The FT has an article this morning with the following headline:
The evidence is stark:
After 2007 the UK's economic wellbeing collapsed.
Matters did get worse after Brexit: investment collapsed from 2016, but the tipping point was not then. It was the 2008 crisis that created that tipping point.
What created that difference? George Osborne did. He delivered austerity, which was a deliberate attempt to undermine wages and simultaneously withdraw the state from involvement in the economy.
He succeeded in undermining wages. In real terms they have not risen since 2007.
And he destroyed growth. That is for a simple reason. National income can be defined as:
GDP = C + G + I + (X-M)
Where:
C = End consumption
G = Government spending excluding transfers of income, which are reflected in consumption
I = Investment by both state and private sectors
X = Exports
M = Imports
Of course you can have a policy to deliver austerity but if you do then there are consequences.
First, you hold wages down in real terms, as happens. As a result consumption stalls, and it is the biggest driver of GDP.
Second, government spending stalls. And it has. Ignore that it might be high in proportion to GDP: in comparison with need it has fallen. That is what matters here.
Third, that means there is no market based incentive to invest, and unless government provides alternative investment (and it has not) then overall investment stagnates.
And a stagnating economy imports more because it is other markets that are producing what people want.
None of this is surprising. All is, in fact, glaringly obvious. Some of us have been staying it for a long time. All we have now is the evidence that we have always been right: austerity has strangled the UK economy.
And the thinking of austerity is continuing. We have unnecessarily high interest rates. We have a government still committed to austerity. And as if to make matters worse, the Bank of England wants to do quantitative tightening to withdraw funds from the economy, making investment prospects even more remote.
Danny Blanchflower and I are issuing a paper very soon saying three things:
- We need a cut in interest rates now
- We need to end quantitative tightening and instead have a new programme of targeted quantitative easing
- We need an and to austerity.
Then we might have a chance of tackling the malaise in the UK economy. Carry on as we are and we have no hope at all. It really is as simple as that.
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A great manifesto.
I was listening to Tobias Elwood prattling on about the state of our armed forces on R4 PM yesterday as if the government he was part of had nothing to do with its parlous state. And the BBC muppet that is Evan Davis did not even point that out to him!
Unbelievable.
What this country needs is time to itself to repair the internal damage that Osbourne has done, never mind tooling up to deal with the external ‘threat of China’ – another U.S. obsession bordering on murder no doubt.
Defence is going to get an additional £5bn over two years. Wallace had asked for £11bn, 8 of which was to offset inflation across a number of very large projects, and an extra amount to cover for ammunition and weapons donated to Ukraine.
In other words Defence has been cut substantially. Stocks of ammunition and weapons systems is critically low. Increasingly the donation of Challenger 2 tanks looks like a way of cutting capability under the cover of a good cause.
And yet the noise coming out of the wider defence community is muted discontent but louder cries that Labour would be worse quoting Gordon Brown’s nearly 20 year old decision to cut the production of the T45 destroyers.
Your closing line chimes with a recent podcast from the Irish economist David McWilliams, where the takes an entertaining and painful look at the UK’s political and economic decline and contrasts with the Republic of Ireland.
Our 40 year bet on the City and service sectors is no longer paying out. London, so long the dynamo for productivity, growth and taxation is spluttering and stagnating, while in Northern Ireland and peripheral Britain; the poorest people now have a healthy life expectancy on par with Sierra Leone.
You might not agree with all the analysis, but that would be to miss the bigger picture of long term decline and the changed way our international neighbours see us.
https://podcasts.apple.com/ie/podcast/the-uk-is-stuck-in-a-political-economical-and/id1462649946?i=1000603322710
Thanks
I’m the same side of the Irish Sea as McWilliams, I remember this podcast episode well. I think many here look at the UK and feel a sense of confusion, as to how a relatively prosperous, stable country has appeared to unravel so quickly in the space of a few years. Most Irish people have connections in the UK, we daily consume British television and media, we have an intimate view of our near neighbor.
The closeness has still left many incredulous that a host of obvious charlatans and chancers could gain the highest offices, while embarking on self-defeating political and economic trajectories that have undermined wider society for the majority of British citizens. It’s sad, and a story that has yet to be adequately told.
Richard,
Osborne is guiding Hunt and being very “clever” has the next main cuts coming in during the 2024 election year.
Why Labour are not saying this orthodoxy is destroying the UK economy and we will not “comply” is beyond belief.
I read Mark Blyth’s book a few years-ago, ‘Austerity, The History of a Dangerous Idea’ – I can’t recommend it highly enough. He destroys any and all arguments in favor of this ‘policy’. It’s emblematic of the dysfunction at the heart of British society that this regressive and damaging idea still has political credibility, eagerly egged on by a billionaire owned media class: what is austerity but a massive redistribution of wealth upwards!
Cameron and Osborne were a uniquely destructive duo, for all of Johnson’s incompetence and stupidity, he never got close to doing the damage they did with their obsession of ‘balancing the books’, never mind Cameron’s absurd notion that calling a referendum on the EU question would pacify his party! History will judge them harshly.
And mark, who I know, wrote in 2012.
I read a piece from an American professor way back at the time.
Austerity was engineered, giving his assessment.
Right enough, Osborne , austerity is just a word, picked out by Osborne to wrap his monetary engineering up as usual , to take from the citizens , once again.
Why the majority of the citizens of these islands do not rise up against the English state for the grand theft, is beyond me.
Collectively we can change things, one voice in the wind is of no consequence.
People these days have so many ways to avoid confrontation, by their ineptitude, for facing up.
I see it in the acceptance of irrelevant reality TV programs, and game shows.
They’ve always have some excuse for placid non entities, wrapped up as D list celebs, with some air head opinion.
Whilst all around we have poverty, starvation , aggression towards asylum seekers fleeing wars, poverty, starvation no prospects for the future , All caused by
The western neoliberal war machine.
They say there is a decline in the imperial west, with a BRICS plus global reset.
We are in this decline as the pot gets smaller.
Time for folks to rise up and join this reset.
For the good.
This may be glaringly obvious and I may have simply missed the point, but why would austerity hold down wages?
Because pubic pay sets the tone for pay as a whole
Thank you!
Hi Richard,
Long-time reader, first time commenter. In a pub debate, a friend of mine insisted that growth in this country was being held back by the cost of servicing government debts, and that only austerity in government spending could undo it.
Whilst I understand that a lot of government “debts” (i.e. money) are held by useful things like pension funds and foreign governments and the government debt has never, and will never, be paid off, it still appeared to be logical that servicing those debts could drag on the capacity for the government to grow the economy.
What is the MMT response to servicing government debts, and the role of the current UK’s debt obligations in limiting/facilitating spending? Thanks.
I will post a blog response in the morning
Unfortunately, Rachel Reeves will take a leaf from the Osborne playbook and continue with austerity.
So we will have an austerity-loving chancellor no matter who wins the next GE.
And the next GE will be fought on who has the most efficient policy for stopping small boats.
What a mess.
Agreed
And that is before you even begin to look at the long term effects austerity has had:
– capacity of public services to cope, modernise and adapt. A lot of their effort and capacity has been wasted on efforts to cope with inadequate resources.
– the defeatist mentality it has created. We ‘can’t afford’ to do what is needed for now and the future. There is no alternative.
– the persistent erosion of standards of public services and infrastructure.