How Conservative Austerity Cost the UK Billions
by Raoul Martinez
3 June 2017
Since 2010, the Conservatives have repeatedly claimed that only they can be trusted to run the economy. Where a prodigal Labour party would run the economy into the ground with excess spending, they say they’re prepared to take the ‘common-sense’ approach of austerity. Raoul Martinez argues that this story doesn’t ring true; austerity is a recipe for economic misery.
On 17 October 2010, British Chancellor of the Exchequer George Osborne told the nation it had been ‘on the brink of bankruptcy’. Four days later he revealed his rescue plan: £80 billion of government cuts. No country had ever volunteered such extreme austerity. The claim that there was an urgent need for deep cuts was part of a growing political consensus held together by a simple story: Britain was in an ‘economic mess’ thanks to the previous Labour government’s overspending and the economic priority had to be elimination of the deficit and reduction of the debt. Government spending on everything from unemployment benefit to disability living allowance would need to be slashed. It was going to be painful, but collective sacrifices had to be made.
Though the story had the virtue of simplicity, it was wrong on every count. According to Cameron and Osborne, bringing the debt – the total amount of money owed as a result of government borrowing – under control was ‘the most urgent task’ facing the Coalition. However, most economists disagreed and some had published a letter in The Guardian to provide some perspective: “History shows, first, that British public debt is not high by the standards of the last 200 years. It is rather low in comparison to the second half of the 18th century, the first three- quarters of the 19th century, and most of the inter-war and post-Second World War era in the 20th century. It is also low in the context of the developed world.” In 2010, the national debt was 57 per cent of GDP, lower than Italy, France, Germany, Japan, and the US. At the end of the Second World War – when the British government created the National Health Service, the welfare state, national pensions, a motorway network and council housing – government debt stood at 238 per cent of GDP. In other words, when Osborne became Chancellor, public debt was not a pressing issue.
Then there’s the deficit – the difference between the amount a government spends and the amount it raises through taxes. The Coalition’s austerity narrative blamed the rising deficit on Labour’s spending, but much of the rise could be explained by the global recession itself, not the unremarkable spending of the previous government. An economic downturn automatically increases dependency on social benefits and reduces tax revenue because people lose their jobs, wages drop and less tax is collected, all of which naturally increases the budget deficit. The recession was a global phenomenon, far beyond the control of the Labour government. Despite this fact, a banking crisis that had its origins in the irresponsible and illegal behaviour of the private sector was repackaged as a crisis of government finance.
When the Coalition came to power, neither history nor mainstream economic theory provided any support for the claim that cuts were the only way to reduce the deficit. Cutting spending in a recession has been tried many times and – without exception – failed. For instance, in the aftermath of the First World War, the US, Britain, Sweden, Germany, Japan and France all adopted austerity policies with devastating impacts on their economies. President Herbert Hoover’s austerity response to the 1929 economic crash was followed by the Great Depression.
The historical failure of austerity as a response to economic crises resulted in a widespread consensus among academic economists that, since recessions are caused by a reduction in demand (and when there is no room to offset cuts by reducing interest rates), cutting spending only makes the situation worse. The textbook response to economic downturns, as any student of the subject knows, is to increase spending. By spending more in the short term, a government can reduce public debt faster because smart spending creates jobs, increases tax revenues and releases more people more quickly from dependency on the state.
However, as governments began to embrace austerity, a handful of economists produced research telling them exactly what they wanted to hear. It was seized on by politicians and journalists alike to justify the unorthodox remedy. This research was ultimately discredited: questionable assumptions, dubious procedures and outright mistakes were exposed. As time passed, what little academic support for austerity existed, fell away. At the start of the Coalition’s time in power, twenty prominent economists sent a letter to the Sunday Times urging Osborne to eliminate the budget deficit over the next five years. The letter was gratefully acknowledged by the Chancellor. Two years later, as the UK suffered a double-dip recession and Osborne was forced to borrow billions more than he had planned, the same group were asked if they stood by their initial advice. Only one out of the original twenty said they did: many were now in favour of ending austerity and increasing public spending.
By 2013, the economies of countries that had imposed severe spending cuts were experiencing slower growth than those that had increased their spending. The IMF, though it had recommended austerity in 2010, in effect conceded it had made a mistake by underestimating the damage of cutting government spending in a weak economy. Its own figures showed that austerity consistently undermined growth. Economist Paul Krugman observed that ‘since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity’. According to Simon Wren-Lewis, Professor of Economic Policy at Oxford University, the cost of austerity in delaying the UK economic recovery is about £100 billion. He points out that “If any other government department had wasted that amount, there would be a huge outcry from the media . . . [which] continues to misrepresent economic ideas even though it has access to academic expertise.” A government campaigning for re-election with that kind of performance, he continues, “should be trying to avoid talking about its economic record at all costs”. In fact, the opposite was the case. In the lead-up to the 2015 election, David Cameron boasted that austerity had rescued the economy and created jobs. This was a deception that only 15 per cent of economists agreed with. Simon Wren-Lewis explains why:
To see how absurd this claim is, imagine that a government on a whim decided to close down half the economy for a year. That would be a crazy thing to do, and with only half as much produced, everyone would be much poorer. However, a year later when that half of the economy started up again, economic growth would be around 100 per cent. The government could claim that this miraculous recovery vindicated its decision to close half the economy down the previous year. That would be absurd, but it is a pretty good analogy to claiming that the recovery of 2013 vindicated the austerity of 2010.
In fact, the recovery only began once austerity policies were relaxed two years into the Coalition’s term. The original plan had been to eliminate the deficit in the first five years, but by 2012 – with no hint of a recovery, lower tax revenues than expected, and waning academic support – Osborne quietly backtracked. From then on, there was much less deficit reduction. The predictable result was that in 2013 the economy began to improve, three years later than it should have done. Of course, the recovery did not benefit everyone equally: real wages had fallen by 10 per cent, while top earners increased their share of the wealth. The majority of new jobs created were low-paid, lacked security and left people without enough paid hours. In 2015, inflation-adjusted GDP per capita was still lower than it had been before the crisis. On top of this, overall government debt had soared. In his first budget, Osborne claimed to have ‘set the course for a balanced budget and falling national debt by the end of this Parliament’. Yet his economic plan had increased the national debt by 80 per cent in just five years. In fact, Osborne borrowed more in five years than his predecessor did during a whole decade.
Even if we accept that reducing the government deficit was an immediate priority, there was more than one way to do it. Osborne opted for a strategy that harmed the most vulnerable, creating a cost-of-living crisis in the world’s seventh richest country. He forced a million people to rely on food banks, stripped disabled people of essential financial support and cut benefits to the low-paid and unemployed. Many people have died because of these policies. One study looked at the impact of the newly introduced Work Capability Assessment, designed to reassess the eligibility of disabled people for out-of-work benefits with the stated aim of getting more people ‘back to work’ so as to reduce the welfare bill. This programme, which declared many sick and severely disabled people ‘fit for work’, was associated with a significant increase in suicides, mental health problems and the prescription of anti-depressant drugs. In 2011, Mervyn King, then Governor of the Bank of England, summed the situation up when he said ‘The price of this financial crisis is being borne by people who absolutely did not cause it’ and ‘I’m surprised that the degree of public anger has not been greater than it has.’
The deficit could have been reduced by placing the burden on the wealthiest instead of the poorest. Rather than cuts to public services, the British government could have raised taxes on the wealthiest individuals and corporations; introduced a financial transaction tax (the so-called Robin Hood tax); eliminated tax loopholes that benefit the top earners; and ensured that corporations paid the full value for using national resources. ‘These revenue raisers would not only make for a more efficient economy’ writes Joseph Stiglitz, they would ‘substantially reduce the deficit [and] also inequality.’ But the rich did not bear the burden of reducing the deficit. Instead, the Conservatives cut the top rate of tax – a policy so unpopular that even the majority of their own voters were against it.
If austerity is bad economics, why did business leaders and politicians support it? The simple answer is ideology. It is an article of faith for neoliberals that the state must shrink, welfare and social security must be cut, and everything from healthcare to prisons must be privatised. The focus on deficit reduction provided a convenient cover to lay waste to the welfare state. Speaking candidly at the Lord Mayor’s Banquet in 2013, David Cameron revealed that spending cuts were ultimately about ‘building a leaner, more efficient state . . . Not just now, but permanently.’ In addition, the austerity narrative also heightens the political bargaining power of business. As Krugman puts it, ‘Business leaders love the idea that the health of the economy depends on confidence, which in turn – or so they argue – requires making them happy.’
As soon as the financial crisis hit, the case against austerity was overwhelming. Given that the most vulnerable people in society were set to be punished for the failings of the financial sector, a free media in a functioning democracy would have torn the government’s austerity fairytale to shreds. This didn’t happen. In response to the Coalition’s plan, the Financial Times claimed ‘There are alternatives to UK austerity, just not good ones.’ Instead of challenging the need for cuts in the lead-up to the government’s Comprehensive Spending Review in October 2010, the BBC, Sky and ITV asked their viewers and listeners where they should fall. The Daily Telegraph celebrated George Osborne’s budget, calling it ‘fair and progressive’, one of ‘authority and intelligence’.
In interviews with government ministers, the assumption that cuts were needed went unchallenged. The BBC’s John Humphrys prefaced a question to the Liberal Democrat leader Nick Clegg with ‘We know you need to make cuts, but . . .’. On BBC TV, Andrew Marr conceded to George Osborne ‘You clearly need to make the savings, the cuts . . .’. On Channel 4 News, Jon Snow grilled Labour leader Ed Miliband after he left out a section in his speech on the deficit, asking ‘How could you not mention paying off this appalling deficit? Surely it is the most important issue of all. It is the essence of our economic crisis.’
On 1 April 2015, the Centre for Macroeconomics at University College London had just published a survey showing that the vast majority of economists disagreed that austerity had boosted growth or employment. On the same day The Daily Telegraph emblazoned its front page with a letter from a hundred businessmen expressing their enthusiastic support for austerity. Although a survey conducted by the Financial Times found that less than 20 per cent of economists believed that the beginnings of a recovery in 2013 were due to austerity measures, it still declared in September that: ‘Osborne wins the battle on austerity’ – a claim repeated across the media.
Research by Julien Mercille at University College Dublin examined the coverage of austerity after the 2010 election, looking at four leading national papers – The Daily Telegraph, The Times, the Financial Times and The Guardian. Mercille found a clear pro-austerity bias (The Guardian being the exception). Of 347 articles, only 21 per cent showed any opposition to austerity. When The Guardian is removed from the sample, the figure drops to 13 per cent. Another way of demonstrating press bias is to examine which ‘experts’ were invited to comment on the cuts. Almost all of them were bankers, economists and politicians. Only 1 per cent came from a trade union.
The preference for establishment sources is the norm. Cardiff University lecturer Mike Berry conducted a study into the impartiality of the BBC and found that ‘across all programming, business representatives received substantially more airtime on BBC network news . . . than they did on either ITV . . . or Channel 4 News’. On the BBC’s News at Six, the year the crisis hit, business representatives outnumbered labour union representatives by more than five to one. This ratio rose to nineteen to one in 2012. Another study focused on BBC Radio 4’s Today programme for the six weeks following the collapse of Lehman Brothers in 2008. The study found that the expert sources invited on were ‘almost completely dominated by stockbrokers, investment bankers, hedge fund managers and other City voices’. Thus the sector that had created the crisis ‘were given almost monopoly status to frame the debate’ to the complete exclusion of voices questioning the legitimacy, scale and value of the financial sector.
Of course, there were notable exceptions across the media. A number of high-profile journalists and economists did their best to voice opposition to Osborne’s cuts. But a look at public opinion over the period shows how influential the austerity narrative had become. In June 2009, a poll by The Daily Telegraph found that three-quarters of voters believed the cuts were necessary. Initially, there was some opposition to the way cuts were being made but, according to the YouGov polls tracking public opinion, this opposition steadily declined over the next few years. As this decline occurred, the proportion of people who believed the cuts were ‘too slow’, doubled. The most popular cuts were often those that targeted the most vulnerable: the disabled, the unemployed and those receiving housing benefit. By 2014, an ICM poll showed that the public, by a wide margin, trusted the Conservatives more – the party of austerity – ‘to manage the economy properly’.
Throughout this period, immigrants, criminals and welfare claimants were offered up by much of the press as scapegoats upon whom the public were invited to heap blame for the failing economy. An Ipsos MORI 2013 survey for the Royal Statistical Society and King’s College London compared public opinion on issues such as benefit fraud, crime and immigration. The public believed 24 per cent of welfare was claimed fraudulently – the actual figure is 0.7 per cent. Almost a third of respondents believed that more welfare goes to the unemployed than to pensioners. The reality is that fifteen times more is spent on pensions. The majority believed that crime was rising – in fact, the figures show it had dropped significantly. A majority thought that 31 per cent of the population were recent immigrants; the actual figure is 13 per cent. In each case, public perceptions mirrored the carefully constructed media narrative that deflected criticism from the Coalition’s failing experiment with austerity.
Throughout the Coalition’s time in government, the Labour Party did not oppose austerity. Under the leadership of Ed Miliband, Labour was committed to ‘austerity-lite’: cuts were needed, they claimed, but not quite as many or quite as fast as the Tories were planning. After losing the 2015 election, Miliband resigned, and the only anti-austerity candidate on the ballot, outsider Jeremy Corbyn, surged to victory on a wave of popular support, earning the largest mandate ever won by a party leader. The media onslaught that followed was remarkable. As subsequent research has shown, the British press ‘systematically undermined’ Corbyn ‘with a barrage of overwhelmingly negative coverage’. Analysing nearly 500 pieces across eight national newspapers, the Media Reform Coalition found that, in Corbyn’s first week as leader, for every positive article there were more than four times as many that were openly hostile or expressed animosity or ridicule. News articles, which are meant to be more balanced, demonstrated more bias than comment pieces or editorials, with 61 per cent judged to be negative. The ‘impartial’ BBC mirrored this pattern. When asked if he was ‘shocked’ at the way the BBC ‘rubbish Jeremy Corbyn’, former BBC political editor Nick Robinson – one-time president of the Oxford University Conservative Association – replied ‘Yes’ and said that he had written to colleagues expressing his grievances.
The experience of austerity in the UK has been relatively mild compared to nations like Portugal, Spain and, worst of all, Greece. They have suffered particularly badly under the austerity fever that swept the eurozone after the financial crash. But not every country took the path of swingeing spending cuts. As the austerity narrative amplified across Europe, Iceland showed that another way was possible. It is an interesting story that has been largely ignored by the press. An effective media would have drawn on this test case to challenge the prevailing narrative.
According to The Economist, ‘Iceland’s banking collapse is the biggest, relative to the size of an economy, that any country has ever suffered.’ Its financial industry imploded, the stock market fell by 90 per cent, and investments worth many times the output of the nation were wiped out in a single week. Desperate for money, the government turned to the IMF for $2.1 billion in loans. The loans came with conditions: the government would have to slash public spending and use half its income to repay investors who had lost money on their private investments. In effect, Iceland’s taxpayers were being asked to foot the bill for the bad investment decisions of its banking elite.
On the back of riots and protests, the Icelandic president granted the people a referendum. Nine out of ten voters said ‘no’ to paying off bankers’ debts and instead demanded increased investment in their fragile economy. Taking this on board, the government rejected the IMF conditions, allowed its banks to default, imposed urgent capital controls and raised spending on public welfare. Universal education and healthcare were protected, social security was strengthened for those most in need, and many people had their mortgage debts written off. As for the bankers, the worst offenders were prosecuted and sent to prison. In other words, Iceland ignored every principle in the financial industry’s rulebook.
The stock markets reacted negatively to the vote, and Iceland was widely condemned. Yet, by 2012, this tiny country was outperforming the US and many European nations with an economy growing by 3 per cent a year and with unemployment levels falling below 5 per cent. Iceland went further and adopted a new crowd-sourced national constitution to safeguard its future. By 2015, even the IMF had to admit that Iceland had achieved economic recovery ‘without compromising its welfare model’. In fact, it became the first crisis-struck European nation to top its pre-crisis peak of economic output and is close to repaying many of the debts it owed to other nations. In response to the question, ‘What is the reason for Iceland’s recovery?’, President Ólafur Ragnar Grímsson famously answered: ‘We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing in Europe.’
Raoul Martinez is a philosopher and documentarian. This article is extracted from Raoul’s recently published book, Creating Freedom, described by the Guardian as ‘Exceptional… this year’s essential text’.