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.

What happens when UK Governments try to control and delegate policymaking? #POLU9UK

To celebrate Andy Murray becoming number 1, I have recorded the podcast in the style of him giving an interview:

 

British politics looks weird because UK governments have contradictory incentives: to look like they are in control, but delegate most, of policymaking; to take but shuffle off responsibility for policy outcomes; to hold on and let go.

These incompatible incentives reflect our incompatible stories of British politics:

• One stresses central control, the other stresses complexity and emergent outcomes despite central government intervention
• One stresses the need for central control to ensure clear lines of accountability, the other stresses the need for pragmatism and how ridiculous it is to hold people to account for things over which they have minimal control.
• One gets all the attention, despite being misleading, partly because it relates to a simple and comforting message on accountability and the exciting world of high politics. The other gets little attention, despite being more accurate, because its message is confusing and often boring.

So, when we discuss the big post-war developments in British politics, and their impact on policymaking and accountability, we should not expect to find a grand or consistent plan. Instead, post war government reforms reflect these contradictions, and prompt a tendency for elected policymakers to delegate or ‘shuffle off’ most responsibility but intervene in unpredictable and inconsistent ways.

What were these big changes? 1. A shift from state to market?

I say this not to diminish the argument that major changes from the 1970s, to alter the balance between the state and market in the UK, were often ideologically driven. Rather, don’t assume that the consistent/systematic application of that ideology is the main explanation. In some cases, governments:

• diluted their reformist beliefs, preferring pragmatism and realistic aims
• pursued reforms for simple aims such as to bolster their popularity
• accepted or reinforced the actions of their predecessors (even if from another party)
• pursued major reforms after key events and crises seemed to force their hand.

Overall, politics is often about telling a story about handling government or crises well, not actually controlling events and outcomes, and no single elected government can oversee a 10, 20, or 30-year plan to reform the state in the scale we witnessed.

Still, we can now see fundamental differences when we compare the UK state with that of the 1970s. Examples include:

• A ‘paradigm’ shift in economic policy, from ‘Keynesian’ to ‘monetarist’ economics (see Hall), prompted by economic crisis in the 1970s under Labour and the election of a Conservative government in 1979. For example, governments no longer promise to achieve ‘full employment’ via measures such as capital investment (indeed, the Thatcher government appeared to accept high unemployment while favouring inflation controls).
• Privatisation. The sale of public assets (including major nationalised utilities and local authority owned social housing), break up of state monopolies, injection of competition in the public sector, introduction of public–private partnerships for major capital projects, and charging for government services.

In both cases, you can see one form of this debate on central control playing out: for some advocates of economic reform and privatisation, this was about producing a ‘rejuvenated’ and ‘lean’ state, with ministers able to focus on core tasks – making strategic decisions and creating rules for others to follow – without having to pretend that they can control the economy or manage major industries. In this account, post-war developments were based on the idea of state planning and central control over the economy and most public services, while post-79 developments were driven by the belief that such planning had failed.

Although prompted by the Conservative government of 1979-97, the Labour government from 1997-2010 reinforced most measures (and privatised more services than Thatcher would have envisaged). It also extended the idea of limiting central government ministerial intervention in the economy by introducing Bank of England independence (making it primarily responsible for interest rates and strategies to manage inflation).

2. A shift from ‘rowing’ to ‘steering’?

This ‘lean’ theme is summed up in the metaphor (made famous by management consultants Osborne and Gaebler) of ‘steering, not rowing’, in which governments decide to provide direction to public services/ public servants rather than managing them directly. Also look out for the phrase ‘new public management’ (NPM) which mostly describes the application of private business methods to the public sector. Examples include:

• Civil service reforms to separate strategic ministerial/ operational decisions and make public servants more directly accountable for the latter.
• Quasi-markets. Public bodies like hospitals and schools are given greater operational independence. One part of the public sector competes with another for (say) the business of commissioning agencies and/ or to compete in league tables of performance.
• Quangos. The increased use of quasi-non-governmental bodies, sponsored by government departments but operating at ‘arms-length’ from elected policymakers.
• Public sector reforms in which non-governmental bodies play an increasing role in service delivery while subject to regulation, inspection, and performance management.

3. Constitutional

These reforms, often designed to give a sense of reinforced central control, are different from decisions by the UK government to shift power upwards, to the European Union, and downwards,(a) in 1999, to devolved governments in Scotland, Wales and Northern Ireland, and (b) through various experiments in regional government (in the early 2000s) and ‘localism’ (from 2010).

What is the overall effect of these reforms?

These reforms prompted several debates about the modern nature of the UK state, based on questions such as, Is it ‘hollowing’ or rejuvenated?

• Is UK central government now less able to influence policy outcomes, and more reliant on persuasion and cooperation from many actors in policy networks? Do we talk about multi-level governance, not government, because no single government can control policy? Is this the great irony of reform: they were designed to reinforce central control but they actually exacerbated the UK’s governance problem?
• Or, has central government shuffled off direct responsibility for the previously unmanageable parts of the public sector that took up a disproportionate amount of ministerial energy (major industries, local government, Scotland), and become more powerful via regulatory mechanisms or more able to shift blame?

When considering these questions, note how this UK-specific discussion can be supplemented by the ‘universal’ factors we discuss in POLU9UK and covered in the 1000 Words series, including: ministers are boundedly rational, operating in a policy environment with a huge number of actors, and apparently unable to control outcomes that ‘emerge’ from complex systems. In other words, the answer to the ‘hollowing’ question will not come only from an analysis of UK government policies.

What is the effect on ministerial accountability?

As in Scotland, the UK Government has experimented with many forms of accountability based on one of these two stories of central government:

1. Westminster-style democratic accountability, through periodic elections and more regular reports by ministers to Westminster. This requires a strong sense of central government and ministerial control – if you know who is in charge, you know who to hold to account or reward or punish in the next election.
2. Institutional accountability, through performance management measures applied to the chief executives of public bodies, such as elected local authorities and unelected agencies and quangos.
3. Accountability via pluralist democracy, fostering the shared ‘ownership’ of policy with stakeholders to produce choices that both support.
4. Localist democracy, encouraging a sense of collective responsibility between local authorities and their stakeholders.
5. User based notions of accountability, when a public body considers its added value to (and responds to the wishes of) service users, or public bodies and users ‘co-produce’ and share responsibility for the outcomes.

Yet, 2-5 generally seem incompatible with, or overshadowed by, 1. Ministers think that the public expects Westminster-style accountability, so they try these other measures but also:

• Try to show that they still control the direction of delegated services, often with reference to problematic proxies of their own success (see the example of Troubled Families)
• Intervene in an ad hoc way in the decisions of public bodies that they’d otherwise like to run themselves (see Gains and Stoker)
• Or, they seem to delegate power to public bodies but introduce so many regulations, budget limits, and performance measures that it is difficult for those bodies to exert their autonomy (see the example of ‘prevention policy’, in which central governments simultaneously support and scupper various forms of prevention and early intervention).

Group work

In groups we can discuss these major reforms and the extent to which they were driven by a grand plan or a series of unfortunate events.

We can discuss accountability and try to explain how and why ministers intervene in some areas but not others.

Since we focused on the two basic stories of (lack of) control in week 2, this week we can zoom in to discuss specific measures to demonstrate success in government or produce the appearance of control. What examples spring to mind?

Early thoughts on the SNP conference: 2 speeches postponing independence and social democracy

The SNP describes itself as ‘a social democratic political party committed to Scottish independence’. However, two key speeches at the SNP’s annual conference in 2015 suggest that both aims will have to be postponed. Instead, the political dynamic in Scotland and the UK will continue to contribute to a strange and often inconsistent social and economic strategy that would not be chosen in a fully reserved UK or fully independent Scotland.

The first speech, by Nicola Sturgeon, confirmed that, although she believes that support for Scottish independence may have risen since the referendum, she does not foresee a second referendum in the near future (unless the UK population votes to leave the EU on the back of votes in England and opposition in Scotland). Instead, Scotland will enjoy further devolution in some areas, such as a greater ability to set income tax rates and vary some social security benefits, and continue to deliver most public services, without having complete control in either.

Consequently, it is not possible for the Scottish Government to take a ‘social democratic’ approach, often linked to the idea of ‘Nordic’ social democracy, to combine (a) spending decisions based on an appeal to universal service provision, and (b) redistribution through taxation. Instead, there is great potential for inconsistent UK/ Scottish strategies: the Scottish Government to oversee a spending regime that favours the wealthy and middle classes (on universal free services with no means testing) while the UK Government maintains a tax and benefits policy that many people will perceive to be insufficiently redistributive.

These issues arise infrequently on the Scottish political agenda, partly because Scottish independence has drawn attention away from serious debates on budget priorities. Further, a continued sense of constitutional uncertainty – built on the SNP leadership’s short term acceptance of devolution, but long term hope for independence – may help minimise economic debate and maintain an economic system that few would design.

The second speech, to be delivered by John Swinney, Scotland’s equivalent of the Chancellor of the Exchequer, confirms that the SNP likes to combine ‘social democratic’ ideas on spending, but strategies on taxation that would generally not look out of place in George Osborne’s Red Box. Swinney will propose to give local authorities the power to reduce rates of business tax (well in advance of Osbourne granting the same powers in England). This initiative follows a series of speeches by Alex Salmond, while First Minister, which suggested that the SNP would also like to reduce corporation taxes and airport charges, to increase economic competitiveness and encourage inward investment. It also reinforces the SNP Government’s decision to (effectively) ‘freeze’ the rates of council tax, which remain the more regressive option than its previous plans to introduce a local income tax, and likely aversion to raising income tax (the most toxic taxation instrument) in any meaningful way (although compare my account with John Swinney’s).

In that context, the economic lines between a Conservative UK government and SNP Scottish Government are far less clear than we might deduce from the vociferous debates that took place during the referendum debate in 2014 and were repeated in the run up to the UK general election. Indeed, the biggest dividing lines were in areas that the SNP knew it could not control – when it argued for an alternative to ‘austerity’ and a slower rate of budget cuts to allow for economy boosting investment – which make the differences seem more rhetorical than substantive.

In cases where the SNP has demanded more powers successfully, its actions tend to relate to ‘hot button’ issues, such as its intention to mitigate the effects of the ‘bedroom tax’. Rather than propose a major reform of tax and benefit provision to get to the ‘root causes’ of socio-economic inequalities via redistribution, it talks instead about the use of public service delivery to mitigate their effects. This strategy relies largely on public service reforms, localism, and the idea of ‘prevention’ policies – to intervene as early as possible in people’s lives to improve their life chances, through interventions such as parenting programmes – which are also promoted by the UK Government. Further, these strategies generally come in second place behind the higher profile spending decisions which often exacerbate inequalities. For example, the SNP Government maintains free tuition fees in Universities which, in the absence of redistributive fiscal policy, and the continued presence of an attainment gap, doubly reinforces major inequalities in education.

These decisions sometimes receive critical attention, but from opposition parties which remain remarkably unpopular in Scotland, and a media that many supporters of the SNP or independence view with incredible mistrust. As long as independence remains the main reported story of SNP conferences, and the SNP remains unusually popular, few will pay meaningful attention to these socio-economic policy issues.