Austerity is a false economy

Austerity has been a moral and economic disaster. That’s why watching the government take a sledgehammer to disability benefits has been a particularly painful sight. It repeats the worst of the austerity that came before and, as true as it was 15 years ago, is completely unnecessary. Politicians have spun narratives justifying the measures around the increasing cost of disability support. Yet, the fact the savings match rumoured shortfalls in government fiscal targets is no coincidence. The fiscal rules that guide this are no real reflection of the fiscal or financial risks the country faces, the cuts proposed may make things worse not better. Cutting support to the most vulnerable isn’t just callous, it is economically incoherent.

While some have called this a return to austerity it may be more accurate to say we never left. Taking a step back can help us realise how imminently visible the havoc austerity has wreaked upon Britain is. Just last year, my secondary school’s roof was so badly damaged in a storm the pupils in year 7 to year 10 had to go back to learning on Zoom for months. The same school closed its sixth form despite being the only provider in a 10km radius for over 18,000 people. Elsewhere in my hometown, the high street is a shell of its former self and every single bank has closed down. The community centre that used to host youth clubs to enrich kids’ social lives now provides food banks to feed them. Now, my family worry if my uncle will be able to continue living independently if his PIP payments are cut.

It can be easy to blame everything wrong in Britain on austerity. But 15 years ago my experience might have just seemed unlucky — now you don’t have to be from my town to find my experience familiar. The common thread of the past 15 years of Conservative Chancellors and now Rachel Reeves too has been a commitment to self-imposed fiscal rules. Yet take these constraints on borrowing and debt at face value and austerity has failed to bring debt down.

Just look at the current situation. Rachel Reeves promised only one fiscal event a year, potentially hoping she could get through the OBR’s Spring forecast with no policy changes. Yet, global economic slowdown and interest rate pressures now mean she’ll likely be forecast to break her fiscal rules as is, requiring a scramble for policy changes to meet the measures. Are we seriously on the verge of fiscal crisis unless disabled people are forced to suffer? No. But our fiscal rules mean small changes in economic variables often cascade down to massive disruptions in day-to-day life. This is no way to run an economy.

Even institutions like the International Monetary Fund, who have devasted developing countries with austerity packages much worse than even the British public can imagine, are backtracking on austerity’s theoretical foundations. The IMF’s own research found that austerity measures lead to debt-to-GDP measures increasing not decreasing. Not only are the visions of imminent fiscal disaster completely hallucinated, the idea that austerity could reduce pressures on borrowing and debt is folly.

However, baked into the UK’s official economic forecast, provided by the OBR, is an economic model that justifies austerity to this very day. Its default multiplier assumptions that measure the impact of public spending on GDP, assume cuts have no impact on the economy after five years. Simple tweaks to these assumptions can change how fiscal measures are assessed, making or breaking the fiscal rules and if austerity becomes ​‘required’.

Crucially, the OBR’s assumptions provide backing for politicians to implement cuts to meet their fiscal targets, without any recognition of how this might increase costs or drag down GDP in the long-term. A more sophisticated approach could give the Chancellor room to make the case for her public investment agenda while showcasing the downside risks to cuts. Yet, the OBR’s cookie cutter assumptions require public spending to be undervalued, leaving us in a doom loop of never-ending austerity and worsening living standards.

Austerity is a complete false economy. It doesn’t take an economist to realise cutting support for ill and disabled people can make their conditions worse and lead to acute distress. In this case, the NHS is left to pick up the pieces, obliterating any fiscal savings cutting preventive support may have brought about. In fact, the reason we might have a growing and larger disabled population is at least in part the fault of austerity, increasing waiting list times and removing preventative support.

This logic doesn’t just apply to welfare cuts and their impacts on health, it’s the disruption to schooling that leads to worse employment and earnings in later life. It’s the short-term political goals prioritised over long-term economic stability. It’s the impoverishment of life in the name of a failed approach to enrich GDP. It turns out miserable living conditions don’t help grow the economy.

Another economy is possible, but only with a change to politics and the economics that grips it. Politicians’ obsession with self-restraint on spending must be abandoned. Instead of panicking about rising debt at nearly every budget we must take a level-headed approach that balances actual measures of fiscal risks with the benefits government borrowing can bring.

Even in a world of pressures on borrowing, cuts don’t have to be the government’s first resort. The government’s targeting of disabled people is a choice. Tackling extreme wealth inequality by taxing the super-rich could provide ready-to-go revenues up to £60bn a year. Equally, reducing the £130bn cost of the Bank of England in the next five years by cutting its subsidies to the banking sector and having the Bank absorb more of its own costs could help in the short-term too.

Austerity has always been a conflict, with false economic theories winning out over people’s livelihoods. It shouldn’t be complicated to understand that personal insecurity begets economic instability. Politician’s refusal to change track showcases either ignorance or a willingness to make people’s life more difficult. Neither will help the economy or reverse the declining trend in living standards.

Image: Kirsty O’Connor /​Treasury