The core building blocks of Britain’s economy are basically on fire. Its education system is failing on every measure, as schools are running out of both money and teachers. Its national healthcare system, the NHS, is falling apart, with the waiting list for hospital treatment breaking record after record. To make matters worse, the streets of Britain’s great cities are increasingly unsafe as its police force and court system are too overwhelmed to go after and convict many criminals. And, sadly, that is just the tip of the iceberg. Similar crises are plaguing public services ranging from transportation, mental healthcare, to asylum applications.
Crises that have one common theme: a lack of money from the government.
Strangely enough, though, this was by design. Starting in 2010, the newly elected government of David Cameron cut spending to all of these departments as he introduced one of Europe’s most extreme austerity programs, comparable in magnitude to that of Italy and Spain.
Well, Cameron’s story was that such painful cuts were needed to save the British state from the bond markets and that they would actually supercharge its economy.
But, now with interest rates on British government debt at its highest level in a decade and its economy performing as one of Europe’s worst, that raises the question:
How did the very policy that was supposed to save Britain, end up ruining it instead?
Well, to answer that question, let’s go back to 2010, to see
How Austerity was Supposed to Save Britain
In 2010, the British economy had just recovered from the great financial crisis, during which government debt had reached around 70% of GDP. This wasn’t unexpected though, since during the crisis spending on unemployment benefits automatically went up while tax income automatically went down. On top of that, given that GDP went down, debt to GDP automatically went up even more. But, even though it was to be expected, this marked the highest level of government debt in decades, a fact that deeply worried the newly elected British Prime Minister, David Cameron.
After all, a government cannot borrow indefinitely without risking an increase in inflation and a collapsing value of the Pound.
And, while most economists argued that falling interest rates signaled that financial markets considered this level of debt as totally acceptable, the conservative mr. Cameron was convinced that a loss of confidence by financial markets was only a matter of time, given how bloated the British state had become.
So, to reduce the debt to GDP ratio, Cameron was faced with two options: increasing GDP or reducing government debt. And, to reduce government debt through austerity, he had two options, increase taxes or cut spending.
Now, around this time of increasing public debt everywhere, economists were having a great debate about whether or not austerity will actually decrease government debt or not. You see, the government is a big part of the economy, and the money it spends tends to circulate. So, Keynesian economists like IMF economist Olivier Blanchard argued that 1 Pound of government spending less typically reduces the economy by more than 1 Pound, thereby likely increasing government debt to GDP. However, a prominent group of Italian economists, most famously represented by Harvard professor Alberto Alesina, offered a different viewpoint. They proposed that if the government strategically cut spending, the economy would not be significantly hurt and could even expand – a process they called ‘expansionary austerity
According to the theory of expansionary austerity, cutting government spending can expand the economy in two main ways. First, by reducing government spending now, market participants will expect lower taxes in the future and will therefore be willing to lend to Britain at lower interest rates. Lower interest rates for the state will then allow lower interest rates overall which will motivate consumers to spend more and businesses to invest more. The second way that austerity can expand the economy is that by reducing the amount of people the government employs, the salaries that unions can demand will be reduced as well. This then means that firms can pay workers less, which will make them more likely to invest, creating more jobs, increasing employment.
So, while the U.S. took the advice of economists like Mr. Blanchard’s and largely steered clear of austerity, expansive austerity was a natural match for the conservative Mr. Cameron, who believed the UK government was too bloated, while private sector investment was way too low.
And so, to secure Britain’s future economic growth, Cameron’s government soon began implementing one of Europe’s harshest austerity programs, radically cutting spending across basically all government departments.
Of course, while expansive austerity theory predicted this would be good for the economy, there were plenty of worries that increased economic growth would come at the cost of a radically reduced quality of life in Britain.
However, here mr. Cameron’s own theory that the British state was too big and inefficient entered the picture. If this was true, it should be possible to cut spending while keeping the level of services in tact, or even making them better by cutting red tape.
However, it’s worth noting that Cameron seemingly believed two areas of public service were not bloated, as they were supposed to be left untouched. The first was the national health service, which mr. Cameron promised would be protected because it was already under significant stress. The second exception was education, because as mr. Cameron’s finance minister said:
We will not make our children pay for the mistakes of the past. We will give them every chance for the future. It is the single best investment we can make for Britain.
So, yeah, that was the plan. Britain’s economy would be set-up for a massive private sector expansion thanks to expansive austerity while most government services would become radically more efficient with the exception of its education sector and the NHS.
Fast forward to today, and the impact of these decisions is clear. Like other European countries that implemented ‘expansive austerity,’ Britain’s economy faltered, while the U.S., which refrained from such measures, continued to grow. And, to make matters worse, not only are the parts of government services targeted by Cameron in a sorry state, even the NHS and education sectors are now running out of money, and crucial frontline personal such as teachers and nurses.
So, where did it all go wrong?
In other words,
How Did Austerity Ruin Britain?
Well, after reviewing several studies and reports, I think the answer is threefold. First, the theory of expansive austerity failed where it mattered. Second, government services clearly suffered. So, perhaps Britain’s state wasn’t as bloated as Cameron thought, he made the wrong spending cuts, or he simply cut spending by way too much. Finally, when it comes to the dire state of the NHS and the education system, Cameron didn’t actually protect these sectors like he promised.
Okay, let’s get into all of these three in a bit more detail.
Why did the theory of expansive austerity fail? Well, remember that reduced government spending was supposed to lower interest rates and thereby supercharge investment and consumption? The first part of that might actually have worked, as interest rates were lower in Britain than in the United States. However, that investment and consumption boom just didn’t happen.
The other mechanism of expansive austerity also only partially worked. Yes, as predicted, real wages of ordinary people stagnated, and unemployment rates did actually drop. However, these jobs appear to have been of a low quality as the amount of stuff Brits made per hour stagnated, meaning that overall, increased employment did not cause economic growth.
But, while austerity didn’t actually expand the British economy, it did have a big economic impact. It made Britain’s economy more unequal by shifting power from workers to firms and capital owners.
But, okay, the economy isn’t all that matters. Did austerity at least make the British state more efficient and less bloated? Well, sadly, I don’t think it did. While the state now again employs roughly the same amount of people as it did before austerity, it now employs a lot more policy consultants that have been hired to help the state deal with Brexit and Covid, while it employs less frontline personal like policemen, greatly reducing the quality of life in Britain.
And, what about the NHS and education departments, how can they be in such bad shape if they were spared from budget cuts? Well, the answer is that they weren’t actually spared by as much as mr. Cameron had us believe. You see, if your population increases, and if there is inflation, then keeping spending roughly constant, is actually a sneaky of way of spending less.
So, yeah, in short, while in theory austerity could have saved Britain, I think that the evidence now quite overwhelmingly shows that it ruined Britain instead.
Which naturally raises the question
Is Austerity ever good for an economy?
Because, given that so many of the European austerity experiments were a total disaster, it is tempting to say that austerity is just bad.
But, actually, that would be the kind of sweeping, unnuanced statement that I try avoid on this channel. Instead, in this video, I’ve tried to explain how austerity ruined Britain by pointing out that spending cuts were made at a time that they were not needed and, more importantly, that they were really poorly implemented.
Of course, that doesn’t mean that austerity should never be implemented. Take for example the government of Kuwait, which employs 70% percent of the population, doesn’t deliver very good services, and is almost completely dependent on oil revenue. I think in such a case, properly implemented austerity can actually help grow an economy while not reducing essential services.
But, yeah that is my take on austerity, and why I think no matter where you are on the political spectrum, it should be pretty clear that austerity ruined Britain.
But, do you agree? Let me know in the comments. Or, if you agree a lot, consider supporting my content by becoming a patron.