What is Austerity?
Athens, Feb 15, 2015. People gather in front of the parliament during an anti-austerity and pro-government demonstration to support the newly elected government for a better deal on Greece's debt, Photo by Kostas Koutsaftikis, Shutterstock.
Everyone talks about austerity these days. The people, they say, have had enough of austerity. There are calls for lifting the 1% cap on public sector pay rises, but also severe criticism against the tragic loss of the Grenfell Tower residents, who are seen as the human cost of austerity policies. Some politicians, on the one hand, say people need to live within their means, while others, are condemning the government’s austerity agenda. The Chancellor Philip Hammond has recently admitted that the government does “recognise that the British people are weary after seven years' hard slog repairing the damage of the Great Recession,” while being reluctant to change its position on the issue of the public-sector pay cap.
Austerity refers to economic policies implemented by governments when they cannot meet their debt obligations. Such austerity measures seek to restore competitiveness and create investment expectations by cutting the budget to stabilise public finances, cutting public-sector wages and lowering taxes. Austerity focusses “only on the debt side of the balance sheet” which, according to many, damages the economy, instead of creating long-term economic growth.
But it is known that in an economy without austerity, where the government, instead of cutting spending, spends more and invests, money circulates helping the economy grow, with the result of tax revenues increasing and the government’s revenue strengthening.
For many academics, such as Mark Blyth in his Austerity: The History of a Dangerous Idea (2013), austerity, also known by the “fancy” name “growth friendly fiscal consolidation,” is not a route to growth and not the correct response to a financial crisis. As a form of “voluntary deflation in which the economy adjusts through the reduction of wages, prices, and public spending,” austerity seeks to “restore competitiveness, which is (supposedly) best achieved by cutting the state’s budget, debts, and deficits. Doing so, its advocates believe, will inspire ‘business confidence’ since the government will neither be ‘crowding-out’ the market for investment by sucking up all the available capital through the issuance of debt, nor adding to the nation’s already ‘too big’ debt.”
According to him, the logic that cutting the state’s budget will promote growth is, to say the least, dangerous, because it “produces the very outcomes you are trying to avoid.” Blyth writes that it’s a mistake to believe that by cutting the budget and reducing the debt, “growth will reappear as ‘confidence’ returns.”
For example, austerity policies in the Eurozone countries of Portugal, Ireland, Italy, Greece, and Spain (the PIIGS of Europe), which have been implemented since the 2008 financial crisis, have not led to growth. By cutting their budgets, their economies shrank, and their debt and interest payments increased.
While the UK is a different case because it has its own currency and central bank, unlike the Eurozone countries, it is still another example where austerity has proven to be hurtful instead of helping the economy recover and confidence returning. As Blyth points out, having its own currency and central bank, the UK “can therefore credibly commit to backing its banking sector with unlimited cash in a way that countries inside the Euro Area cannot, while allowing the exchange rate to depreciate since it still has one.” But UK growth “hasn’t sprung back in response either, and neither has confidence. The British are in as bad shape as anyone else, despite their tightening, and the United Kingdom’s economic indicators are very much pointing the wrong way, showing again that austerity hurts rather than helps.”
Austerity is a “zombie economic idea” because it keeps coming back despite failing again and again. Blyth argues that it doesn’t work in practice and that the poor end up paying for the mistakes of the rich.
Former Chancellor Norman Lamont’s view of austerity
While Blyth’s academic study warns against the dangerous effects of austerity, which exacerbates the problems it sets out to alleviate, former Tory Chancellor Norman Lamont says that austerity “is just another word for living within one’s means.”
Norman Lamont is a Baron who served as a Chancellor in the 1990s and is a member of the House of Lords. Talking to the Today programme yesterday, he said that the government’s cuts the last eight years or so, cannot be considered “austerity” measures and that austerity is just another word “for living within one’s means. It’s not really austerity.”
He argued that public sector pay was higher and that he was against the idea of abandoning “restraint on public expenditure. The control of public sector pay is extremely important. It’s roughly half of current expenditure and about 30 per cent of total expenditure. It comes to £200 billion plus a year.”
Austerity became a reality under the Chancellor George Osborne in 2010 who managed six years of austerity and spending cuts as a way to reduce the debt and deficit of the UK. His promise back then was full of optimism: “Our policy is to raise from the ruins of an economy built on debt. A new, balanced economy, where we save, invest and export; an economy where the state does not take almost half of all our national income, crowding out private endeavour." Osborne’s austerity politics divided the country, and despite the fact that his policies stabilised the UK economy after the crisis, the recovery has “seen the divide between rich and poor increase.” By 2015, the deficit did fall by almost half, at £80bn, and it has since fallen further.
The deficit is now at £52bn and the national debt has increased to £1.73tr.