Austerity in the UK

A layperson’s guide to the motivations behind austerity, and the economic impacts — by a layperson

(or how I learned to stop worrying and love the deficit)

Dust from the election settles, yet a decidedly unsettled tension remains. £12Bn of further cuts to public spending loom heavy, once again destined to burden the nation’s most vulnerable.

Think whatever you like about George Osbourne. You’re totally free to think he’s a multimillionaire cretin who has barely held down a legitimate job, hellbent on destroying the lives of the most vulnerable people, like a demon-child slowly extracting the legs from a spider. A shape-shifting lizard constructed in a lab from the crystallised fear of “lesser humans” galvanised with 24-carat deluded self-importance. If that’s your view, don’t let me try to persuade you otherwise.

Lately though, in an attempt to avoid only searching for the narrative that best suits my own values, I’ve been determined to understand him. I’m going to assume he’s not actually a crazed reptilian lunatic and — in order to correct for my bias — I’m going to assume that there really is a reason for this harsh austerity, and seek to understand it.

When talking with friends and family in the run up to the election, a theme kept repeating itself that bothered me; even left-leaning voters reciting “well, I do think we need to balance the books”. It struck me, however arrogantly, that if I didn’t know what “balancing the books” really meant in national economic terms then there’s a decent chance neither did many others. I wanted to be able to challenge what I’d been hearing, because something about it felt like a convenient fear-trigger used by politicians to control opinion, but I couldn’t escape the fact that I didn’t have a clue what I was talking about.

So I decided to start studying the subject, which I must warn you, is a miserable hellish mess. The following article is the result of said misery.

“I’m afraid there is no money”

The infamous note left at the treasury might have been meant as a joke, but it now represents something more. The need for change in economic policy seems accepted by the public, including those who vehemently disagree with how this has been implemented. That is, even the most ardent anti-austerity protester probably has some niggling feeling in the back of their mind that we are, or certainly have been, in the midst of what economists call “a clusterfuck”.

What must be debunked though — if indeed anyone is still hanging onto this notion — is that Labour’s public spending caused the economic crisis, which in turn warrants Osbourne’s austerity programme. In the words of Senior Economics Commentator at the Observer, William Keegan:

“It can hardly be emphasised enough that it was the banks that caused the crisis, not Labour’s public spending plans […]. Labour’s public spending plans were not responsible for the financial crisis that hit the US economy, France, Italy, Spain, Greece and other members of the Eurozone.”

We can easily get sidetracked by criticising light-touch banking regulation, but that’s a whole other piece in itself. If you wish to learn about the horrors of free market fundamentalism then (love him or hate him) Russell Brand’s film The Emperor’s New Clothes is an accessible place to start.

Back on public spending, even though it was clearly not the cause of the economic crisis in 2007, it continues to be used crudely to bash Labour around the head with — indeed it was a key part of the Conservative 2015 election campaign. But as it turns out, Labour’s track record on reducing the yearly budget shortfall isn’t so bad…

The reality of public spending is best measured in public sector debt as a percentage of gross domestic product. Put simply, the amount of yearly debt the public sector racks up, expressed as a percentage of the nation’s output. Numbers from the Office for National Statistics show this was in fact higher under every single year of Ken Clarke’s chancellorship (1993–1997) than it ever was under Gordon Brown. For example, it was 41.9 per cent in 1995–1996 and 42.4 per cent in 1996–1997. Brown had reduced this to 29.7 per cent by 2001–2002, and despite additional investment in education and health services it was still only at 39.5 per cent in 2006–2007, just before the crash.

Labour has recently showed incredible prowess at neglecting to defend themselves on this subject. I mean really, quite bizarrely stoic in some ways. Of course there are other factors, but that the Conservatives managed to use Labour’s public spending record as a way to win debate regarding the economy is either incredibly impressive on their part, or incredibly pathetic on Labour’s.

Between the lines of all this blame-shifting on public spending policy, lie two opposing economic theories; Chicago School Economic Theory, and Keynesian Economic Theory.

Ideological economics

The only other time since 1945 that the UK has suffered at the hands of austerity was actually immediately after the Second World War. Our economy was completely ruined — there really was no money left.

To dig us out of this hole, loans were arranged from the US, negotiated by British economist John Maynard Keynes. These loans, and later the Marshall Plan were required for us to save our economy. They also paid for the creation of the NHS.

Before the war Keynes had already changed the world’s view on economics. In 1934 he visited the White House to urge and ultimately influence Franklin D. Roosevelt towards the creation of the “New Deal”, which rescued America from the Great Depression. A key theory underpinning Keynesian Economics, widely accepted to this day, is that economies run in cycles of boom and bust, and that the best solution for managing this is for governments to pump money into their economy during times of recession, going into debt if necessary. This stimulus increases employment and productivity, and thus expedites recovery. During the “booms” governments must in turn reduce spending and raise taxes. To mend the roof whilst the sun is shining.

One crucial component of this theory is something known as the multiplier effect. That is, the principle that any increases in public spending affect the total levels of spending by a multiple of that increase. Since people have money to spend, demand in the economy will ultimately rise. The multiplier effect shows that the value gained in economic terms is higher than the amount of government spending required. It can be thought of like a feedback loop — but people must be in a position to spend in order for the loop to build up.

In short, increasing public sector spending during a recession catalyses and expedites recovery, and the short-to-medium term debts incurred to fund this don’t matter so much in the long run. Economies always recover, eventually.

An alternative theory, the neoclassical Chicago School Economic Theory, suggests instead the absolute minimum of government intervention, and the free and unregulated nature of the markets to ensure long term growth. Perhaps its most famous member, Milton Freidman argued for lowering taxes wherever possible, whenever possible, “given any excuse”. The reasoning being that it is the barriers of taxation and the burden of the state that cause the requirement for government intervention of the Keynesian kind, and ultimately hinder long term economic growth.

Thus the desired outcome is a smaller state, with lower taxes for all. If we follow the principles right through, a small state is all that’s required in a prosperous economy. Just enough government to manage legislation, but reduced responsibility on the state to provide welfare. Ultimately, in a well-oiled economy, wealth will naturally “trickle-down”.

Trickle-down is problematic, because it’s intrinsically married to increases in relative poverty — that is an increased disparity between the richest and the poorest. But proponents of the theory argue this is moot when in a prosperous de-regulated market-driven economy, overall poverty decreases. The rich may be getting richer and richer, but the poor are better off thanks to this wealth. It’s important to recognise this for what it is; simply a means for trickle-down believers to sleep at night.

The reality is quite different to the theory. What actually happens is the rich pay less tax, the disparity between the richest and the poorest increases, the poor begin to accumulate more debt, the economy starts to grind under the strain of reduced spending, and eventually crisis occurs.

Note that this isn’t crudely just Socialism vs Capitalism. Both models incorporate capitalist economies, and both include some form of welfare state. But there is a particular distinction along those lines which I’d like to draw attention to.

In a Keynesian world, the goal is a balanced and healthy economy with a better-off working class and fewer people in poverty. It hinges on productivity — if the working classes are productive, the nation’s output increases. In a Chicago School world, there is more reliance on pure capitalism — the making of money from having money — to drive wealth up for the rich. It matters less that the working classes are productive. As such, it is an ideology which serves the elite, and not the greater good of people. It doesn’t even serve the middle classes, though the mirage of “trickle-down” can feel almost close enough to taste for those with businesses and land.

Over the decades these theories have been further refined — there are obviously many permutations and advanced cases which supersede my simplistic explanations — but the respective ideologies are important to keep in mind.

Supporters of Chicago School Economic Theory include; Margaret Thatcher, Ronald Reagan and George Osbourne.

“We must clear the deficit”

In 2010, the Coalition came to power, and George Osbourne became our chancellor. At this point (post crash), unemployment had risen by 800,000 putting further strain on the welfare bills. As a result, the public sector debt to GDP ratio (described earlier) had risen to 43.5 per cent in 2008–2009, and then to 52.5 per cent in 2009–2010.

Osbourne declared that the deficit must be cleared, and that this would require several years of austerity.

This issue of deficit reduction was a hot topic at the most recent election once again, but still I’m fairly sure the details have been lost on many of us. Put simply, the deficit is the yearly amount of government spending that has exceeded income from taxes, including any interest due on borrowing. The deficit is met each year by this borrowing — the Bank of England issues bonds in exchange for loans, and these loans must eventually be repaid with interest. The national debt is simply the running tally of year-on-year deficits.

It’s really easy to raise fears around the subject of debt, because of how our own personal debts affect our anxiety levels. I was bewildered when watching Ed Miliband fail so miserably to answer a question from a member of the public, along the lines of; “you broke the economy by spending more than you had. If I spend all my money, I can’t afford a pint at the end of the week, it’s that simple. Why can’t you understand this?”

National economies work very differently to our personal finances. There are interest rates, currency exchange rates and the balance of overseas payments (i.e. international imports compared to exports) to name just a few factors. In order to influence the economy, there are two kinds of policy which can be actioned; fiscal policy, which are adjustments to public spending and taxation affecting “the budget”; and monetary policy, which are adjustments to interest rates but also currency valuation and in rare cases — as was the case after the crash — provision of currency through “quantitative easing”.

An economy’s health depends on a balanced approach to both fiscal and monetary policy. In other words, what matters is balancing the economy, not just the budget.

Osbourne was and still is obsessed with balancing the budget, even if it is taking longer than he’d hoped. In fact, he’s bragging about a budget surplus by 2018. William Keegan suggests it is worth noting that Britain has only had a budget surplus in about a dozen years during the 70 years since the Second World War. In fact, economists consider long term deficit to finance positions to be quite normal and even desirable.

It’s also worth noting that the UK is not Greece. Keegan points out that in 2010 the debt office was having no trouble at all managing debts, which had an average maturity of 14 years. In comparison, the Greeks couldn’t be sure of much even just a few weeks ahead.

In short, whilst clearing the deficit sounds attractive to our instincts, it certainly isn’t necessary at all times. And remember that according to Keynes, the last thing you want to do during a recession is cut public spending. Even if it means accepting a higher deficit.

Osbourne’s “recovery”

Fast forward to 2015, and Osbourne is basking in the glory of presiding over actual economic recovery. The deficit in 2014–2015 was still £50Bn more than he’d hoped in 2010, but he has nonetheless played his part in the Conservative election victory based on a success story.

He has massively reduced public spending, and five years later the economy is recovering. Has he somehow managed to defy Keynesian Economics?

Well, no. As it turns out, in the first half of 2010 thanks to the post-crash Keynesian stimulus put in place by the then-Labour government, the economy was already showing signs of recovery. Budget forecasts for GDP growth were looking healthier, at 2.3 per cent, 2.8 per cent, and 2.9 per cent for 2011, 2012 and 2013 respectively. George Osbourne’s fiscal policies are considered by economists to have completely halted this recovery in its tracks. The actual number for those years ended up being 1.1 per cent, 0.3 per cent and 1.7 per cent respectively.

It would appear that whilst we are now finally seeing a recovery, it has been significantly delayed by reckless fiscal policy — policy which flagrantly ignored that long-term low interest rates of 0.5 per cent cannot be lowered any further to accommodate the impacts of public spending cuts. The recovery has been so slow in fact, that it has taken two years longer than the Great Depression of 1929–1931. In the US, their stimulus programme was much larger and more prolonged than ours, and by May 2014, their GDP was already 6.5 per cent above the pre-crisis levels.

No one seems surprised by this, because it conforms to Keynesian Economics. American economist and winner of the Nobel Prize in Economics, Paul Krugman, points out how laughable the suggestion of Austerity in the UK is:

“It is rare, in the history of economic thought, for debates to get resolved this decisively. The austerian ideology that dominated elite discourse five years ago has collapsed, to the point where hardly anyone still believes it. Hardly anyone, that is, except the coalition that still rules Britain — and most of the British media.

I don’t know how many Britons realise the extent to which their economic debate has diverged from the rest of the western world — the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere. George Osborne and David Cameron boast that their policies saved Britain from a Greek-style crisis of soaring interest rates, apparently oblivious to the fact that interest rates are at historic lows all across the western world.”

Ideology of the privileged, sold to the middle classes, imposed on the vulnerable

As I said earlier, I went searching for the motivations behind austerity, thinking perhaps there were economic details which this layperson is unaware of that could explain it all. As it turned out, the economic details served only to further indict Osbourne, and the answer I was looking for belonged to a bigger picture.

Transcending these muddy waters of economics, there is clear and overwhelming ideological desire for a small state. This appears to outweigh economic policy rationale. In the case I’ve described, happily delaying recession recovery (I’m sure Osbourne understands Keynesian theory perfectly well). And worst of all, it permits a blinkered view of the social impacts caused by fiscal policy.

So lets take a moment to look at those impacts. The data on public spending cuts shows the yearly impact per-citizen to be on average, £1,126. Unless you’re on low income, in which case it’s £2,744. Or if you’re disabled, in which case it’s £4,660. Or if you need social care, in which case it’s £6,409.

Disabled people in poverty bear more than four times the burden of this austerity than the average citizen. Those in need of social care bear nearly six times the burden.

Pitch any argument you like about the need for us to “collectively tighten our belts and accept some cuts” — bring it on. Because these numbers illustrating the pain inflicted on the nations most vulnerable people will smash your ignorance out of the park. This is absolutely inexcusable policy, end of.

*breathes deeply*

More gently, I wish to finish on a point about who is “behind” this. By which I mean, who supports it in the general public. I don’t think I’ve ever met someone with a place in their moral compass for the unfair treatment of disabled people living in poverty. Even, fucking Tories.

I can understand the ideology held by the privileged elite. I can see the power it grants them. I could write a whole other article on corruption in politics and how it is only this elite few who enjoy a measurable correlation between their will and policy. But the elite are not the majority, and they are not even that large in number. The Conservatives won this election, of course in part because of how well Labour lost it, but also because they continue to speak so well to the middle classes.

So I arrive at what I find most troubling of all; that a decent percentage of the middle classes actually believe in, and aspire to, the values projected by the Conservative party, whilst the actions and behaviours of the party often do not, in turn, represent the values of those people.

I say this is the “most troubling of all” because I think it’s perhaps the most important of all dialogues to be having. We can, should and will be attending the national anti-austerity demonstration on June 20th. This is a vital yet easy thing for us to do. My fear is that the Conservative voting middle classes of Britain never get to see that their vote — placed in good faith on a firm bed of commendable traditional conservative values — is being used and abused in the name of elitist ideology, both threatening the welfare of the nation’s most vulnerable, as well as risking the livelihoods of the very business owners who voted for it.

Whatever your primary concern, let us all — together — make it perfectly clear that in the name of fairness, equality and economic stability we will not accept further public spending cuts.

On June 20th, please do join the national demonstration outside the Bank of England. If you can’t be there, consider donating to the organisational costs or organising within your local community.

Let’s make our voices heard, so that in the future, no humble musician has to suffer a week of studying economics. It’s been, quite horrible.