Kieron O’Hara is an associate professor and senior research fellow in electronics and computer science at the University of Southampton. He has also written extensively on conservatism and the Conservative Party.
Whoever coined the term ‘austerity’ for the strategy of paying down a deficit is a lefty marketing genius. The austere are harsh, stern and stringently moral, forcing everyone into cold baths and hair shirts.
The original austerity government was 1945-51, when the economy had to be realigned with peacetime needs after so much capital had been wantonly destroyed (dock strikes hardly helped either). No wonder Attlee continued, nay increased, rationing.
Other signature policies were devaluations, nationalisations, the expansion of education, the development of the welfare state, planning, and food subsidies (the Tories opposed this type of austerity). There was full employment, but also food shortages, power cuts and a housing shortage.
Marshall Aid from the US helped. Attlee did get borrowing down, helped by reduced defence spending, but also hiked taxes, with a top rate of 98 per cent.
Clearly this is very different from today’s ‘austerity’, which means paying down deficits and trying (usually unsuccessfully) to ensure that the giant modern state doesn’t grow further. Following the financial crisis, the governments of Davod Cameron and Theresa May have been trying to reduce spending to the level of receipts, but – thanks to Brexit, and Mrs May’s change of ideological direction – the target for achieving this has been pushed ever forward into the future.
This kind of ‘austerity’ would not be recognised by Attlee. Today, ‘austerity’ means a nation spending what it earns (not necessarily going short or heating tins of beans over a guttering candle). Cutting spending is one way of achieving balance, but not the only way.
For those horrified by small decreases in public spending, and those too scared of voters to tax them, borrowing presents itself as a neat way forward – spend the money that you are confident that you will earn soon. And increasingly innovative financial instruments enable you to reach further into the future to spend the money that you will earn in the medium or even long term. As long as they actually earn the money, future generations will pay.
This is unwise for a household, if manageable for a business. But for a state the result is problematic because of a quirk of democracy – existing generations outnumber future voters, and so can always appropriate their money, if the financial means to do that are in place. The result is a current overspend, and a large future debt.
That’s fine if moderate growth is all that’s required to repay the debt, but many of the assumptions built into government finance are unrealistic to say the least, particularly given the ageing population, which means that some of the current liabilities (e.g. for pensions and health and social care) stretch into the distant future when the ratio of economically active workers to retired folk will be far less favourable.
Angela Merkel, who runs Europe’s most successful economy, has always considered debt as an attractor of risk – if you are in debt, you have less control of your destiny, because some of your future earnings are already spent (earmarked for debt repayment). Under New Labour, the financial crisis showed how vulnerable to shocks an indebted economy can be. Although we made it through under Alistair Darling and George Osborne, the result has been severe suppression of growth and wages, which contributed to recent political instability.
The baby boomers, as David Willetts has argued, have been particularly complicit in this dynamic. The size of that generation (which includes myself) gave them an outsize voice in the democratic process. A combination of financial wizardry and rash promises has brought wealth forward through time into the pockets of the boomers.
Generous pensions were promised from the 1950s onwards in lieu of excessive wage claims. This means, for instance, that US states like Illinois have impossibly high deficits, while in the UK BHS was undermined by its £571 million pension liabilities. Most pension funds assume unfeasibly high rates of return.
The looming pensions crisis was caused by employers making promises their successors could only keep if the economy soared forever at these rates. Workers were happy to play along, because the assumption of constant high growth meant that they (a) didn’t have to put so much aside, and (b) could retire relatively early. Workers of the future would pay – thanks to slow growth, for an awfully long time.
In the election, a new generation came out to vote, in large part for Jeremy Corbyn’s Labour Party. There have been celebrations (indeed, it is a good thing for people to vote) of the idealism such young people bring to politics. This is, of course, nonsense – voting for lots of free stuff, the Millennials are as pleased to spend other people’s money as the baby boomers. The youthquake is overdone; politics is rarely an expression of one’s demographic status.
Let’s take the example of the abolition of tuition fees. Is this really idealistic? It’s certainly not socialist, as it’s a £10 billion transfer of money to wealthier folk. As a policy, it won’t achieve its objective; by comparing England (fee-paying) and Scotland (no tuition fees) we can see that poorer people are more likely to go to university in England than Scotland.
What’s so good about this policy which cemented Corbyn in place (and destroyed Nick Clegg)? It can only be a bribe – young people want someone else to pay for their university career. That would be fine if only a few went to university, as, say, in the 1960s or 1970s. But governments want 50 per cent or more of people to go through uni, so the policy is unaffordable – unless we take more money from the future.
This effluent will at some point hit the fan. Many commentators have been celebrating the death of austerity, but it will be back – however firmly governments and voters put their fingers in their ears, and however loudly they sing ‘la la la’.