Austerity: it came, conquered then disappeared—without any argument

Back in 2013, in what still felt like a slump, I reported on “Winston,” a stick-thin, lonely and unemployed 47-year-old who spoke for a bewildered nation: “where is all this money, all this electronic money that’s gone missing? How has it gone missing? Who is accountable for it?” Subject to brutal benefit sanctions, Winston was at the sharpest end of austerity, but most of the country was affected somehow, whether through the big squeeze on wages or cut-backs to services. Everyone else, too, was just as baffled as him about what exactly had gone wrong with the banks, and why the rest of society had to pay for the damage.

The age of austerity blew in with a cloud of confusion. “Sound money” Treasury officials seized their moment straight after the 2010 election to warn nervous new ministers—including those, like Liberal Democrat Vince Cable, who weren’t instinctive slashers—that Britain would go the way of crisis-stricken Greece without deep retrenchment. There was indeed a large government overdraft, but the comparison was deeply misleading. Greece had a long record of defaulting on debt, whereas we had been credit-worthy for centuries, and outside the euro retained freedom Athens could only dream of. No matter. The mood was panic, a plan was needed, and austerity looked like a plan. It stuck. Cutting the deficit became the government’s animating mission, and the framework for every decision it took.

Within two years of the cuts starting, economists pointed out that—when viewed from Mars, or even the bond markets—the biggest problem for the UK economy was not the deficit, but the low-productivity trap it was sinking into. But such pointy-headed objections didn’t cut through. The overriding political story was still about the books—witness the support for David Cameron’s cuts-based “long-term economic plan” in the 2015 general election. And without unemployment ever spinning entirely out of con- trol, the deficit was eventually reduced. But it is hard to regard the austerity doctrine as an economic triumph: we have been through nine unremittingly cash-strapped years for public services, and the most anaemic recovery in centuries.

This summer, though, the Conservative Party suddenly decided that the public finances didn’t matter a jot. The judgment has been that the 150,000 or so party members empowered (for the first time in history) to pick a new prime minister on the whole country’s behalf have themselves had enough of hair-shirt economics. While HMRC’s ready reckoner states that an extra point on corporation tax will rake in £2bn a year, Jeremy Hunt—who, you’ll recall, presented himself as the “grown up” in the race—encouraged the idea that cutting the rate would so boost the economy that more revenue would somehow flow in anyway. Meanwhile Boris Johnson, a devil-may-care character whose pitch is that the UK “needs a bit more optimism,” offered goodies all round. There’d be tax cuts for people on £50,000-plus which would rise with income, the full whack going to those on £80,000-plus. For good measure, we’d have National Insurance cuts, plus an end to the long squeeze on public-sector pay.

There is even less real economic argument around all this than there was when austerity arrived. The prime ministerial wannabes spoke as if the large, ongoing costs of their policies could be funded by raiding the outgoing chancellor’s contingency fund for a no-deal Brexit. But that once-and-for-all allocation is no way to fund recurrent annual costs, and especially not when both candidates were parading their willingness to plump for the very no-deal whose specific consequences this money was earmarked to ameliorate.

However scrappy the big swerve has been, should austerity sceptics not celebrate finally prevailing on policy? Not necessarily. For one thing, Keynes’s argument—that the government’s budget should be used to lean against the mood of private industry—has not yet won. The sudden impulse to loosen the purse strings, the great man’s biographer Robert Skidelsky tells me, is not about stabilising the economy. Instead, it is the desire for “vote-catching” that is tempting them to distribute the Exchequer’s gains from “today’s low unemployment.” Should the mood darken—and from global debt markets to UK sectoral surveys there are signs it might, even without a potential no-deal Brexit—we’re still absent the “Pauline conversion to proactive fiscal policy” that we need. In other words, there is still no guarantee a fresh recession will not be answered with fresh cuts that make it worse.

For another thing, a decade of pinching pennies has worked to close down important discussions about priorities. The deficit was cut in panic, using a salami slicer. There was no debate about things the state should stop doing, still less about the tax reforms needed to sustain popular services like the NHS. Nor about the infrastructural investments that might begin to solve the low productivity puzzle. One reason why politicians immediately alight on upper-middle class tax cuts is that they’ve simply not thought about alternatives.

If there is a fresh downturn, says Julian McCrae, an associate with the Institute for Government, the biggest danger with the markets is not the UK’s large stock of debt, but rather the sense our chaotic “politics is not serious enough to grip those long-term challenges.” Tax and spending decisions are still being busked. The consequences are not only baffling but unpredictable. It may not be long before we are all—like Winston—asking again where the money has gone.