Is this the end for austerity?

Some Tories reckon it’s time to give that magic money tree a good shake and end austerity. Others wonder when austerity is actually going to start. Simon Wilson reports.

Has there been any austerity?

“Austerity” is obviously a politically loaded and contested term, rather than an objective way of describing the UK’s efforts at fiscal retrenchment since the financial crisis of 2008-2009. But if you define austerity as real-terms cuts to central government spending on the delivery and administration of public services, then the answer is that between 2009-2010 and 2012-2013, overall spending fell by £41bn, or 10.1%, according to data compiled by the Institute for Fiscal Studies (IFS).

In other words, the vast bulk of the UK’s spending cuts came towards the start of the coalition government of 2010-2015. Since 2012-2013, central government spending on public services has held more or less steady in real terms, with a further £4bn trimmed off back in the four years to 2016-2017. 

Is spending now projected to grow?

Only slightly. And in per-capita terms – crucially in terms of the politics – it’s projected to carry on falling. The latest forecasts (again, as compiled by the IFS) are that overall departmental spending will be broadly flat between 2016-2017 and 2019-2020, before increasing in the following two years (taking us to the spring of 2022, when the current parliament is scheduled to end). But if you factor in the UK’s continued population growth, a more austere picture emerges. In 2009-2010 departmental spending was equivalent to £6,460 per person.

In the fiscal year recently ended (2016-2017), this had fallen to £5,460, and is currently forecast to fall a bit more to £5,370 by 2019-2020. Thus, over the course of ten years, spending per capita will have fallen by £1,090, or 17% in real terms.

So the size of the state has shrunk dramatically?

Not at all. As a proportion of national income, public spending is broadly where it was almost ten years ago at pre-crisis levels (around 38% of national income). That’s because, first, the years following the financial crisis saw exceptionally weak (or negative) economic growth, and public spending as a share of income shot up; an increase that has only now been unwound.

Second, much to the chagrin and surprise of successive governments, the weak recovery of recent years (in part caused by too much austerity, according to some critical economists) means that the real-terms cuts in spending haven’t cut the overall proportion by as much as policymakers predicted. Also, of course, the government has continued to increase spending in some areas, notably health, pensions and international development.

But we’ve eliminated the deficit?

No, though it will be back down to levels that are close to normal. The UK’s government deficit (ie, the amount by which the government’s spending exceeds its revenues in any given year) peaked at almost 10% in 2009-2010. To put that in some context, that 10% figure is a far higher proportion than we have seen at any time since the World War II.

In the mid-1970s (for one year) and in the early 1990s (for two years) the deficit peaked at just above 6%. Over the course of the coalition parliament the deficit fell back to 5% by 2014-2015, and in 2016-2017 it was 2.6%. That is the same as it was in the last year before the financial crisis (2007-2008), but a bit above the long-run UK average prior to that, of 1.8%. (The UK also still has the fifth-largest budget deficit of 35 advanced economies.)

Should we care?

Notwithstanding the government’s stated aim of returning the public finances to surplus, deficits are the normal state of affairs in the UK. Surplus years are rare, but not unheard of; the most recent were the three years from 1998-1999 to 2000-2001, and before that there was the single year 1988-1989.

What about the national debt?

It’s at its highest levels for half a century, due to years of deficits that were higher than normal and the low-growth economy. In the years before the financial crisis, the UK national debt was around 30% of national income and nudging up a little. Since then it has risen steadily and is forecast to peak in the current financial year (2017-2018) at 88.8% – that’s the highest since 1966 – before falling back to around 80% in 2021-2022.

In global terms, the UK isn’t a freakish outlier. Portugal (topping the list with 121%), Japan, Italy, France and the US all have a bigger debt pile than us (as a proportion of national income).

So nothing to worry about?

Not so fast. We do have the sixth biggest debt of 26 advanced economies. In cash terms the debt pile currently stands at £1.7trn, and (as pointed out by the government’s Office for Budget Responsibility in an ominous “stress test” warning last week) the cost of servicing it will rapidly balloon if interest rates rise significantly from their historic lows. What does all this mean? It means that if the UK really wants to end austerity and start spending more, borrowing or taxes will have to rise significantly.

What about taxes?

If you accept the notion that the political wind has changed, and the public have had enough of spending cuts, then “be prepared for the system to follow”, says Jonathan Eley in The Financial Times. The issue is not so much the deficit (now manageable) as the gigantic national debt, which threatens the long-term stability of government finances. No party can continue to pretend that the national debt will be reduced by spending cuts alone: the big question is where the big tax rises will come from.

The UK’s income tax (which accounts for half of revenues) is already pretty progressive. So the answer, almost inevitably, is that taxes in future will need to be focused on wealth as well as income, to keep pace with the vast increases in wealth inequality of recent decades. The government has already “raided large pension pots through stealthy and hard-to-understand changes to the lifetime and annual allowances. Property and other assets will surely not be far behind.

disfi.com