Austerity evermore. Voters’ bill per Parliament: £100 billion and rising
Over the course of last week we were subject to a barrage of commentary about austerity into the next Parliament. This week began with Cameron’s intervention to affirm ‘our long-term plan’ no matter what the global economy might throw at us. But on the basis of the alleged goal of deficit reduction, austerity has not worked. Yet so few seem willing to call it and to ask why. In the meantime, the public face the prospect of austerity evermore.
Last week concluded with Andrew Marr warning of an “absolute nightmare of cuts and tax rises”, responding to a Peter Hitchens’ piece in the Mail on Sunday. Hitchens had been motivated by contributions from the Financial Times. At the start of the week, Chris Giles had made his routine pre-fiscal-event calculations to show the Office for Budgetary Responsibility (OBR) are likely to be setting out a grim outlook when they report for the Autumn Statement (3 December). The opening gambit headline: “Osborne faces doubling austerity cuts to £48 billion a year to hit targets”. A series of pieces through the week warmed to the theme, under the strapline: ‘Britain and the cuts: the halfway point’. By Thursday we were warned that ‘the Treasury fears ‘disaster’ after Cameron tax vow’ (my emphasis on their implicit emphasis). The IFS too were in on the act, chastising the Coalition for not spelling out details of some £38 billion of spending cuts in the next Parliament (NB that’s not the total, just the total that isn’t spelled out), and Labour for the lack of detail in its own plans. They warned of ‘extremely deep cuts’.
Outside the immediate timing of the Autumn Statement, these contributions seem to set the parameters for political debate in the run up to the election. In doing so the 2010 election is re-invented for 2015.
Now quite plausibly these commentators are frustrated with the lack of clarity from politicians on how these matters will be addressed. But less is said about why the outlook is so bleak; why we are seemingly back where we started; whether austerity actually makes any sense at all? Surely this is what economists should be doing?
My understanding of the situation is as follows. According to the Coalition plans set out in the June 2010 Budget, we should now be three quarters of the way through five years of austerity, amounting to £120 billion. Instead we find ourselves half way through a nine year austerity, amounting to £210 billion. So with £100bn done, we should have had £20bn to go; instead we have £110bn to go, more than we started with. (Though I should stress these cash figures are very slippery and are offered as only indicative.) (NB for perspective: the health ‘departmental expenditure limit’ this year is 108 billion; education £54 billion)
Recent OBR analysis is indicative of the way these huge shortfalls have come about. They explained how for 2013-14 the deficit was expected to be £60 billion, but on a comparable basis turned out to be £109 billion. A huge £50 billion more / nearly twice as much as expected. On the current course the deficit for 2014-15 may well be up on last year’s figure. I cannot quickly put a full time-series onto a comparable basis, so the following chart is again only indicative, showing the original profile for public sector net borrowing, against the latest outturn figures from the ONS, with a projection for the current financial year at the same amount as last year. The figures speak for themselves: apart from coming off the peak, rather than declining steadily towards zero, the figures remain stuck between £100 – £120 billion a year. The cumulative difference across the figures shown is £109 billion, which is remarkably the same as the figure above for austerity to go. I doubt whether too much should be read into this, but it hopefully suggests that, ballpark, the figures are reasonably consistent and not too misleading.
Figure 1: Public sector net borrowing, £ billion
(NB the actual data are from Table C7 of the June 2010 Budget and the ONS public sector finances release, table PSA2, using public sector excluding banks.)
On this basis, we should surely conclude that the central deficit reduction policy objective of the Coalition has not been delivered?, notwithstanding the OBR projections of it all turning right in the increasingly distant future.
As part of their series the FT also reported voters’ ‘waning appetite for austerity’, with now only two out of five believing more austerity and cuts will be needed in the next five years. Michael Burke has drawn attention to Lord Ashcroft survey results that show specific reasons why voters have a problem with the Tories. Over 80 per cent of Labour voters think the Tories have taken austerity too far in the past (82%) and would take it too far in the future (85%). While Tory voters are sanguine about past austerity, into the future the majority reason for not voting for their own party is they might go too far with austerity into the future (48%) (higher than EU issues seemingly). I wonder how all these voters would feel if they knew they had the same amount of austerity yet to come, and that the last round of cuts achieved very little in terms of the headline numbers?
So why has austerity failed? The OBR are obliged to pass some kind of judgement. In their recent Forecast Evaluation Report (as above) they showed that various taxes had fallen well short of expectations; spending cuts had delivered as expected. So the shortfall is primarily a consequence of the failure of real earnings to recover. But of course economically this follows a failure of aggregate activity over the duration of the Parliament. Now the OBR continue to offer the Coalition a way out of jail by saying the failure was primarily a consequence of the Eurozone crisis. Whether this captures the whole story is certainly debatable.
But even on the basis of the OBR arguments, we already know that we cannot rely on the EU for growth into the future. We didn’t need Cameron’s intervention in the Guardian to tell us that (though just how far he went is certainly of interest). So the prescription to ‘keep to our long-term plan’ is a prescription for policies that even if we accept them as harmless under normal conditions, will be harmful in the context of a failure in our main trading partners that is increasingly unanimously expected. We stare into the abyss of austerity elections until the end of time.
Fortunately the IMF, OECD and others are beginning to wake up to what is in reality an extensive failure of demand on a global scale, and taking steps to a more expansionary fiscal stance. Of course others have argued for much longer that to withdraw demand in a fragile recovery would have the effects of reducing aggregate activity and associated tax revenues, and would be counter-productive in terms of deficit reduction.
We must now stop the cuts hysteria in the UK and demand an impartial and appropriate discussion about what has happened and what the options really are. Back on the Andrew Marr show, with relentless and brutal austerity uncontested, there were anxieties about how the failures of politicians across the world were leading to the rise of alternative political forces, in particular the hard right. We reap what we sow.