UK Austerity: Heinous or Hyperbole?

Background

One of the most prevalent narratives propagated in the run up to the recent general election in the UK—which continues to generate significant amounts of public outrage and media attention—is that of "savage" public sector cuts; the great evil that is austerity.

For anyone reading without any knowledge of UK politics, the 2010 election saw the end of a thirteen year reign of the Labour Party. The Conservative election campaign had strongly criticised Labour's record on the economy, accusing them of reckless spending and borrowing, particularly in the years leading up to and following the 2008 financial crisis.

Since the crisis was global in scale, the degree to which Labour were directly responsible for the huge (£153bn) budget deficit in 2010 is up for debate, nonetheless Labour's credibility was severely damaged. One of the primary stated goals of the Conservatives was to reduce the deficit and bring the country's finances back under control, which would involve rolling back the spending increases Labour implemented in their attempts to soften the impact of the recession.

Winning enough of the vote to form a coalition with the Liberal Democrats in 2010, and then enough to form a majority government in 2015, the Conservatives were fairly convincingly able to blame the economic conditions left behind by Labour for the austerity that followed, however the public have become increasingly discontented in the seven years since, and this undoubtedly contributed to the Conservatives losing their majority in June's election.

Actually Austerity?

Interested to see the extent of the austerity implemented by the Conservatives, I decided to delve into the figures provided by HM Treasury's public expenditure statistical analysis reports. On first inspection the raw numbers appear to tell a very different story, with public spending increasing every single year, however inflation and population growth are to some degree responsible for this consistently upwards trend. After putting the figures into a spreadsheet and adjusting accordingly, I was able to produce the following:

Fig 1. UK Public Spending Overview 1997-2017

Several key areas of government spending can be seen in the graphs above, providing enough of a snapshot for the purposes of this article.

The first thing to notice is that in most areas, spending has indeed been reduced since 2010. Police spending is a fairly stark exception, which is interesting given the outcry in the wake of recent terror attacks against the significant reductions in the number of police officers. When you also consider the consistently falling number of criminal offences, it seems reasonable to assume that resources have been re-allocated away from pure manpower, for example into more specialised units, or improved equipment or technology, but this is deserving of its own separate discussion.

The crucial decision that needs to be made in order to fairly evaluate these spending reductions is what to compare against. The accusations of "savage cuts" are invariably based on spending reductions since 2010. While total spending hasn't actually been cut substantially since 2010, the population increase over the last seven years means that the per-capita cuts are much more visible. Similarly, public expenditure as a percentage of GDP has also fallen steadily since 2010 from 44% to 40%.

However, it is unreasonable to use 2010 as the baseline as it marked the peak of a sharp increase in spending that was always intended to be temporary:

[A]dditional borrowing was undertaken [from 2008 to 2010] in order to implement the temporary fiscal stimulus measures that the government thought necessary and sensible to insulate the UK economy from the full force of the global recession. Chote et al., Institute for Fiscal Studies (2010)

Thus, it makes more sense to compare current spending against pre-crisis levels. On that basis, total inflation adjusted spending in 2016 was over £50bn (7.2%) higher than in 2008; and 1.8% higher per-capita, and is projected to be higher still in 2017. Additionally, spending as a percentage of GDP is remarkably close to 2007-08 levels (a little under 40%), though it should be noted that % GDP figures can be misleading, since you can spend more in real terms while spending a lower % of GDP.

To take some specific examples, healthcare spending in 2016, again adjusted for inflation, was a little under £14bn (11.13%) higher than in 2008, and 5.47% higher per-capita. As alluded to earlier, police spending has seen a considerable 28.2% rise compared to 2008.

In some areas the spending cuts have been more substantial, for example education spending in 2016 was 12.5% lower than in 2008, however one also has to consider other factors that could be responsible. For example, significant increases in university tuition fees means less of a contribution is required from government, and the Institute for Fiscal Studies (2017) also reported that further education "has been the only major area of education spending to see cuts since 2010." Similarly, unemployment benefit expenditure fell by 63% from 2008 to 2016, which is partly explained by falling unemployment.

It's completely compatible with the above that there have been major cuts to specific departments or jurisdictions that have led to job losses and real negative repercussions, but when considering the public finances as a whole the accusation of "savage cuts" seems to be, at best, an exaggeration.

In real terms [between 2010 and 2015], government spending fell by just 0.5 percent a year. Real spending per capita fell by a little more – by about 1 per cent per year. In other words, the overall adjustment in government spending was very small indeed – certainly, many private sector households and businesses had to make much greater adjustments to their budgets given the economic realities that they faced after the financial crash. Bourne et al., Institute of Economic Affairs (2016)

What has actually occurred is a roll-back of spending back to 2008 levels, and as a result the budget deficit has been similarly cut down to 2007-08 levels (relative to GDP). Unfortunately the extra borrowing that has taken place has led to a massively increased public debt and similarly increased interest payments which currently exceed the entire defence budget by nearly £5bn. A budget surplus is required in order to begin reducing the debt, which necessitates further restraint.

Despite this, the widespread resentment continues to build, not just in the United Kingdom, but across Europe even in countries that have implemented even weaker forms of austerity, often revolving more around tax increases than public sector cuts.

The data show that austerity has been implemented in Europe. However, with some rare exceptions, the forms of austerity were heavy on tax increases and far from involving savage spending cuts.Morgan et al., Heritage Foundation (2014)

The government continues to spend in the region of £50bn more than it raises each year, and so while the deficit has been reduced quite successfully, it still makes little sense to call the current spending pattern "austere". It might be more accurate to say that the UK is "moving towards" austerity; if we take that to mean a state of affairs where the government is actually repaying the huge amounts of debt it has racked up, and where economic growth would allow for increases in public spending without increased borrowing.

Another consideration one has to make is that like-for-like spending since 2010 has been higher than that of twelve of the thirteen years Labour were in power. If the current levels of spending are unacceptably low, how can that be reconciled with Labour's spending patterns being called "loose" at best, "reckless" at worst, particularly in the latter half of their time in office?

On the eve of the financial crisis, the UK had one of the largest structural budget deficits among either the G7 or the OECD countries and a higher level of public sector debt than most other OECD countries, though lower than most other G7 countries. Most OECD governments did more to reduce their structural deficit during the period from 1997 to 2007 than Labour did.

Failure to match higher spending with commensurately higher tax revenues unwound the improvement in the public finances seen during Labour’s first term. [...] Between 2002 and 2007, the Treasury’s initial forecasts for borrowing were consistently lower than borrowing actually turned out to be. This did not solely reflect unforeseeable events; even at the time many of these forecasts were made, external observers believed that the Treasury was being unduly optimistic. Chote et al., Institute for Fiscal Studies (2010)

Closing Thoughts

The UK's implementation of austerity has been very middle of the road. The deficit is much smaller, but neither spending nor the size and influence of government have been reduced when compared to before the financial crisis. Increases in income tax, VAT and capital gains tax which may have initially helped to reduce the deficit have also dampened growth, with tax cuts having been shown to work better in tandem with spending cuts to foster economic recovery (Furth, 2013; Morgan et al. 2014).

One of the primary reasons for such limited austerity is public perception. Promising extra money being pumped into public services is an easy way to win votes (as demonstrated by the success of Labour's election campaign which promised enormous investment into the public sector and outright nationalisation of rail and energy). Making entire sections of the public sector immune to cuts (so called "ring-fencing") is also something that wins votes. Conversely, cuts are generally seen as bad, even by those who see them as necessary, which makes the enactment of significant spending reductions very difficult.

Most of the negative effects felt by those working in the public sector are more likely a result of the government's "strategic choices to increase spending in some areas and to reduce it in others" (Bourne et al., 2016). Real criticisms could be made here about spending priorities, but "austerity" provides a convenient one-word scapegoat which unfortunately short-circuits potentially productive discussion on the matter.

Large sections of the public have bought into a narrative of cruel politicians unnecessarily starving public services of funding, and point to the doubling of the debt as evidence that nothing has been gained. It's rarely clear what people who make such arguments would have preferred: Would they have proposed an immediate £153bn spending cut in 2010 in order to prevent any increase in the debt? Or perhaps they think spending should've never been cut at all, and favour sustained elevated spending after an initial Keynesian stimulus.

Jeremy Corbyn has made the claim that "you don't cut your way to prosperity, you invest your way to prosperity", but this is simply false. There exists strong evidence to suggest that the reason for the less than stellar recovery was/is too little austerity rather than too much, and that government stimulus does not guarantee economic recovery.

One example that comes to mind is Japan, which has been attempting to spend its way out of economic stagnation since long before the 2008 financial crisis. It now has the highest national debt in the world relative to its economy (second only to the United States in absolute terms), yet its economy continues to flat-line. Meanwhile, countries like Estonia, Lithuania and Latvia—which pursued austerity to a greater degree than the rest of Europe—have seen some of the highest levels of growth (Mahoney & Knox, 2017).

Public austerity is a necessary condition for private flourishing and a rapid recovery. The problem of Europe (and the United States) is not too much but too little austerity — or its complete absence. Bagus, Mises Institute (2012)

It should be clear that austerity policy, properly understood, works to revive the economy and restore economic growth. In contrast, the approach of using bailouts and stimulus is bound to fail. Keynesian economists may be good at telling scary stories of death spirals and black holes, but the lessons of history clearly point us in the direction of austerity and away from stimulus. Thornton, Mises Institute (2013)

Proclamations of austerity notwithstanding, most European countries have cut neither spending nor taxes. Yet, the ones that have are now growing the fastest.Melchiorre, Competitive Enterprise Institute (2013)

An in-depth analysis of the comparative effects of austerity versus stimulus is well outside the scope of this article, and would have to take into account a complex interplay of factors; however several of the sources below may provide a good starting point.

References