Introduction – George Eaton
In 2010, in defiance of advice from most economists, the Conservative-Liberal Democrat coalition government imposed austerity on the UK. A decade later, the social cost of this project is clear. Rough sleeping in England has increased by 165 per cent since 2010; life expectancy has stalled for the first time in more than 100 years; and the number of people in poverty in working families has reached a record high. Even before the coronavirus outbreak began, average real wages had once more fallen below their 2008 peak – a lost decade for living standards.
But the surge in government debt – the budget deficit is forecast to exceed £200bn this year, with debt surpassing 100 per cent of GDP – is already prompting renewed demands for austerity. George Osborne, the original author of the cuts programme, has warned of the need for a future “period of retrenchment”.
Boris Johnson has insisted that austerity will “certainly not be part of our approach” but can he be trusted to maintain this pledge in face of rising debt and pressure from the free-market right? (The Prime Minister was notably more explicit in rejecting the word austerity – “I’ve never particularly liked the term” – than he was in ruling out all and any cuts.)
Faced with the renewed threat of austerity, 12 leading economists write below on how spending cuts damaged the UK and on the alternatives available: growth and investment, progressive tax rises and Bank of England money creation. An early test of the extent to which Johnson’s Conservatives have truly changed will be whether he listens.
Robert Skidelsky: Artificial limits on borrowing must be scrapped
Strong support for the economy now is right, necessary and uncontroversial. My main concern, though, is that we exit the Covid-19 crisis with a fiscal constitution built to last: one that scraps the fiscal rules that drove George Osborne’s disastrous austerity policies, but which does not simply react to political need with splurges of public spending.
What should the principles of such a constitution be? First and foremost should be a recognition of the state’s vital investment function. It is the duty of government to provide the community with its necessary public goods and services – things that domestic private enterprise lacks the incentive or capacity to supply.
Contrary to Thatcherite wisdom, there are “essential” goods and services that a community needs, most of which have to be “home grown”. The crucial ones are transport infrastructure, health and education services, and social housing. These should never be run down, or forced to rely on unreliable foreign sources. In fiscal terms, this means scrapping artificial borrowing rules such as a debt ceiling of 60 per cent of GDP. The question should be not what the government can afford to spend, but what our kind of community cannot afford to be without.
Second, government responses to private sector downturns should be not to reduce their spending but to increase it. Austerity at the Treasury is fine when the economy is booming, but can be catastrophic when it is shrinking. Osborne’s cuts to the NHS were bad both because they reduced the long-run capacity of the NHS to cope with shocks, and because they, together with the cuts to housing, education and local government services, were wrong in principle at a time of economic stagnation.
The question of finance is secondary. The goods ordered by the government will be financed anyway, down to the smallest penny. What is important, as Keynes put it, is to arrange the financing in such a way as “to prevent the social evils of inflation now and later; to do this in a way which satisfies the popular sense of social justice; while maintaining adequate incentives to work and economy”.
Robert Skidelsky is the author of a three-volume biography of JM Keynes, a cross-bench peer and emeritus professor of political economy at the University of Warwick
Mariana Mazzucato: We should recognise the state’s power to create value
The Covid-19 pandemic has plunged capitalism into another of its periodic crises, forcing governments to return to the frontline and inject money into the economy in an attempt to restore “normality”. Even those countries such as the UK that were previously wedded to austerity have transferred their affections to public spending and borrowing on a scale that would previously have caused ridicule (as experienced by Labour at the last general election).
But what will the new normal be? It cannot be a return to the patently failed policies of the past, which have increased inequality and led investment and productivity to stagnate in many countries. If “normality” means renewed austerity to reduce the enormous debt-to-GDP ratios which will no doubt accumulate because of government borrowing, past failures will only be magnified and the world will be on an even more dangerous course. We must instead learn from the crisis to bring about systemic change and put capitalism on a fresh and sustainable footing.
First, we must rethink what government is for. The response to the coronavirus crisis has demonstrated what ideology long denied: the state’s power for positive change. The state has to be redesigned with the organisational capacity to manage the demands of rebuilding society in the wake of the pandemic and be seen as the value creator it can be. It is not enough to clap NHS workers and throw money at the service in times of emergency, the structure of our health system, and the public organisations around it, need to be strengthened, properly remunerated and nurtured. We have been trapped in a vicious circle: the private sector, not the state, is considered to be the value creator; therefore, there is no need to invest in the state; therefore, the state’s capacity is run down.
Second, to create value, the state needs the financial wherewithal to do so. No longer can direct government financing of swathes of the economy be derided as a “magic money tree”. Public borrowing can be constructive and productive. The critical point is investment in the economy’s productive capacity, not the source of the funding. Third, we need government to be mission-oriented and focused on outcomes: long-term solutions for the whole of society to the great challenges of our time such as the climate crisis, the digital divide and crumbling health systems – this will be the subject of my next book.
Mariana Mazzucato is a professor at University College London (UCL) where she is founding director of the Institute for Innovation and Public Purpose (IIPP). She is author of The Entrepreneurial State (2013) and The Value of Everything (2018)
David Blanchflower: The economy must serve ordinary people, not hedge funds
In 2010, George Osborne imposed reckless austerity on the UK in the worst economic decision for many decades. By strangling growth through spending cuts and tax rises, his actions led to the slowest peacetime recovery in 300 years. Now, owing to the expected surge in the national debt, there are calls to do it all over again. No way. No how.
Keynes warned us in the 1930s about what he called “the long, dragging conditions of semi-slump” that follow a financial crisis, as happened in 2008. Economists always knew that slashing in a slump was precisely the wrong thing to do: the UK government could borrow cheaply in the markets who saw zero risk of default. But the Conservative-Liberal Democrat coalition government didn’t listen.
The main argument it put forward was that austerity had to be implemented because anything above a 90 per cent debt-to-GDP ratio, which was fast approaching in the UK, had to be avoided because it would inflict long-term damage. It turns out that was nonsense. The finding was driven by a simple spreadsheet error – so-called Excelgate – and when it was corrected any basis for austerity collapsed. Countries with much higher debt-to-GDP ratios than 90 per cent have been shown to grow faster than average.
Austerity was simply a way for those who wanted a small state to make the poor poorer and that is what they did. Growth slowed and even today average real wages are below their 2008 peak. Austerity especially hurt those who were least able to help themselves – the disabled, single mothers and children. It weakened the National Health Service and social care services, and made communities more vulnerable to Covid-19. Austerity killed people unnecessarily.
Now its authors are back at it again. It’s time, they say, for more austerity – and soon. But it is not: in a slump, governments should spend to support living standards. We need to learn from last time to ignore the bleatings of those who want the economy to work in the interests of hedge funds, not ordinary people. It is time to strengthen the NHS and communities after the damage the austerians did. You don’t weaken people when they are down, you build them up. The alternative to spending cuts is to invest in people and places through government spending, incentives to work and, if necessary, through central bank financing. Contrary to austerian logic, government spending crowds in private spending during a slump, rather than crowding it out. This lesson must never be forgotten again.
David Blanchflower is professor of economics at Dartmouth College, New Hampshire, and a former member of the Bank of England’s Monetary Policy Committee
Torsten Bell: Austerity makes no sense economically or politically
The UK is in the midst of a devastating economic crisis. Whole swathes of the economy have rightly been shut down to combat the spread of coronavirus, while an unprecedented package of government measures to support firms and families has been announced.
The combination of the two means tax revenues are falling and public spending is surging. The Office for Budget Responsibility estimates that government borrowing will rise to well over £200bn this year if the lockdown lasts for three months.
And it could be even higher. The Resolution Foundation estimates that if major restrictions endure for six months, the government might need to borrow well over £300bn. And borrow it should – as with the lockdown these are not policy choices but the largely unavoidable price the pandemic imposes on us.
But the economic damage may be long lasting, not least given the huge surge in unemployment as demonstrated by more than 1.5 million Universal Credit claims. This would mean a permanent hit to our public finances.
The last time the country was in this position in the wake of the 2008 financial crisis, George Osborne made two crucial decisions: to reduce the budget deficit swiftly and to do so overwhelmingly via spending cuts. We’re living with the legacy of that austerity today.
It is simply not possible or desirable to repeat that approach – indeed it makes no sense economically or politically. First because securing the recovery rather than rushing to deficit reduction must be the priority. And second there is little public support for austerity. No one looking at our public services today really thinks there is more fat to be cut.
Tax rises will instead have to take the load. As we ponder which ones we need to remember where the economic pain of the crisis has fallen most heavily – on women, young people and the low-paid. While everyone will have to contribute, the burden must be fairly shared. Wealth has grown much faster than our incomes in recent decades. But wealth taxes have not risen at all, and are riddled with problems. This is not a situation a post-virus Britain can afford.
Torsten Bell is chief executive of the Resolution Foundation
Adrienne Buller: The climate crisis demands investment and a resilient public sphere
The economic consequences of the Covid-19 pandemic are set to cause a record annual fall in carbon emissions of 8 per cent (according to the most recent International Energy Agency estimate). This would be several times larger than the impact of the 2008 financial crisis, and, incidentally, almost exactly the rate needed to limit global warming to 1.5°C – a target widely accepted as vital to averting the most severe impacts of climate change.
But far from being cause for celebration, this forecast should alarm us. That shutting down vast swathes of the global economy only just achieves the minimum required pace to meet the 1.5°C target demonstrates the extent of the structural challenge we face in confronting the climate crisis and securing a sustainable future for the inhabitants of this planet – particularly one that is just. And, crucially, current emissions reductions have come at tremendous cost, with lives and livelihoods lost, businesses folding, and a devastating global recession looming.
A systemic transformation of the scale required – from extraction and inequality to sustainability and shared prosperity – must be state and public led, and rooted in democratic accountability. Indeed, as this crisis has made clear, the market alone is wholly unable to meet the pace, scale or degree of co-ordination required to confront complex global challenges, nor can private industry withstand major shocks without decisive state support. The likely loss of thousands of jobs in industries such as aviation and North Sea oil & gas due to Covid-19 – despite the UK government’s furlough scheme – is a sobering preview of the chaos that an unmanaged transition to a low-carbon economy could bring.
Far from a return to austerity, hostility toward public-led investment and an antipathy to state planning, confronting the climate crisis and building resilience to its impacts will demand unprecedented public investment and leadership. This spans everything from delivering zero-carbon public transport; to ensuring a just transition for workers in affected industries such as fossil fuel extraction; to adequate investment in low-carbon forms of work such as health and social care that the current crisis has proven so crucial and so undervalued.
This crisis is teaching us, in tragedy, the indispensability of the social safety net, of resilient public services and of a capable state apparatus that can act decisively, using all available tools to prevent and minimise harm. Let us not forget these lessons as we look toward the climate crisis, and not waste an opportunity to rebuild an economy that is more sustainable, equitable and resilient.
Adrienne Buller is senior research fellow at Common Wealth
Christopher Pissarides: Austerity was a mistake in 2010 – the UK must not repeat it
Soon after the 2008 financial crisis, as the British economy was struggling to recover, the then chancellor George Osborne embarked on a policy of fiscal austerity to repay the debts accumulated during the crisis. That was a mistake that should not be repeated. It slowed the recovery, it devastated public investment and it contributed to the UK’s low levels of productivity growth since then.
Before Covid-19 hit, the government promised substantial spending, focused mainly on public investment, to restore the UK’s crumbling infrastructure and level-up the struggling regions. Public spending has now been refocused on helping businesses and the public navigate the crisis. In my view, this is a necessary investment.
The debts accumulated will be more than those that prompted Osborne to embark on his austerity project. In my view this debt does not need to be repaid, at least not yet. The economy will need the investment promised in the March 2020 budget as an absolute minimum. It will also be important to help the workers who lost their jobs, and the companies that struggled during the lockdown to get back to normal business. Coronavirus will change demand and the way that we do business in unpredictable ways, and this will need more investment.
Interest rates are ultra-low at present, and when the recovery starts pressure on prices will inevitably build up. To some extent, this will erode the debt in itself. It is important that the Bank of England does not raise interest rates quickly and allows for some inflation to take place; even the 2 per cent ceiling target might be sufficient but more flexibility from the Treasury would be even better. The level of debt will probably not exceed 100 per cent of GDP, a manageable level in an era of near-zero interest rates.
As the economy fully recovers and sustainable growth begins, the situation can be re-evaluated. At that stage, and not before, we could consider using some of the future tax revenue for debt repayments. The government must continue to support business, stimulate growth and support workers through transition.
Christopher Pissarides won the Nobel Prize in economics in 2010. He is Regius Professor at the LSE and chair of the Institute for the Future of Work
Ann Pettifor: The slump will be aggravated and lengthened by austerity
It is clear that some commentators and think tanks have not woken up to the severity of the debt-deflationary depression we are heading into. Delusional austerity enthusiasts have not given this threat much thought. Nor it seems has the Resolution Foundation, which has called on the Treasury to maintain fiscal rules and “to keep inflation expectations firmly anchored around the 2 per cent target.”
Both groups fail to grasp the devastating scale and depth of the forthcoming depression, which will be prolonged and deep. Austerity would simply aggravate and lengthen the slump.
At the behest of Montagu Norman, the then governor of the Bank of England, austerity was imposed on the UK economy after the last great pandemic – the Spanish flu of 1918 – with disastrous consequences. Taxes were increased, government spending was cut, interest rates rose and the strengthened pound boosted debt servicing costs. Soon the British economy was in free fall. The consequences were dire. 1919 culminated in 1939.
In 1919, the British economy was recovering from a world war, as well as a pandemic. Today, the global economy is weakened both by the ongoing great financial crisis and austerity, from which Western economies have never fully recovered. Over the past ten years corporates have failed to invest and instead, thanks to quantitative easing, they have gorged on low interest rates and cheap debt. The deflation of these debts will be achieved through default, write-offs or bankruptcy.
The debt overhang has already depressed both investment and consumption. Coupled with gluts in oil, cars, beef and dairy products, the effect will be to depress prices of both assets and commodities, resulting in more bankruptcies. These will lead to rises in unemployment while coronavirus continues to demobilise consumers and immobilise travellers.
Given this likely scenario, to once again impose austerity would be an egregious act of deliberate, government-inflicted harm, culminating in the kind of political tensions that exploded in war in 1939.
Ann Pettifor is director of Prime Economics and the author of “The Case for the Green New Deal”
Jonathan Portes: Markets want and need the government to spend and borrow
Can we afford to pay for the economic response to Covid-19? The UK government’s main policy measures – the Job Retention Scheme, and loans and grants to business – are designed not to boost the economy in the short term, but rather to mitigate as far as possible the permanent damage that would result from widespread business failures and unemployment. Suppose the cost – the increased budget deficit over the next year or so – is £300bn. Sounds bad. But at current interest rates, we could finance that for £2bn a year; trivial in macroeconomic terms. By contrast, the fiscal cost of even a modest 2 per cent permanent hit to GDP would be close to £20bn a year. The arithmetic is simple: we can’t afford not to act.
But will we be able to continue borrowing at these rates if it means an ever-rising national debt? This is perhaps the key learning of the last decade; worrying about debt when the private sector isn’t investing is just a conceptual error. The reason interest rates are low is that private-sector consumption is weak, investment weaker and risk appetite very low. Savings need to go somewhere; in current conditions financial markets both want and need government to spend and borrow.
The constraint on borrowing isn’t the level of the debt or the deficit, but when those conditions reverse. When the private sector wants to spend and invest, demand, growth and inflation expectations will all rise. All this would be excellent news for the economy, but then interest rates would rise and we’d need to put the public finances back on a sustainable path.
That doesn’t, or shouldn’t, mean “austerity” as in the last decade – the cuts to public services and welfare benefits that left us in such an exposed position when this crisis hit. But it does mean that we need to find a way to finance, via taxation, the welfare state we need. Economists were saying that well before the Covid-19 crisis; let’s hope that after it the politicians and the public are more receptive.
Jonathan Portes is professor of economics at King’s College London. He was previously director of the National Institute of Economic and Social Research
Carys Roberts: Tax rises are a progressive alternative to cuts
Boris Johnson doesn’t want the term “austerity” to be associated with his leadership. But fiscal hawks on the right of his party are already calling for a fresh round of cuts to bring down the inevitably large post-pandemic deficit. And, there are many competing definitions of “austerity”: if and when austerity does come, it won’t be named as such.
Last time round, the argument for austerity was won with flawed but intuitive economics. This time, its opponents need to lead the debate with clear explanations of why austerity deeply damages – rather than protects – society, the economy and the public finances. And they need to be ready with an alternative set of proposals.
The Bank of England has intervened with crucial support to keep interest rates low. This has triggered renewed interest in monetary financing, with Charlie Bean, former deputy governor of the bank, and Adair Turner, former chairman of the Financial Services Authority, calling for some of the debt purchased by the bank to never be repaid. Such action would help, but it will not be the whole answer: uncontrolled monetary financing could be dangerously inflationary.
To inform its response to the current crisis, the government should look to the past. The UK’s debt burden was 270 per cent of GDP in 1946, but in subsequent decades it was brought down without austerity through a combination of high growth and moderate inflation. The crucial factor in reducing debt after this crisis will be smart investment as part of a green recovery, to generate well-paid jobs, and consequently a sustainable tax base. To avoid the mistakes of last time and build a balanced economy, investment and new job creation must be spread across the country and make the most of everyone’s talents.
After the crisis, we will also need to revisit tax increases – not just for the sake of public finances, but to redress inequalities that have been further exposed by the pandemic, and to better-fund public services and the wages of people who work in them. That should include taxing the wealthy and unproductive economic activity, for example by equalising taxes on income from work and wealth. It should also mean concerted and co-ordinated action to tax the digital platforms likely to do very well out of the lockdown.
Carys Roberts is executive director of IPPR
Alfie Stirling: Austerity did not fix the roof – it eroded it
Assessed on its own terms, austerity is supposed to be about fixing the roof while the sun is shining. But the Covid-19 pandemic has shown that this could hardly have been a more complete failure.
Austerity eroded the public sector’s ability to absorb shocks. The slowest decade of per capita funding increases since the 1950s left the NHS struggling to cope with even seasonal flu, let alone a major pandemic. Meanwhile, the UK entered economic lockdown with the weakest unemployment support in its postwar history and the third weakest among 35 advanced economies globally. Temporary increases to Universal Credit announced in March 2020 reversed just a fifth of the cuts seen since 2010, and for one year only.
Spending cuts transferred risk from government to families with a double pinch: forcing people to rely more on savings in an emergency, while at the same time contributing to the worst decade of real wage growth for two centuries. This left households with little to fall back on, with the savings rate falling to its lowest sustained level since the 1960s.
But despite all this pain, austerity did not materially improve government’s ability to increase debt in a crisis. During recession, the UK can almost always borrow. This is partly because investors have few other safe places to put their cash, partly because central banks can always buy government debt if needed, and partly because subdued economic activity means there is little risk of sustained inflation. Despite the UK’s budget deficit being forecast to rise to more than £200bn per year, the cost of financing overall debt is expected to fall to the lowest levels on record.
In the 2020s, the UK must not repeat the mistakes of the 2010s. We must recover by focusing on three things: prevention, resilience and flexibility. Where threats are knowable, such as climate change, huge efforts must be made to prevent the crisis from worsening. Where threats are unknown, public services must be strengthened over years – not weeks – so they have the resilience to absorb shocks. And where previously we obsessed over public debt, we should learn to flexibly weigh up what debt really costs us, compared with the costs of failing to invest for the future.
Alfie Stirling is head of economics at the New Economics Foundation
Tony Yates: Public demand must substitute for private demand
When the public health part of the Covid-19 crisis is over, fiscal policy is going to involve some hard choices. First, there will be an economic hangover from the firms and jobs destroyed during the lockdown, necessary though it was. Public demand will have to substitute for private demand, meaning significant budget deficits beyond this year.
Second, we have to refashion the state to improve our capacity and readiness to deal with another pandemic; and to fund a new settlement for “key workers” whose social value in circumstances such as this often exceeds what they earn. As a permanent reconfiguration of the size of the state, its cost will have to be met through general taxation.
Third, we have to resolve how to pay down the cost of fighting this pandemic. There is a limit to the state’s capacity to borrow. In fairness to future generations, we have to preserve that space so they can fight their own pandemics or other risks (such as climate change) which we foisted on them. Ultra-low government borrowing costs mean that we can carry that debt and pay it down over a long period, perhaps even decades.
But what is fair will depend on the risk of future pandemics and on whether the economy resumes healthy growth. Low risk and healthy growth might mean no taxes are needed to actively return the debt-GDP ratio to where it was. But the future could prove worse than this. So no austerity: deficits in the near-term to counter recession, higher taxes to fund a more resilient state and a fair settlement to allocate the costs of this crisis across the generations. How today’s Tory party responds to these challenges is hard to predict.
Tony Yates is former head of monetary policy strategy at the Bank of England
Frances Coppola: After the crisis we must resist the siren voices demanding austerity
People seldom call for austerity during a crisis. They want spending. Lots of it, to ease the pain and hasten recovery. But when the crisis is over and things start to look more normal again, their attention turns to the cost. “How will we pay for all this?” they ask. And siren voices answer: “We must tighten our belts, pay down the nation’s credit card and balance the books.”
After the 2008 financial crisis, we listened to those siren voices. Terrified by the debt crisis in Greece, the UK elected a government that promised austerity. The coalition government embarked on a programme of public spending cuts and “reforms” to eliminate the post-crisis deficit. They promised us that eliminating the deficit would make us better able to survive another crisis.
But a decade of spending freezes and cuts has not left us better able to cope with another crisis. It has achieved exactly the opposite. The NHS is overwhelmed even in a normal winter flu season. Our welfare system is wholly unable to support people through even normal difficulties, let alone the worst recession since the 1930s. Social care, homeless services and others have been cut to the bone. The safety net that we rely on to support us through economic crises has been systematically shredded.
The “lockdown” is economically damaging. But it is necessary because the NHS and other public services can’t cope. Had we gone into this crisis with comprehensive, well-funded public services, the economic cost would have been much lower.
When the lockdown is eventually lifted, and things start to look more normal again, the siren voices will be back. This time we must resist them. Austerity on steroids to “balance the books” after this crisis would render us even more fragile. It would be utterly disastrous.
Frances Coppola is a financial economist and the author of The Case for People’s Quantitative Easing