Austerity 2.0 will be a disaster

Funny how everything always seems to repeat itself. At the time of writing, Sunak has not yet been installed as our third PM in 3 months; but I’m confidently/arrogantly going to assume that by the time anyone reads this, he will have been.

Going further, I’m also going to predict that he and Jeremy “C” Hunt are going to make catastrophic errors of over correct from Trussonomics that will have profound adverse consequences for the UK and all of us poor schmucks who have to live here. I don’t think it is going to be as bad as a return of the Clown would have been, nor as bad as the path that Truss and Kwarteng were headed on. But they are going to make a big mistake, visible, in my view, from space.

That mistake is going to be austerity 2.0. I can already see the argument being lined up; the old Osborne “Family Credit Card Maxed Out” is going to be all over the press. And unfortunately, because it is an easy-to-understand metaphor, lots of people are going to buy it. Now it won’t resonate like it did in 2010; times are different, and I think it is fair to say the public is in a very different place than we were back then. It will however give some cover and succour to those in the process of making the big mistake.

The problem with this credit card analogy, is that a country is not like a family budget. For me, I have a certain amount of income; and good financial management means trying to spend less than this (heck this is getting harder with the worst crisis in cost of living for a hundred years and being involved in a massive strike at work… ho hum). But it is simple to understand the basics of what *I* need to do to manage my finances.

Countries are very different though, because what the state does in terms of spending has a massive impact on what income they have. Cutting spending can, when done wrong, mean that although you are spending less, that is dwarfed by an even bigger drop in income meaning at the end, your financial situation is actually worse (see 2010–2012).

So, another analogy, not quite as intuitive as the credit card one, but hopefully helpful.

Imagine a travelling salesman, he normally does alright, but times are tough. He looks at his budget and decides he needs to make some savings. He looks at his weekly budget and sees that after his mortgage payments, the biggest single expense he has is Diesel. He finds he is £100 a week short, so it’s simple he doesn’t fill up his car on Fridays and the budget is balanced. Simplez!

Except, he normally makes £250 a day working. Yup, he makes £2.50 for every quid he spends on fuel. So, by cutting that day’s fuel, he ends up even worse off, actually £150 down on where he was before he started trying to sort his problem out.

A lot of state spending is like this; the UK Government is by far the biggest actor in the UK economy; it’s spending decisions massively impact on our wider economy and our tax take. So, let’s look at a real example. The U-turn on the Fuel Bill support so that it is now going to end next April. At which point “targeted support” will come in and millions of working families will be facing maybe as much as an extra £200 a month in energy bills. On top of the tripling of average bills we’ve faced since this April. Lots of households will be, just on energy alone, as much as £350-£400 a month worse off than they were this time last year. Now, that is really bad for us working families, but it is also bad for the wider economy and by extension, the finances of the state.

Because this causes a “demand side” problem for the economy. In an economy, everyone’s spending is someone else’s income. If millions of families have to find another £200 a month to pay for their energy bill, then that is £200 they were spending elsewhere gone. Looking for something that is easy to cut.

One of the big things people will cut out is eating and drinking out. In the UK, the hospitality industry employs about 2.5 million people, about 7% of the workforce. If millions of people stop or reduce eating out, then many of these businesses become unviable. A sector already on its knees post-Covid, that operates on slim profit margins and already has soaring costs of its own because of energy and inflation, suddenly sees it’s income drastically drop, and it has no ability to raise prices because of the lack of demand.

Loads of people who currently have jobs in that sector soon won’t (they stop paying tax) and many will need to start claiming benefit (increasing Government welfare spending). So, a bit like our travelling salesman, the Government has cut some money out; but in return has seen its income go down and its expenses go up.

Now some spending cuts will still be “in the black” despite this, whilst many will put us “in the red”. And the double kicker for the state is this can have a cascade effect in the economy. Those businesses that go bust stop buying from suppliers, causing more knock-on economic effects. They stop paying rent, so the owners of the property have a drop in income too. And all sorts of other consequences.

Austerity in 2010 didn’t work in even its own terms; UK debt went up massively under successive Tory governments since first elected. And the UK state and public services are hugely less resilient than they were then. Years of under investment has left the NHS on the brink of crisis, there is virtually nothing the Government can easily cut without having drastic adverse consequences for everyone.

Trussonomics failed and caused the markets to react poorly to the UK Government’s financial viability because it was based on un-costed tax cuts with no credible mechanism of how they could be paid for. This meant our “risk premium” went up. But this also goes for savage cuts that mean the tax take goes down, and the Government total bill goes up when dealing with the aftereffects of a huge recession.

I’m not pretending this is an easy path to walk and in truth, I don’t have any good answers here (all the options are bad). But given everything that has happened in the country since the financial crisis in 2008; another huge recession made worse by the actions of Sunak’s new Government is going to cause serious problems for the social fabric of our country.

This is especially going to be hard for a PM that has no mandate to do any of this. No one voted for Sunak to be the PM and the Tory 2019 Manifesto promised investment and spending, not massive cuts. This is probably a topic for another blog; but if a PM with no mandate has presided over savage unpopular cuts without any perceived legitimacy, then the democratic deficit there raises serious questions.

I don’t know what the answer is, but I’m sure it isn’t reheated Austerity 2.0