In the wake of the 2007-2008 financial crisis, the UK underwent sweeping budget reforms, and almost every government agency saw extensive cuts. Alistair Darling announced in the start of 2010 plans by the Labour government of cuts “deeper and tougher” than Thatcher’s in the 1980s, and when the Conservative party was elected that year they made those cuts a reality. Yet a decade on, what was ushered in by politicians on both sides of the aisle in Westminster is now a reminder of the UK’s failure to effectively deal with financial turmoil. As we experience another crisis in 2020, can we learn from the past?
At the heart of the issue is the concept of countercyclical fiscal policy. Fundamentally, it attempts to stabilize the business cycle by saving when the economy experiences periods of sustained growth, and spending when it goes into recession. This is achieved by reducing government spending and raising taxes during growth periods, and subsequently stimulating the economy during recessions with tax breaks and spending increases. This should go alongside appropriate monetary policy actions, such as cutting or raising interest rates as necessary to control the supply of credit. In times of financial crisis this goes further, with extensive stimulus packages and bailouts, like the plans we have seen by many governments in response to COVID-19 or the assistance given to banks in the aftermath of the global financial crisis in 2008. In more recent years we have also seen the development of quantitative easing to restore confidence to markets in times of crisis, and to keep them liquid.
Yet, while the UK did see a strong monetary policy response to the global financial crisis with an extensive quantitate easing program, along with bailouts for banks, the fiscal policy response was completely opposite to the principles of countercyclical policy. Taxation rates were raised and government agencies saw budgets slashed across the board, with only the NHS, International Development (foreign aid) and school budgets ring-fenced from cuts (other departments with budget increases escaped cuts, but were not protected from them, meaning that the government had the option to cut them). School budgets, in budget terms, refers to education from ages 4-16; both early years education and post-16 education saw cuts. Although the NHS as a whole saw its budget protected, many nurses and other vital staff saw real term wage cuts due to pay increases being outpaced by inflation.
An analysis of the social impacts of austerity is outside of the scope of this article, but this in no means downplays the numerous costs that it has brought with it (with the poorest in our society hurt particularly hard with cuts to welfare, housing and local governments). Yet the economic impacts of austerity are clear, in that it significantly delayed the recovery of the UK economy. At a time where the economy needed favourable conditions to stimulate business activity, higher tax rates stifled growth. UK GDP only recovered to 2008 levels around 2013 (for comparison, US GDP recovered by 2010), and the Bank of England had to engage in a second period of quantitative easing between 2011 and 2012.
The other crucial impact of austerity is that it left local governments with few tools in their arsenal to combat crises. As the coronavirus crisis affects the entire nation, local governments do not have the resources to fight back in ways that are needed in their communities. The social care system was already stretched before the coronavirus, and PPE shortages have been exacerbated by inadequate stockpiles due to budget concerns.
Yet austerity is still not over, with most government budgets still significantly below 2008 levels in real terms. Budgets were intended to recover about a third of what they lost to austerity cuts by 2021, although this prediction was made based on spending increases that were allocated before the coronavirus crisis, which could significantly change. Even so, this still leaves them far below where they needed to be ten years ago in response to the financial crisis, let alone today. We may not yet have felt the longer term impacts of austerity, such as an infrastructure network less able to keep up with growing demand due to lack of government investment, or a less competitive UK workforce as a result of cuts to post-16 education.
In dealing with the current coronavirus crisis, it is therefore important that we don’t repeat the mistakes that we made ten years ago when we handled the global financial crisis. The government must not shy away from taking on debt to relieve the pressure that our economy is facing. We have seen austerity cripple weaker economies, such as that of Greece, and the economic contraction that austerity brings only hurts in the long run. A much better recovery strategy is to take on debt now, and have the money to pay it off in the future with a strong economy that recovered from crisis quickly. With record low interest rates, there is not a better time to borrow in order to get our economy back on its feet.
In response to the coronavirus we have seen quick action from Westminster, with a £123 billion package to support all aspects of our economy. The Bank of England has complemented this with a monetary response of slashing interest rates, and a £200 billion quantitative easing programme. The Coronavirus Job Retention Scheme in particular will protect around 8 million jobs, meaning that our economy will be much better prepared to kick-start itself once lockdown measures are eased. However, despite what was initially hoped, it is appearing less and less likely that the economy will simply be able to return to business as usual. Some businesses will unfortunately not survive the crisis, despite government assistance. With social distancing measures in place for the foreseeable future and overall reduced consumer confidence, the economy will not be able to pick back up immediately. As a result, it is vital that the government continues to support the economy in the coming months, without deficit concerns pushing us back towards austerity. The deficit is expected to expand to £337 billion, up from £55 billion before the crisis. Yet this is a valuable investment if the alternative is economic stagnation or contraction in the coming months and years.
Luckily, the government seems to have learnt its lesson. The public discourse around austerity has significantly shifted in the last 10 years, and many economists have warned the government against a repeat of past mistakes. Chancellor of the Exchequer Rishi Sunak said that the government could “turn the page on austerity”, and that he would prefer economic growth to cover the deficit. It seems unlikely that austerity is to return in the same form as we saw it in 2010. Yet as we emerge from another economic crisis, we must continue to remember the impacts of austerity in order to avoid repeating it.
etonomics.com 