Following the economic crash of 2008, Tory governments have put cutting the budget deficit (the difference between what the government receives in taxes and what it spends) and reducing the national debt at the centre of their economic policy. Austerity, principally, was their method of doing that. That is cutting government spending on our vital services and additionally freezing public sector pay. Austerity has caused untold misery to millions of our citizens; meanwhile Britain’s national debt now stands at 86% of GDP, an increase from 40% just before the economic crash.
Cutting government spending as a way of reducing the deficit comes from the fallacy of treating the government budget as if it were a household budget. The argument that as a family: “you would want to pay your debts and live within your means” is a very appealing proposition. However, there is a fundamental difference between running a household budget and a government budget.
In a previous article in the Huffington Post (June 2015) I explained the difference as follows:
“In science if you want to study the behaviour of a system under different conditions, you put a boundary around it and examine its interaction with its surroundings. For a household, let us put a boundary around the house (the system). Money flows through the boundary into the house by what the family earns and out of the house by what the family spends. It is obviously desirable to have these balanced. Most families, however, will still be in debt, primarily in terms of a mortgage to buy their house. No one would suggest that a family should wait until they saved the whole value of the house before they bought it. Student members of the family would also incur debts to finance their higher education. So having debts to invest in the future of the family is necessary and desirable. If we look at the government budget, our system is now the whole country, and the government is within it. Government money comes from other parts of the system in the form of taxes. The amount it gets depends on the economic activities within the country.”
Thus eliminating the deficit by cutting government spending would dampen economic activities within the system (the country) to the extent that government revenues drop by more than the money saved through cutting spending. Government debt consequently increases rather than decreases. This is in addition to the hardship caused to the poorest and most vulnerable members of our society.
Portugal has now demonstrated that austerity as a response to economic depression is economically illiterate. Their economy is now thriving, thanks to the socialist government that took over in 2015. It abandoned the austerity pursued by the previous government and increased wages thus boosting demand for goods and services. Consequently this has substantially reduced the deficit as a percentage of GDP
Money is what sustains economic activity within the country. Following the economic crash of 2008, money dried up as the banks stopped lending. The correct response would be to pump money into the economy, through properly funding our vital services, with adequate pay for our public sector employees. And building energy efficient affordable housing the country so desperately need. Austerity takes money out of the economy leading to a downward spiral, totally the wrong response as Portugal has clearly demonstrated.
Britain’s chancellor, Philip Hammond, however, is still wedded to austerity, albeit with minor loosening of the purse strings. When, oh when will this morally and economically bankrupt policy end? The evidence is clear, Chancellor, put the welfare of people at the heart of your economic policy, and the budget deficit together with the national debt will take care of themselves.