UK austerity: An American view

The New York Times’ UK correspondent, Peter Goodman, recently published a piece which took a close look at the impact of austerity on the UK. In common with the best journalism on this subject – the piece by Sarah O’Connor in the FT last year made a similar point – it highlighted the human costs of austerity. In Goodman’s words, “a wave of austerity has yielded a country that has grown accustomed to living with less, even as many measures of social well-being — crime rates, opioid addiction, infant mortality, childhood poverty and homelessness — point to a deteriorating quality of life.” He goes on to point out that “Britain is looking less like the rest of Europe and more like the United States, with a shrinking welfare state and spreading poverty.”

There have been big cuts in spending before, with the share of spending in GDP falling sharply in the late-1980s, but the economy was growing much more rapidly so we did not notice as much. Moreover, the recession of the early-1990s resulted in a significant turnaround in outlays which soon returned to mid-1980s levels as a share of GDP.  Back in 2010, the Conservative-led coalition government announced budget plans which were underpinned by “a commitment to fairness” and it would “seek to build over the long term a fair tax and benefit system that rewards work and promotes economic competitiveness … [with] … measures to encourage people to take personal responsibility for their actions by rewarding those who work hard work and save responsibly for the future.” Running through the government’s budget plan was the message that the state benefit system was damaging work incentives and that it was their intention to rectify this problem.

All the signs were there that policy was aimed squarely at the welfare bill. And as one of the charts in the June 2010 Budget publication made clear, the bottom 10% of households by net income were hit harder than any group other than the top 20% (see chart). But what exactly was the point of all the austerity? Even before he was appointed Chancellor, George Osborne penned an article in The Telegraph suggesting that the parlous state of public finances threatened to send the UK the way of Greece, and he returned to this theme on a number of subsequent occasions. This is, of course, nonsense. Greece borrows in a currency which it does not control and has a poor record of managing its public finances. The UK issues in its own currency and has never technically defaulted on its obligations since the Act of Union brought the UK into being in 1707.

I assume that the man appointed to manage the nation’s finances knew this and I am inclined to treat the Greek comparison as a cover story for a more ideological assault on the role of the state. Goodman suggests that “from its inception, austerity carried a whiff of moral righteousness, as if those who delivered it were sober-minded grown-ups. Belt tightening was sold as a shared undertaking, an unpleasant yet unavoidable reckoning with dangerous budget deficits.” He juxtaposes Osborne’s 2010 claim of “Prosperity for all” with the reality that “Eight years later, housing subsidies have been restricted, along with tax credits for poor families. The government has frozen unemployment and disability benefits even as costs of food and other necessities have climbed” and highlights that many of those seeking to transition to the new benefits system “have lost support for weeks or months while their cases have shifted to the new system.” If such a piece had been written by a local journalist, they would no doubt have been accused of having an axe to grind. The fact that it was written by an American with no skin in the game gives it a lot more punch.

This all comes at a time when the UK will increasingly have to face up to some unpleasant fiscal truths in the years ahead, especially when it comes to funding the NHS. Paul Johnson, director of the Institute for Fiscal Studies, has pointed out that over the last 60 years “health spending has more than doubled as a fraction of national income, but total spending has been flat. Cuts to defence, housing and debt interest made space for health and welfare. This is not going to be an option for the future.”

Maybe the cuts to the welfare bill, which successive governments have implemented over the last eight years, will give them a bit more leeway to deal with the problem. However, the fact remains that the government will need to open a debate about raising taxes to provide for some of these needs. It will be politically difficult: After almost a decade of cutting services, the government will be pilloried for asking for more money. But without it, still further cuts may be necessary.