From the TUC

This is still austerity, but not as we knew it

25 Nov 2016, by in Economics

There were welcome signs in the 2016 Autumn Statement that the Chancellor has learned from his predecessor’s mistakes.

The OBR forecast greatly increased borrowing (around £120bn more over 5 years) because they see uncertainties around the referendum meaning a weaker economy especially over the coming three years. But the government took the extra borrowing on the chin, and did not attempt any emergency cuts. Instead they did the opposite and increased spending – notably an infrastructure package of £23 bn.

On the level of macroeconomics, this is a profound change of approach.

Phillip Hammond has learned the lesson of the last parliament: you cannot cut spending to fix the public finances

If spending is cut, the economy is damaged and growth is reduced; this means lower gains in employment and wages (including more low quality work). As a result tax revenues are hit and anticipated improvements in the public finances do not materialise. And then some. On the front page of their website on Autumn Statement day, the OBR were reminding us that in 2015-16 (i.e. well before Brexit) government revenues fell short of (June 2010) expectations by £85bn.

So the change in approach to recognise that you need government spending to stimulate growth is a big deal.

But we shouldn’t get too excited…

The chart below shows the annual growth of the total of government consumption and investment spending over the current and last parliament and in the six years before the coalition took office. The green indicates the latest profile, and red the position at the March Budget. Dotted lines give averages across parliaments (roughly).

At the Budget spending growth was planned to grow at a marginally higher rate than under the coalition: 1.5% p.a. (dotted red) compared with 1.3% p.a. (dotted blue).  The changes announced at AS16 mean annual average growth will be 2.0% p.a. (green). Under Labour, however, spending growth was 6.8% p.a. (grey).


These figures are offered as the most direct measure of government stimulus to the economy. (It excludes policy changes on taxes and welfare, but these are complicated by the fact that taxes and welfare spending respond not only to policy change but also to how the wider economy responds to the overall stance of macroeconomic policy, e.g. tax credit spend has increased as earnings have remained depressed.)

The most obvious thing to note is that even over the twelve years of (past and future) austerity, spending was cut only in 2011. Rather than reductions in actual spending, austerity has amounted to a sharp reduction in the growth of government spending, by roughly 5 percentage points a year relative to 2004-09. This reduction has caused massive social damage, but, from a macroeconomic point of view, avoiding outright cuts means fiscal policy has still acted to support the economy – just.

Moreover austerity policies have almost nothing to do with whatever limited recovery in public finances the Tories might now be claiming.

The main improvement to the public finances under the coalition came as a result of the economy recovering from the financial crisis. This recovery was effected under Labour, as part of the internationally coordinated effort. This is illustrated on the two charts below.

The left shows a standard presentation of revenue, expenditure (here, all spending: including welfare and other transfers) and the deficit; the right shows the annual changes in each of these measures. The figures on the right are presented so that the components add up in an accounting sense. When the deficit improves on the year the sign is positive (red diamond above line); increases in revenues (yellow) have a positive sign and increases in spending (green) have a negative sign.

The first key change comes in 2008-09 when the deficit widens sharply: this is the result of tax revenues collapsing. Having increased by 30bn in 2007-08, they fell by £10bn in 2008-09 – that is, a downward change of £40bn. At the same time spending expanded (not least to soak up the increased benefit bill as people lost jobs). Overall, expenditure grew by an additional £20bn, from an increase of 35bn in 2007-08 to 55bn in 2008-08. The total deficit increased by £60bn – with the change in tax revenues twice as important as the change in benefit revenues in explaining that change.

In the next year the deficit continued to deteriorate sharply as the decline in tax revenues continued to intensify; spending was still increasing, but by less than in 2008-09. Then in 2010-11 the improvement to the deficit (diamond above line) is driven mainly by the sharp recovery in government revenues – partly as a result of the VAT increase, but also as a result of economic recovery. But over the next two years the coalition hit spending: the green column shrinks to nothing. Wham – the economy is hit and yellow tax revenue gains fade nearly to nothing by 2012-13. So the coalition U-turned: a new monetary framework (and Mark Carney) from 2013 turns into serious fiscal stimulus from 2014 (the size of this is more obvious on the earlier chart). With some moderate economic recovery, tax revenues perk up – though really these remain pretty modest annual improvements (hence the £85bn shortfall).

Public sector finances: deficit, revenues and expenditure


(NB the U-turn indicates Osborne was ahead of Hammond, but kept quiet for political reasons. As the ex-chancellor’s ex-special adviser Rupert Harrison – now operating in the financial sector –admitted “the rhetoric of the cuts was always worse than the reality in order to gain public support”, FT 14/7/16.)

Philip Hammond’s increases to capital spending will provide additional support to the economy, as it thrashes around in the wake of the Brexit vote and deals with global conditions that are anything but favourable (see IMF here). But they fall vastly short of what is needed.

We have shown elsewhere that in 2020 working people will be nearly £1000 a year worse off on the OBR’s latest projections. There was nothing in the Chancellor’s speech for public sector workers, the NHS and young people, and only the mildest offset to the coming storm for recipients of universal credit.

It is interesting to observe that now government debt has reached the dread 90% of GDP, nobody cares: apparently, we need not worry. Maybe so. But it is not about whether this or that level of debt is or is not sustainable, it should be about understanding why policy to reduce debt ended up increasing debt. This week the Chancellor recognised that spending is a necessary part of getting the economy growing. Economic growth will deliver not only the boost that working people need, but also health to the public finances – as tax revenues are boosted and welfare spend is reduced. There is no public finances crisis: there is a self-inflicted crisis of economic growth.

£23 billion is a start (see also here), but in the great scheme of things the government’s overall spending plans are still austerity. The Chancellor will have to do much more to convince us that he gets that a new approach is needed. In the meantime working people will continue to endure hardship that is entirely unnecessary.