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The Opposition forced a vote for today on the end of austerity measures (not all) in regards to pay cap on public sector jobs. (The vote also includes pay rises for emergency services and the recruitment of police officers and fire-fighters)

UK austerity was initiated with the Conservative/Lib Dem coalition in 2010, but the national debt has nearly doubled since then. So what is the actual aim of said programme, if we're accruing more debt?

Update:

I've learnt not to look into national debt as an isolated topic, instead should be looking at the ratio of Debt to GDP, which provided by @JBentley "went from around 71% to 84%, which puts things into perspective".

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    The questions "what were the stated aims", "what was the real ideological intention", and "why did the policy not achieve the stated aims" give very different answers. – pjc50 Jun 28 '17 at 15:06
  • @pjc50 could you elaborate? so maybe I could narrow it down if need be, but as is I'm not quite sure what you mean. – Bradley Wilson Jun 28 '17 at 15:20
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    @BradleyWilson politicians usually say one thing but mean another. Often they have goals that are not palatable to a large part of the electorate, so they have to add spin to gather support. This means the stated aims and ideological intention are likely not to be aligned. Furthermore, any large government program often fails to achieve the stated aims due to the real aims being different (see above) or due to good old fashioned ineptness or being a boondoggle to begin with. – user5586 Jun 28 '17 at 17:46
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    The premise of your question is flawed. The majority of policies which can be considered part of austerity measures commenced with the 2010 Conservative / Lib Dem government and were added over time (i.e. not all immediately in 2010). According to your chart, national debt went up by about 70% in that period, not 100%. But you shouldn't look at national debt in isolation. As a ratio of debt to GDP, it went from around 71% to 84%, which puts things into perspective. – JBentley Jun 29 '17 at 11:26
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The stated aim of austerity is to promote economic growth, which ultimately would allow reduction of the UK national debt relative to GDP. From the budget speech given by George Osborne, then Chancellor of the Exchequer, to the House of Commons on 22 June 2010:

Some have suggested that there is a choice between dealing with our debts and going for growth. That is a false choice. The crisis in the Eurozone shows that unless we deal with our debts there will be no growth. And these forecasts demonstrate that a credible plan to cut our budget deficit goes hand in hand with a steady and sustained economic recovery, with low inflation and falling unemployment.

The UK economy has continued to grow, but the national debt has grown faster. Some economists have criticised the assumption that austerity will promote increased growth. The UK government remains committed to austerity measures such as the cap on public sector pay; but in a speech on 20 June 2017 Chancellor Philip Hammond acknowledged public discontent with austerity, and suggested the government would consider increased borrowing to invest in economic growth. Exactly what form this investment may take remains to be seen.

A practical effect of austerity has been to reduce government spending as a percentage of GDP, from 48.0% in 2010 to 42.1% in 2016. It is fair to note that many Conservatives see this as a desirable goal, in and of itself.

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    Austerity is purely aimed at reducing public spending which in turn will reduce the deficit - in theory. The deficit in turn will reduce the national debt once it returns to surplus. The UK economy has not "continued to grow" since austerity started in 2010, there have been several quarters showing contracting GDP ie Q4 2010, Q4 2011, Q2 and Q4 2011 etc. – davidjwest Jun 28 '17 at 15:00
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    @davidjwest - ...in some theories. Particularly Monetarists and some Austrians. Classical Keynesian theory says it will instead gut your economy, and should only be done during economic expansions, when tamping down growth is actually desirable. – T.E.D. Jun 28 '17 at 15:17
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    'Austerity is purely aimed at reducing public spending'- that's a secondary effect. It's primarily aimed at punishing the poor. – nicodemus13 Jun 29 '17 at 8:48
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    Reading the discussion on the other answer and reading this (including further reading), I now understand that this answer directly answers the specifics of the question and the other explains the surrounding implications. – Bradley Wilson Jun 29 '17 at 10:26
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    @nicodemus13 Citation? – JBentley Jun 29 '17 at 11:19
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It is important here to recognise the difference between debt and deficit.

Deficit is the difference between the amount of revenue a government receives (e.g. from taxation) and the amount it spends, any shortfall needs to be made up by borrowing.

Debt is the total amount of money that is owed, not only does this eventually need to be paid back but also has the ongoing cost of interest payments.

So (in simple terms) before you can even begin to pay off the debt you need to have more money coming in than you spend. In practice it is slightly more complex than this as inflation can reduce the effective size of a debt and you can borrow money to pay off debts to get better interest rates, and for a whole country the value of the currency has a significant effect,

To reduce the deficit governments can either reduce spending or increase revenue from taxation. Taxation revenue depends both on the levels of taxation and the total value of the economy compared to what is being taxed e.g. if companies make more profits and employ more people then corporation tax, income tax and national insurance receipts go up. You can increase taxation but there is a danger that if taxes are too high you slow down the economy as businesses either become non-viable or cut costs. Equally VAT revenue depends on consumer spending and business rates are ties to the value of occupied business premises.

At this point is is also worth noting that any business which sells VAT liable products, employs people or occupies premises is directly contributing to government revenue through income tax, NI, VAT and business rates, regardless of the amount of corporation tax it pays.

So essential thinking behind austerity is that you cut spending now to reduce (or at least control the rate of increase of) total debt and the associated interest payments. This means you will have more money to play with in the future while at the same time keeping taxation relatively low. Equally it is not trivial to calculate exactly where the ultimate burden of taxation falls.

The counter argument is that governments are generally able to borrow money at a fairly affordable rate so it is better for them to spend more in the short term to boost the economy and make it up later from increased economic growth and productivity. This can come both from the direct results of more cash going into the system e.g. if the government builds a whole load of roads then that cash goes to contractors and their suppliers who employ people who then spend their wages. In the longer term well targeted spending on health, education and infrastructure will have long terms economic benefits in terms of productivity which will make existing businesses more effective and attract new investment.

What a government can't do though is pump money into the economy indefinitely without getting any sort of return. Ultimately a government can only skim off some percentage of the wealth generated by the economy as a whole. While they very much can borrow or indeed just print more money it ultimately needs to come from somewhere.

The big difficulty is that all of these effects are very hard to measure and there are reasonably logical arguments on both sides. But there is no entirely subjective measure of what approach is 'right' regardless of what criteria you apply.

On one hand neither cutting costs at the expense of productivity nor throwing good money after bad without getting any return are sustainable strategies.

Of course part of the issue is that, by their nature politically motivated governments (and indeed the people who elect them) of any stripe tend to be very bad at long term decision making.


The reality is that it is not a question of austerity vs generosity as that would be a gross over simplification but rather what is the most effective way for a government to spend the resources it has available and this comes down to complex fine details rather than slogans or internet memes.

Ultimately is is not even necessarily about morality or class as it is generally the poorest and most vulnerable who really get it in the neck if an economy implodes...just ask the Greeks.

I would also add that this is written from a fairly politically neutral viewpoint and if anything I would say that both of the main UK political parties are more or less equally poor on this issue.


There is also an effect that public spending in general can boost the economy in the short term by employing people but unless it increases productivity it can be unsustainable. Again this very much depends on exactly how money is spent in very very general terms spending on infrastructure and research and development grows the economy while spending on services is more likely to disappear.

  • Thanks for such an elaborate explanation for the laman in economics. – Bradley Wilson Jun 28 '17 at 20:27
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    This is an outstanding answer. I tried to change "than" to "then" in "employ more people than corporation tax" but the site won't let me edit just one character! – cja Jun 28 '17 at 20:44
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    (-1) You're actually missing the most important factor in all this: Growth (and by extension the tax base and ultimately the state's revenue) cannot be treated as an exogenous variable. The reason austerity failed and stimulus worked since 2008 is that any change on the spending side resulted in an even larger change on the revenue side. “This means you will have more money to play with in the future while at the same time keeping taxation relatively low.” implies a causality relationship that just isn't there in this case and in any case isn't obvious. – Relaxed Jun 28 '17 at 23:10
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    The rest of the discussion on inflation, investment, borrowing money cheaply, etc., while not necessarily untrue, distracts from this fundamental point. Incidentally (and that's really only incidental to my point), that's not really a matter of opinion or unknowable, there is empirical evidence and models that performed quite well. But even if you want to disagree to stay “fair and balanced”, the case for austerity needs to be based on the fact that it won't impact growth enough to offset the gains, you cannot reasonably ignore the issue and assume revenue is constant. – Relaxed Jun 28 '17 at 23:15
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    I think it's well written even though it overstates the uncertainties. The ratio of a change in national income to the change in government spending that causes it is called Fiscal Multiplier and it's been known for a long time that the case for austerity was based on too low numbers. See IMF:s statement from 2012 and the UK Office for Budget Responsibility's admission they underestimated – JollyJoker Jun 29 '17 at 7:51
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I'll elaborate on

The questions "what were the stated aims", "what was the real ideological intention", and "why did the policy not achieve the stated aims" give very different answers.

If you want the stated aims, you can for example find this speech by David Cameron in 2009 laying out the aims. Including the statement "Unless we deal with this debt crisis, we risk becoming once again the sick man of Europe."

The context for this was the European sovereign debt crisis of the late 2000s, itself brought on by the banking crisis. It was believed (probably correctly) that allowing banks to go bankrupt would paralyse the wider economy while they were wound up, so it was necessary for states to step in with loan guarantees. Ireland and Greece came off particularly badly.

The ultimate debt-related fear is that it might suddenly get more expensive, or even be unable to obtain at all (see Greece). Reducing the deficit reduces the need to obtain additional credit.

The gap between stated aims and actual distribution of the austerity can be seen e.g. in Cameron speaking about austerity from a golden throne. The Conservative party have long had the aim of reducing taxes, benefits and the pay and power of the public sector. Some of this is driven by ideology, some by donor companies that stand to benefit from the contraction of the public sector. Some of it is the legacy of the 60s and 70s when public sector pay rise conflicts dominated politics and resulted in crippling strikes.

Why did the policy not achieve the stated aims?

The short answer is that, when it comes to public spending, growth is far more important than fiddling around with "prudence", and that most public spending is actually very efficient already.

The key question is the "fiscal multiplier": for each pound of tax spent, how much extra economic activity is generated, and how much of that comes back to the government?

If the fiscal multiplier is greater than one, then every extra pound of tax spending will result in more than one extra pound of revenue. Therefore Conservative efforts to cut public spending would have the effect of reducing tax revenue, without any change to tax rates.

(It seems likely that the main rise in public spending and reduction of tax revenue over the 2008-present period has been due to economic contraction rather than policy change - unemployed people claim benefits, don't pay tax on wages and pay much less VAT on purchases. This is the Keynesian "automatic stabiliser".)

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You should define "austerity".

However, ignoring the precise definition, it's clear that the government has aimed to reduce the deficit, which is what has happened. So each month we're borrowing less and the amount we owe is increasing more slowly than if the the deficit had remained the same.

Other countries (e.g. Ireland, Canada) managed to reduce their deficits much faster. You may be interested to read about how they did it.

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    You should cite and expand on this answer – SleepingGod Jun 28 '17 at 20:37

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