The austerity delusion has ruined as all.

Please remember: the government kitty is in no way like your own. (Photo: The Telegraph)

The austerity delusion has ruined as all.
Why do you care about the cutting the budget deficit?
It’s not affecting you or the economy.


Please remember: the government kitty is in no way like your own. (Photo: The Telegraph)

Please remember: the government kitty is in no way like your own.
(Photo: The Telegraph)

I asked myself that very question a few months ago; why does the budget deficit seem to be the main focus of this election? Most people don’t really know much about economics and aren’t the state of their wages a more pressing concern?

I finally found out a reasoned, economically literate answer last week – courtesy of Simon Wren-Lewis, a professor at the University of Oxford. And now as I write this article, more and more crop up. Each one more in depth, and pointing to the same reason:
We have been fooled.
The media have wilfully, or idiotically, pedalled ignorance.
What’s important isn’t the budget deficit, it’s the information deficit in the UK.
The media is 5 years old on the deficit story, and they’ve taken the coalition’s bait to keep it up – a media spin so effective that no question has been put to the actual importance of a budget deficit and the need for any austerity at all.
Ed Miliband was lampooned by all scions of the press for forgetting to mention it in his party conference speech last year, but as Paul Krugman, a Nobel Prize winning economist, makes clear in his brief history of ‘the austerity delusion’ – “I don’t know how many Britons realise… the extent to which the UK seems stuck on obsessions that have been mainly laughed out of the discourse elsewhere.”

A lot of inaccuracies are taken as truth. Take one – Labour mismanaged the deficit, and therefore the economy.

The financial crash of 2008. (Photo: The Telegraph)

The financial crash of 2008.
(Photo: The Telegraph)

In actual fact, the main reason for the huge increase in the deficit was the global financial crisis and resulting recession. For example, one fact; for every 100,000 workers laid off, it costs the Treasury £500 million. Unemployment increased by nearly 2.5% during the recession; from 1.6 million reaching a peak of almost 2.7 million at the end of 2011, its highest level for 17 years. Alone that’s over £5bn off government receipts, further increased by an exacerbating multiplier effect of government Jobseeker’s Allowance (JSA) spending for those newly unemployed and business lost in markets due to the lack of income. The recession also had many structural (long-term i.e. over 20 years) impacts that reduced government receipts permanently.

Without the government having any part to play at all.

The budget deficit was rising before the crash because we had to spend more to fund the Iraq and Afghanistan Wars – like the USA who ran a large deficit. Whether we should have gone to war, is another question entirely.

However the newest media lie is all about the budget deficit. The budget deficit is the focus on everybody’s minds coming into the 7th May; who will cut it the quickest, the most responsibly, by leaving the EU etc. I saw this fear so clearly in a young lady’s eyes during the Question Time debate, shouting in anger at Ed Miliband – “Why are you gonna increase the deficit and pass the debt down to us and your children?” They plan to decrease it, though.

This took the focus off the deficit for a while (Source: The Mirror)

This took the focus off the deficit for a while (Source: The Mirror)

And those who propose an end to austerity like the SNP are side-lined as idiots.

Claims made by the coalition like those on the right, are inaccurate as proven by Full Fact, yet they are held aloft as the ‘successes’ of the last five years of the Coalition.

In fact, the reasoning behind austerity and the eventual effects have proven it to be a huge failure of government policy and grand “delusion”, as the majority of economists worldwide have concluded.

Our affection with the budget deficit can be broken down into two main concerns:
It is bad to have one
It is indicative of an inefficient welfare state.
1. It is bad to have a budget deficit

It may seem so, if you relate it to a “maxing out your credit card” like this site does. This site was actually the first hit when I Googled “budget deficit UK”.

However, it is a clear piece of propaganda pedalling the belief that a government deficit is anything like your debt.

I want to make it clear that there is no correlation between the workings of your finances and government, because standard economics dictates government cuts in spending have a contractionary effect, reducing the real output or GDP of the economy as a whole. Your cuts only affect you.

The UK government can never run out of money, due to special Bank of England provisions, while you easily can. As Wren-Lewis emphasises, “It is part of every economics student’s initial education to learn why this analogy between individuals and governments is wrong – but most people have not studied economics.”

Those, like the lady on Question Time concerned by an increase, should realise that all debt is passed down to younger generations, regardless of the budget deficit which has an impact, but which is very small compared to the £1.5tn we currently owe. At current estimates, every person in the UK owes £24,000. Only a radical change in policy could put a dent in that.

The coalition, and media, exploited the national anxiety and lack of economic knowledge amongst most of the population during the recession. This has continued over the past five years into this election, by perpetuating this fallacy that, as people across the country would have to tighten their belts to deal with its effects, so would the government, meaning that all press and media have wholly in principle justified austerity cuts, whether they liked their effects or not.

We were further deluded into seeing austerity as a success, since it has been the banner of coalition policy for the past five years and so linked to the increase in economic growth, currently 2.7%, the highest of the G7 group of the world’s biggest economic powers. However, what they don’t tell you is that it could have actually been much higher. The parliamentary brief for the 2010 parliament suggested a 2.1% GDP increase in 2011 would be a “conservative” e.g. low estimate for possible growth. In fact, GDP growth was actually 0.8% in 2011.

The cause? “The delay in the UK recovery over the first part of the coalition government’s term is at least in part a result of the government’s fiscal decisions,” citing “overly aggressive cuts” that may have cost the UK economy 5% in GDP over the past five years, £1500 for each UK resident.

Substantial and stabilising economic growth only occurred over the past three years, once George Osborne reduced his rate of deficit reduction and the economy began to pick up in 2013. This wasn’t a miracle recovery, there is a clear trend in harsher austerity reducing the rate of economic growth. Think of what’s happened like Krugman states: “If this counts as a policy success, why not try repeatedly hitting yourself in the face for a few minutes? After all, it will feel great when you stop.”

A clear trend showing the decrease in economic growth under Osborne's deeply aggressive cuts, then subsequent increase in 2013 as the cuts were reduced. (Source: Trading Economics)

A clear trend showing the decrease in economic growth under Osborne’s deeply aggressive cuts, then subsequent increase in 2013 as the cuts were reduced.
(Source: Trading Economics)

The other main part of the austerity delusion and idea that all budget deficit is bad lay in the belief that it was central to the economic health of this country. In fact, a lot of what the Bank of England did, in buying debt and decreasing interest rates, had more to do with returning the economy back to recovery. This work actually reduced the amount of interest the UK had to pay on government deficits, reducing its overall value. They have kept interest rates at a historic low of 0.5% in the attempt of increasing economic growth – but the austerity knife cut that plan to pieces by reducing any demand in the economy that low loan interest rates created. The increase in employment? There isn’t any coalition policy that can be directly tied to it; it is only an indicator that economic growth is producing jobs as expected in any recovering economy.

So despite what most news outlets are saying, e.g. The Economist, The Times and The Telegraph, you can’t trust the Conservatives with the economy either.
2. It is indicative of an inefficient welfare state.
This is more of a Conservative belief, since as a party, it has historically cared more about how well each pound spent was working for people on benefits, rather than Labour, whose original principles were to instate the welfare state based on a moralistic belief in the development of Britain as a “social democracy.”

Whether you agree with one view, both or neither, all parties have said that they want to make the welfare state work better in its use of taxpayers’ funds. To some pressure groups, this has been used a weapon to push for cuts, but if we take it at face value, the phrase suggests government should find the best use for our money. The Conservatives have some headline changes they put forward as “successes”, for example reducing the number of unneeded NHS management staff saving millions, Cameron said on the recent Question Time debate, linking to their plans outlined here.

But the cuts over the past years haven’t increased efficiencies of the welfare state. The coalition is way off the £22bn of NHS savings proposed by the coalition. There’s still an £8bn yearly black hole of NHS funding, and rising.

I hark on about the economy because it has to be clear that the Conservative-led coalition plan of austerity was dogmatic, not economic. The cuts are not increasing efficiencies, rather government policy has resulted in:
housebuilding at its lowest level since the 1920s
fewer owner-occupiers and homelessness up by one third
the first fall in living standards over a five-year period since modern records began in 1960
more than 900,000 people relying on food banks, a 15-fold increase since the last election.

Is this a sight we want to see more of? (Photo: the Evening Standard)

Is this a sight we want to see more of?
(Photo: the Evening Standard)

The last point, for me personally is a great stain; a country whose welfare state is there to provide for the most vulnerable. It’s understandable that a few people might slip through the gaps, but 1,000,000 people aren’t momentarily slipping, they are descending into a dismal and deprived standard of living where necessities are hard to come by. “Get a job!” people say. Well, how can you think of work when pure survival, and the loud sound of your churning stomach is the only thing that really worries you?

It isn’t only the poorest feeling the pinch, the majority of middle-classes either aren’t feeling much confidence in the economy as we can see inflation, a key indicator of confidence and the rate of spending, is 0%, forecast to decrease soon. Their wages aren’t even in line with inflation, as wages have not risen in relation to inflation and productivity has not grown.

The ‘mediamacro’
However, the importance of these issues have been continually side-lined, sometimes forcefully. As Wren-Lewis notes, “When its (the BBC’s) former economics editor, Stephanie Flanders, dared suggest that a lack of productivity growth might be a problem, Iain Duncan Smith made a formal complaint.” The media has focused on the deficit as a key signifier of how “responsible” a party is, and has shifted the entrenched austerity delusion so far, there is little political debate or will to change this quickly established status quo. The debate has been shifted so far, that austerity is such a fait accompli, its specifics aren’t being specified by any major party particularly well – the dogma being pedalled on our TV screens “We’re just going to cut it better/faster/less painfully/more fairly than them.” That’s mediamacro(economics).

This means that the impact of the election has, in my view, has already been decided towards its impact on most people in the UK. Even though there are stark differences in the policy intricacies, they are still all framed by the notion of who’s borrowing more and who’s borrowing less – not who will increase social cohesion, increase economic growth, increase the strength of our foreign policy and response to crises, commit to the next generation, improve standards of living and solve the housing crisis.

The rest of the touts, like tougher rules for banks, right to buy, clamping down on tax evasion etc. aren’t really going to help anyone, and some, while needed, are just to calm people’s conscience. Though honestly, young people aren’t really getting anything, other than being royally shafted to put it bluntly.

Will someone come to break up the austerity stronghold? The left in the UK is way too weak, but even the right will have to realise austerity isn’t working. Rather than a political intervention, the country needs one based on economic sense. Our country could barely afford the past five years of austerity. This delusion cannot continue any longer.

About Che Applewhaite
Che Applewhaite is the Editor-in-Chief of Whippersnapper. He is a 18-year-old student who is passionate about understanding the issues today that he thinks will affect the future, primarily changes in international relations, feminism and global warming. His musical tastes are defined by a deep appreciation of jazz, minimalism, house and rap, though by no means are limited to those genres. He can often be found in a museum or bookshop on a weekend.
  • Charles Heatherington

    What economically illiterate nonsense. The deficit needs to be reduced because the government needs to keep paying debt interest. The more it has to pay in debt interest, the less it has to spend on public services. That's why we should get it down.

  • Anonymous

    As the true definition of quantitative easing is "the introduction of new money into the money supply by a central bank", rather than supporting failing private financial institutions by a central bank, this article has legs. I fear the standard of public debate on economics in the UK (though possibly higher than in the US?), will lead to mis-voting in tomorrow's UK general election.

    But I think you chose to rubbish this article from afar from personal interest.

    It is about time the UK used the Bank of England to better use than repurchasing government bonds (via the "Asset Purchase Facility" etc), and therefore instead of directly increasing the amount of capital in the private sector, use the issue of new money to partially fund public services.

    Contrary to the views of a senior employee at Javlin Capital, Charles, the views expressed are different to yours – but chime with Alan Greenspan's view that if you can print money in the currency of your debt, you will never default. Likewise, you don't actually need to borrow to fund public services – you can issue currency to partially fund them.

  • BHS

    Awaiting for more informations.