Election year draws near. If George Osborne isn’t worried by the economic signals, he ought to be. There is evidence that austerity hasn’t worked: and it should work, even if not in the way we are told.
We are supposed to believe that if the state balances the books, businesses will have confidence to invest and consumers will spend more. The new growth and resulting surge in tax revenues then makes up for previous belt-tightening.
In all previous cases of successful austerity, however, from Chile and New York City in the mid-1970s to Canada in the mid-1990s, spending cuts had a negative impact on growth. The reduction in growth persisted for as long as the fiscal tourniquet was applied. So in what sense did austerity work? And why isn’t it happening this time?
Consider Thatcher’s first term. That government braced itself and rode out social conflict and soaring unemployment of a scale that would have brought this shaky coalition to its knees. It was pitiless, relentless, seemingly impervious to protest or plea. It was the most unpopular government in postwar history. Yet in 1983 it was propelled back into office with roughly the same percentage of the vote it had obtained in 1979.
This is because in 1982 the world economy – after a decade of turbulence and stagnation – began to turn the corner. A new vector of growth had opened up in south-east Asia, and global capital rushed to invest. The recovery was sufficient for the Treasury to begin relaxing the purse strings, thus allowing just enough people to feel wealthy enough in advance of the 1983 election.
The global recovery wasn’t enough by itself, however. Thatcher had always been clear that her austerity agenda was not a belt-tightening exercise, but a deliberate attempt to transform and “modernise” British society. It was, in the idiom of the IMF, a “structural adjustment programme”.
Mass unemployment was an instrument for the disciplining and weakening of labour, followed up by union-busting as state policy. Cuts in welfare had a similar effect. Cuts in taxes for businesses and the rich encouraged private sector investment and luxury consumption. With lower costs of investment and higher returns, British business was in rude health. Profit margins for UK companies had slumped since 1973, but rose more or less consistently between 1982 and 1997.
True, Thatcher’s reforms stored up many pathologies in the British economy, some of which became evident after the credit crunch. These include the weakening of the industrial base, a neglected infrastructure, the dependence on public and private debt, the lunatic housing market, the excessive strength of finance. However, these dysfunctions were preferable for Thatcher’s base to the lingering pathologies of the postwar system. Anyway, the number of growing capitalist economies without any serious crisis tendencies is approximately zero.
Thatcher fought for high stakes and won handsomely. This is the success that Cameron et al have wished to repeat. But it isn’t the same this time.
The Tories and their Liberal Democrat allies might have hoped to ride out the storm and go into 2015 with the recession fading and a viable plurality of voters feeling wealthier. Indeed, Osborne began laying the groundwork for this narrative last year. His cuts reduced growth and delayed recovery. But when recovery did come, Osborne claimed that stagnation was a legacy of Labour’s failure, and that sound Tory policy had at last rescued the economy. And he was pragmatic enough to relent on his cuts targets in order to avoid hurting the recovery before the election.
Lately, however, Cameron and the Bank of England have warned that stagnation in the world economy and the eurozone in particular, could undermine Britain’s recovery. They’re right, in a way. The four largest economies – the US, eurozone, China and Japan – are all either tepid, slowing or headed for recession. That means the healthy global environment in which austerity could be redeemed doesn’t exist.
The problems are deeper than the government would like to admit. The pathologies inherited from Thatcher’s transformation have not been displaced by new, more viable ones. Rather, they have been compounded. The most salient of these is the centrality of debt. Much new growth has been contingent on rising public and private debt. If consumers hadn’t resumed borrowing, despite not having paid off old debts, recovery would have been impossible.
Worse still for the government, the private sector still doesn’t want to invest. Plummeting wages, reduced benefits, lower business taxes, more profit opportunities in the public sector – nothing seems to be enough. The FTSE 100 is hoarding £53.5bn capital, even with the economy growing. This is because the major impediment to growth today is not the cost of investment, but poor returns. It is the fundamental weakness of the economy.
On the face of it, businesses have done well out of austerity Britain. Profits have been driven sky high. Of new wealth produced, the lion’s share has gone to profit. However, businesses clearly have no confidence that were they to invest the billions they have hoarded, they would see a profit. The tremors in the City and the slowdown in the housing market show how precarious the situation is.
It is convenient to blame Europe for all this. It may strengthen Ukip, but the Tories may prefer to have that sort of argument than confront the fact that, even in the terms of capital, austerity has failed.
