to save than to spend.
That logic might work were it not for the damage that spending cuts have on the fundamentals of our economy.
Think about the impact of NHS waiting times on productivity. Small business owners spending hours waiting in A&E with their kids instead of growing their enterprise. Staff members off sick for days instead of hours because they can’t get an appointment with their GP. Thousands of elderly patients stuck in hospital beds because the under-funded social care system is too stretched to help.
The list goes on. Cuts to Universal Credit will drastically reduce work incentives for low-income families. An ever-more targeted welfare state is fuelling a ballooning bureaucracy of claimant assessment — assessments which may now cost more to run than they save in reduced benefits. Public health, an area widely seen as delivering huge bang for its buck, is now diminishing, creating costs that the NHS and wider economy will have to bear.
Even in areas where the economic cost is less visible, the impact on our long-term economic strength may be significant.
For example, surely school funding cuts are the wrong call in an era of unprecedented automation, where workers will need the best education they can get to stay ahead of machines? In the same way, closures of Children’s Centres grate against the evidence for early childhood intervention.
Soft heart, hard head
There is a human, softer case to be made against all these cuts.
But that’s not the case I’m making. Instead, in each of these areas where the government is withdrawing spend to tackle the deficit, there is a hard-headed economic argument for why it may cost us more than it saves.
It’s the argument that the state is not only a mechanism to create a fairer economy — but a bigger economy too. That government can be, in certain areas, the most efficient provider of services. And that public investment can lead to private, as well as social, returns.
Debating macroeconomics is rarely seen as a vote-winning strategy in the heat of an election campaign.
But when the outcome of that debate — a hard-nosed, rigorous, and brutal look at the numbers — will affect £50 billion of public spending, then it might just be an argument worth having.
Austerity may have, perversely, become good politics. Whether it’s still good economics too is now in doubt.
Adam Swersky is a councillor in Harrow and cabinet member for Finance and Commercialisation. He writes in a personal capacity.
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