Austerity has cost the UK £3,500 for every household

The maths of cuts.

Counterfactuals are tricky. How can we know for certain what the British economy would look like if austerity had never been implemented?

Well, we can't be certain. But with a few assumptions, we can ale an educated guess, and that's precisely what Alan Taylor has done at VoxEU. The assumptions he makes aren't uncontroversial, but they are easily defensible, and the results are stunning.

First, we have to assume that the government actually did have the ability to avoid austerity. That is, if Osborne hadn't rapidly started to slash the state, would the bond markets have refused to loan to us shortly after? It seems unlikely, especially given, as Taylor points out, gilt yields remain incredibly low despite our debt-to-GDP level rising and our real GDP worse than predicted. The bond market basically doesn't care about the national debt, at least while it's at the levels it is now; instead, as opportunities for investment have frozen worldwide, yields in the UK have collapsed, along with those in the US and Japan.

So the UK didn't have to implement austerity; it was a choice. The second assumption is that policymakers "care about timing fiscal adjustments so as to mitigate damage to the real GDP path of the economy", and won't just splurge the money wherever they can find political support for it. That is a fairly weighty assumption, to be sure, and one which a lot of people working at the intersection of politics and economics might question. At the same time, though, it's a pretty necessary assumption to do much thinking about macroeconomics, not least because if you assume politicians are idiots, it becomes pretty hard to justify any state spending at all.

If you buy those two basic assumptions, Taylor writes, then you can start to work backwards from the observed effects of austerity in other countries to build up the counter-factual. This part is just the same as we've seen again and again: austerity hurts growth. A lot.

Last year, for instance Paul Krugman did a rough-and-ready calculation and estimated that cutting budgets by 1 per cent of GDP since the recession reduced GDP by around 1.25 per cent. That's not supposed to be generalizable – but it does seem true for a specific time (2008-2012) and place (Europe).

Taylor's model is far more robust: it takes account of allocation bias (the fact that the state of a country's economy may have influenced whether or not it applied austerity measures), and also allows for the fact that austerity has different affects applied in a boom or slump. And it finds a massive effect in a slump, compounded by the fact that, as Taylor says, "a dead cat bounces": given we'd expect more future growth the deeper in a slump we are (as the economy catches up with where it should be), there's a tendency to underestimate the damage of austerity.

But this is all preamble. You're here for the money shot. How much has austerity cost Britain? Three per cent of GDP:

Simon Wren-Lewis amortises that across the UK: it comes to £3,500 for every UK household over those three years. Bear that in mind next time you hear the government talking about how much our welfare bill is. Once upon a time, we had that money.

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.