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How Austerity Broke Britain

The past decade has exposed austerity as the most destructive policy in modern British history – but the Tories are determined to keep it alive.

A decade of cutbacks and belt-tightening has led to the greatest crisis in NHS history. (Credit: Getty Images)

Over the last decade, economic debate in Britain has been dominated by one subject: austerity.

The size of a government’s budget deficit and total public debt have always been hot topics among economists, but since the financial crisis these metrics have acquired greater popular significance. Mentions of the word ‘austerity’ in books and articles, for instance, increased sharply after 2007.

When ‘austerity’ arrived a little over a decade ago, it represented a sharp break with the fiscal policy seen in the previous decade, when government spending had been on an upward trajectory.

The combination of a larger public sector and central bank independence led policymakers to believe they had solved the age-old problem of the cyclicality of the business cycle. As Labour Chancellor Gordon Brown told the British Chamber of Commerce in 2000, ‘My vision is of a Britain where there is not stop-go and boom-bust but economic stability.’ We now know that the years of apparent stability seen during Tony Blair’s leadership of the Labour Party in fact represented a long and large upswing in the financial cycle, followed by an equally deep financial crisis and recession.

Crisis Origins

After a prolonged period of capitalist triumphalism that followed the fall of the Berlin Wall, a disaster on the scale of the 2008 Financial Crash had seemed impossible. Unsure what to do in response to a crisis they didn’t see coming, the initial response of policymakers was to alleviate the pain by using the government’s spending power.

In the midst of the chaos, Gordon Brown dusted off his old economics tomes and searched for answers in the writing of economists studying the last great financial crisis — the Wall Street Crash. He quickly realised that many of Britain’s banks were effectively bankrupt and proposed that they be bailed out to avoid the collapse of the economy.

He also saw that the financial crisis had shattered business and consumer confidence, while leaving a legacy of indebtedness that would constrain economic growth in the years to come. Drawing on Keynesian theory, he introduced a stimulus package that was supposed to relieve the impact of the 2008 Crash and return the economy to growth.

The debt-to-GDP ratio rose sharply after the crisis as the government absorbed the debt of the overleveraged banking sector and injected demand into an economy falling into a deep recession.

It was in this context that the future Chancellor George Osborne picked up some very different research to the one that Brown had been studying.

In 2010, Carmen Reinhart and Kenneth Rogoff published a working paper entitled Growth in a Time of Debt, which argued that countries with a debt-to-GDP ratio of more than 90 percent grow more slowly than those with lower debt levels. With public debt increasing all over the world, the research suggested that cuts to government spending would improve growth rates — contrary to the received economic wisdom at the time.

The paper was extremely influential, and Osborne referenced it several times in an important speech made in 2010. He cited the authors’ statistic that debt-to-GDP ratios of over 90 percent have a negative impact on growth and quoted Rogoff directly. ‘It’s very likely’, Rogoff had argued, ‘that this will trigger the next crisis as governments have been stretched so wide.’

Osborne’s solution would be to ‘eliminate the bulk of the structural current budget deficit over a Parliament’. This began one of the most destructive periods of economic policy in British history.

Wielding the Axe

Blaming the previous Labour government for causing the financial crisis with its reckless spending, David Cameron declared that ‘the age of irresponsibility is giving way to the age of austerity’. Billions of pounds worth of cuts were introduced between 2010 and 2013.

The cuts included a pay cap for the public sector, a critical measure given the increase in public sector employment seen in previous years. The Institute for Government estimates that this measure alone saved between £10 and £20 billion.

Alongside the pay cap, public sector staff numbers were cut substantially. In the NHS, the number of senior managers was cut by around 30 percent. Around a quarter of staff in the prisons service lost their jobs. In education, teachers were forced to do more with less. Pupil to teacher ratios have risen significantly since 2010, and teachers are now striking due to their astonishingly high workloads.

And the crisis in staffing in adults’ and children’s social care has now reached acute levels. From 2010 onwards, the government cut spending on Sure Start centres by nearly 70 percent. It also introduced sweeping cuts to social security, which led to increases in poverty as a whole, and particularly the number of children living in poverty.

Osborne and Cameron decided to include public investment in the cuts, widely considered to be an unwise decision given that prudent public investment pays for itself over the long-run through increased growth and tax revenues. According to the Institute for Government, ‘[c]apital spending fell by 31.9% in real terms between 2009/10 and 2012/13’. Productivity, closely linked to levels of investment, has stagnated for the longest period in the history of modern capitalism.

The impact of austerity was particularly devastating for the NHS. The cuts to the capital budget meant that investment ground to a halt — and left the health service, more than a decade later, with a maintenance backlog of £10 billion.

Conservative critics of public healthcare will argue that spending on health and social care increased even under austerity. This much is true: with an ageing population, it would be impossible to reduce spending without the total collapse of the system. But after an average real spending increase of 3.7 percent per year from 1948 to 2010, it fell to just 1.4 percent under austerity.

To put that figure into context, health writer Colin Leys pointed out in a previous Tribune article that the proportion of people over 75 years of age rose by 12 percent during the same period. The NHS was starved of resources precisely at the moment it faced a historic challenge, and we are now living with the consequences.

Cuts to early intervention services have created greater demands on the public sector as those in need of support fall through the net, only to end up experiencing severe crises further down the line. Poverty, homelessness, and violent crime have all increased due to the government’s decision to abandon those most in need of public sector support.

In short, as anyone living in the UK will have noticed, the institutions designed to protect our health and well-being are crumbling. Since austerity, we have increasingly lived in a society in which the population is being left to fend for itself.

Farce and Failure

Even on its own terms, austerity didn’t succeed. Public spending was brought down, but not by as much as expected. Osborne’s goal of achieving a fiscal surplus was never achieved.

The paper Osborne had cited in his call for cuts to public spending was later found to contain critical errors. Today, the names Reinhart and Rogoff are renowned in much the same way as Fukuyama and his ‘end of history’: false prophets whose academic work is most often a punchline.

When the errors in their paper were corrected, the purported link between government debt and growth levels disappeared. In fact, there appeared to be a positive link between levels of government debt and growth. An entire thesis built on sand.

The argument that high public debt had caused the financial crisis was, of course, absurd. It was the debt accumulating in the private sector — in consumer and financial markets — that lay behind the crash. Had governments failed to intervene, it is likely that the world would have entered a second Great Depression.

As progressive economists have been arguing for over a decade now, austerity is counterproductive. Cutting public spending reduces demand in the economy, which constrains tax revenues and increases the demands on the public sector. Cutting public investment, meanwhile, destroys the economy’s long-term growth potential, restricting growth for decades to come.

These factors are a significant part of the explanation for the UK’s poor performance on productivity, wage growth, and GDP growth since 2008. The results are in and there isn’t really a debate: austerity does not work.

The case for austerity was presented less as an economic imperative and more as an ethical one. The UK had enjoyed many years of growth and prosperity by living beyond its means; the time had come to pay the bill.

This morality tale had truly perverse consequences. A period of elite excess was twisted into a reason for popular guilt, which would legitimate punishment of the poor. On those ideological terms, at least, austerity worked: the number of food bank parcels handed out by the Trussell Trust increased by 2,612 percent under Cameron’s premiership.

In the years that followed the financial crisis, the Tories skilfully directed anger away from the bankers who had caused the crash and onto a series of public enemies — from public sector workers to benefit ‘shirkers’ and illegal immigrants.

After Brexit, this found a new articulation in the ‘woke’ youth and so-called liberal elite. Paradoxically, the end point of this trick was to turn fire back onto bankers and the markets, but not as profiteers or recipients of public funds — but, instead, as Liz Truss’ ‘left-wing economic establishment,’ a phrase that truly demonstrates how far the austerity era has taken us through the looking glass.

Austerity 2.0

The country briefly appeared to forget about the suffering unleashed by Cameron and Osborne as it was consumed by the fire and fury of Brexit. But today, this is no longer the case.

The Conservatives’ reckless approach to negotiating the UK’s departure from the European Union has created deep structural challenges for the UK economy, and the purported benefits have yet to appear. Brexit has not, in other words, made people feel as though they have ‘taken back control’.

The moral case for austerity has been shattered by the privation experienced since 2010. If the cost of repaying one’s debts is the collapse of our social safety net — of our responsibilities towards one another — then it cannot be presented as a convincing ethical imperative.

Today, the idea that the UK has had it too good for too long seems utterly absurd to most people in a way that it didn’t in 2010. The appeal of the statement ‘the age of austerity is giving way to the age of yet more austerity’ is much less than that of ‘the age of irresponsibility is giving way to the age of austerity’.

If the electoral case for austerity is in decline, the economic case was dismantled long ago. Even the IMF has conceded that the UK’s austerity programme was unnecessarily harsh and deep, making it counterproductive over the long run. So, why has Rishi Sunak wedded his new premiership to a platform of Austerity 2.0?

The answer, of course, has little to do with the economic, moral, or even electoral case for austerity. These were the means through which the austerity project was sold, but not the reason for its introduction.

Quite simply, austerity was introduced to consolidate the power of the ruling class in the context of a recession that had damaged its legitimacy.

Alternative economic ideas and movements that championed them were widely popular in the wake of 2008. The idea that the crisis had been caused by the recklessness of our economic elite had to be replaced with an alternative explanation. In this context, austerity was the perfect ruse.

Today, it is being reintroduced for the same reason. The financial crisis permanently dented trust in our political and economic rulers. The pandemic and the cost-of-living crisis have eroded it even further. And with people struggling to make ends meet, levels of industrial action have risen to highs not seen since the 1980s.

During the 1980s, the Thatcher government introduced measures designed to corrode the power of the working class and strengthen capital. The idea, as author Gregoire Chamayou agues, was to restore the ‘governability’ of society. Workers had to be reminded who was boss — and neoliberal economic policies provided the whip that would be used to beat them into submission.

Today, austerity, combined with tighter monetary policy, is playing the same role. Lower government spending, higher taxes, and high interest rates all restrict demand, and therefore put downward pressure on wages and undermine stable employment.

The threat of unemployment is supposed to discipline workers into accepting lower wages and avoiding strike action. The problem for the government is that working people have been subjected to so much suffering over the last decade that many feel they have little left to lose. When you can barely heat your home and put food on the table, not demanding wage increases in line with inflation seems like a greater risk than doing so.

At this rate, the Conservatives are highly likely to lose the next election. But Keir Starmer and Rachel Reeves continue to insist on the importance of ‘balancing the books’, believing they have learned the lessons from the 2010 election while failing to realise that the context has utterly changed.

The economic, moral, and electoral arguments for austerity have been repudiated. People don’t want more suffering — they want a fundamental break from the last decade. But while even the opposition remains trapped within its logic, that seems an increasingly distant prospect.