Chapter 9 Economic Policy: Austerity

This post by Sean Kippin introduces chapter 9 of Politics and Policy Making in the UK by Paul Cairney and Sean Kippin. Key terms to remember include:

• Deficit: the amount to borrow when annual government spending is higher than income.
• Debt: the overall amount of government borrowing (from multiple deficits).
• Recession: a sustained drop in economic activity. Often defined as a reduction in gross domestic product (GDP) over two successive financial quarters.

From 1979 a ‘post-war consensus’ to pursue ‘Keynesian’ policies gave way to a ‘neoliberal’ approach which emphasised state withdrawal and market forces. This reduced the state’s control of its own economic policy, and left it subject to international forces. The response of successive UK governments to the financial crisis (which began in 2008) demonstrates how policymakers define and attempt to solve problems, the barriers they face when trying to enact their agendas, and the profound social consequences of their decisions.

Defining and solving the crisis

The global financial crisis of 2007-8 included the collapse of major banks in countries such as the US and UK. The UK was particularly vulnerable since its economy depends disproportionately on a large financial sector. The UK government sought to reinject financial sector ‘liquidity’ (access to cash or the means to convert assets to cash), since a failure to do so would risk economic collapse and terrifying social consequences. Its action took the form of enormous ‘bailouts’ to failing banks, including taking part-ownership of some. Such measures were controversial, as they seemed to let the banks off the hook for their risky lending practices and lack of prudence in managing their customers’ finances.

This immediate banking crisis created an economic crisis marked by recession and low growth. The response was to use mildly Keynesian economic policies to engage in counter-cyclical public spending to trigger economic growth, in the form of a ‘fiscal stimulus’. The combination of high spending and low growth generated attention to the issue of higher debts and deficits, with the Conservative Party benefiting from the issue politically and emerging as the largest party in the House of Commons following the 2010 General Election (then forming a Coalition government with the Liberal Democrats). Crucially, it gave them an opportunity to pursue longstanding neoliberal ideological goals.

The Coalition placed responsibility for crisis at the former Labour government’s door by claiming that they had ‘spent too much and ‘failed to fix the roof while the sun was shining’. This new problem definition was influential, reinforced by the unfolding Eurozone crisis, and triggered a shift to austerity whereby the Coalition pledged to eliminate the fiscal deficit within a single, five year parliamentary term. The Coalition related these issues to broader debates about the appropriate size and role of the state, the need for public sector reform, and the balance between tax rises and spending cuts which are socially just and economically viable.

Is UK economic policy within the Government’s control?

Economic policy has a strong international dimension, due to the centrality of international markets, the effects of currency fluctuations, and the interdependencies of globalised economic and financial systems. The UK government also handed power to an independent Bank of England from 1997 onwards, which sets interest rates and controls other elements of monetary policy (Chapter 4). The devolved executives also oversee important economic functions.

Conservative and Labour UK governments have supported neoliberal policies such as deregulation. Many have argued that such a hands-off approach helps to explain the severity of a global economic crisis as experienced in the UK.

While the outcomes of economic policy may be out of reach of UK governments, they have more influence over crisis narratives. For example, the Coalition government used a persuasive narrative to justify austerity, consisting of the following components:

1. Excessive debt is dangerous.
2. Britain is broke.
3. Austerity is a necessary evil.
4. Big government is bad government.
5. Welfare is like a drug, and government action should not encourage dependence.
6. Reform government to reward strivers and punish skivers.
7. We need to fix Labour’s mess quickly.

While the narrative was successful, UK policies were less so. Indeed, these policy choices were highly contested in relation to the following issues. First, UK debt levels were high, but affordable due to low interest rates. Second, the notion that the country had ‘run out of money’ was misleading and based on an inaccurate ‘domestic household‘ analogy. Third, despite the claims of the Coalition’s leading figures, there were alternatives to its approach. Fourth, a key element of austerity – that state intervention ‘crowded out’ the private sector and thus economic growth – is rather controversial. Fifth, it drew upon misleading claims about ‘welfare dependency‘ and a false distinction between in and out of work poverty.

Did the Government deliver austerity? And what were the consequences of its efforts?

The substance of the government’s austerity drive was spending cuts, tax changes, public sector reforms, and even a hike in English university fees (despite Liberal Democrat promises to the contrary).

The government cut spending heavily in some areas, such as local government and welfare, but not in others, such as money spent on old age pensioners and the NHS. It was more successful in projecting austerity than achieving its fundamental goals. Austerity harmed economic growth, and triggered a recession. Recession prompted a relaxation of spending cuts and even an intervention from the IMF. Public spending rose during this period, but fell as a proportion of GDP:

Other reforms, such as Big Society,  and gimmicks like the ‘one in, two out’ rule for regulation didn’t amount to much.

The social consequences of austerity were severe, and felt unequally

• Women received a ‘triple whammy‘ of cuts to benefits, and increase in employment, and the retrenchment of vital public services
• Austerity measures were ‘disproportionately detrimental to members of racial and ethnic minority communities‘ 
• Older people were (relatively) protected from austerity, such as in the form of the pension ‘triple lock’, while younger people were hit hard by changes to tuition fees, housing benefit, and the Educational Maintenance Allowance
• The Department for Communities and Local Government was the hardest hit by cuts, which translated into particularly severe local budget cuts to large urban centres in the North of England, while ‘middle England’ received less harsh cuts, exacerbating existing regional inequalities. 

In other words, the Coalition’s response to the economic crisis included policies which created social harms, backed by a top-down uncompromising language. If so, can we envisage more inclusive means of policymaking? Many ideas have been proposed:

–  Constitutional reform, such as through greater devolution or electoral reform might help to include a greater breadth of perspectives in policymaking.

–  ‘Co-production’ with service users and other citizens

–  Deliberative democracy, to assemble a representative body of people engaged in a finding common ground and reaching decisions, could foster participation in and legitimacy for policy decisions

–  Community wealth building to use ‘anchor institutions’ and member owned businesses to ensure wealth generated locally is kept there  

Many of these agendas have been proposed and rejected. Others show less potential for transformation than their advocates might suggest. Some may some appealing, but lose support should they propose too-radical change.

Conclusion

This story of post-crisis economic policy connects strongly to the Westminster story. Politicians responded to crises by projecting strong control of the situation and of acting decisively to make hard decisions on banking, then economic crisis, then debts and deficits. However, it also confirms elements of the complex government story: policies did not have their desired effects, often leading to a course change. Public sector reforms demonstrate the usual mixture of eye-catching presentation and low impact. Austerity was ultimately more useful as a dramatic government story than a way of controlling economic policy and achieving goals on debts and deficits. A government can appear to deliver on its promises, but not getting what it wants, while causing damage along the way.