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.

Show Hide image

Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.


Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  


India Bourke is an environment writer and editorial assistant at the New Statesman.