Austerity and Debt: A Cover Story for a Takeover

When Prime Minister David Cameron and Chancellor of the Exchequer George Osborne took office in 2010, they initiated a programme of spending cuts, described as austerity, allegedly to pay off the massive debts that had been incurred under Labour. Some months after this, Britain’s economists started talking about the multiplier effect. This was a phenomenon first described by the economist John Maynard Keynes. Keynes stated that when the government puts money into an economy - or takes it out - the impact on the economy may be greater than - or less than - the actual sum. This was the multiplier effect, the proportion by which the economy is expanded - or shrunk.

Osborne had assumed that if you take £1 billion out of the economy, then the national product will shrink by £1 billion, but some economists were arguing that the multiplier was in the range of 1.5 to 1.8, so that if £1 billion is taken out, GDP could shrink by as much as £1.8 billion. But even trying to pay off debt using a policy that will shrink the economy by £1 billion is a reckless method of solving a problem. Or trying to.

What Cameron and Osborne were doing was taking money out of Britain. That is, cutting incomes, spending power and tax revenue. They were cutting the pay of teachers and freezing the pay levels of doctors and nurses, cutting the number of police employed, and reducing the funds going to local authorities. This meant that teachers, doctors and nurses were spending less. The police forces were cut by 20,000 officers, and if we assume that half of these found jobs at a similar pay level, it is likely that the other half of those made redundant were earning less.

The cuts faced by local authorities also meant job losses. They reduced the number of library staff, cut road cleaning and maintenance, reduced the provision for adult social care and homelessness, and cut spending on education.

Every cut in pay, every freeze in pay levels and every job that was scrapped meant workers earning less. So they would spend less, which meant that purchasing power was taken out of the economy. But also, with every cut in wages, staff would be paying less in tax. The cut in spending would be bad for the economy, while the impact on business would depend on the number of workers affected, and the level of the wage cuts. Clearly, if a large number of workers lose their jobs or suffer savage pay cuts, the shops, restaurants, pubs and hotels that the workers normally spend their money in are going to feel the impact.

In any area of commerce, there are companies that are just raking the money in, and others who at struggling to survive. For those companies, even a small drop in income could threaten their continued existence. Or the drop in revenue for each business may be so severe that they are forced to make staff cuts or pay cuts. As a result, many more workers may be faced with job loss or lower pay. This cycle of job losses leading to further losses could repeat itself almost indefinitely. And in every stage of the process, reductions in pay lead to reductions in spending, which in turn lead to a fall in turnover for businesses.

Damaging the economy is clearly not good policy, but repeated wage cuts are not the worst of it. Each worker who is earning less income, is a worker who is paying less tax. And as the whole point of austerity was, according to Cameron and Osborne, to pay off a “huge” debt, wage cuts actually make the problem worse. With a smaller cohort of workers actually paying tax, and many of those who do pay, are earning less than they did, tax payers as a group are therefore paying less tax. So the government’s tax revenue has been reduced as a direct result of pay cuts. So the government has less money with which to pay off the allegedly “huge” debt.

To return to the multiplier, it was bad enough if spending cuts operated in the way that Osborne thought, that is, take money out of the economy, and it will shrink by that amount. The cycle of pay cuts or job losses being followed by a drop in spending and income tax payments, operates just as forcefully and just as harmfully whether they have lost their job or suffered a pay cut. and the same undeniable inevitability means that workers earning less will pay less tax and spend less.

The only difference is that with a multiplier of 1, the sum lost by the economy will be roughly equal to the amount taken out of it, but if the multiplier is 1.8, the amount lost by the economy will be almost twice as much as the sum taken out. Either way, those who have their wages cut or eliminated by government action will be worse off. But with a multiplier of 1.8, the process of pay cuts and spending cuts will work its way through the nation more extensively, hitting more workers, more shop assistants, more restaurant staff.

Under Osborne’s incompetent care, there was not merely a fear of the British economy falling into a recession, although this seemed very likely. There was a lot of concern at the time about the UK suffering a triple dip recession, an almost unheard of phenomenon of decline, recovery, over and over again.

Sadly, austerity was continued under subsequent Conservative governments. It just wasn't labelled as such. Later politicians, such as Theresa May or Boris Johnson, promised to spend money on education or healthcare, or levelling up the economy, but actually did nothing. Well, nothing good. Boris and his acolytes managed to offend the EU big wigs, pass a few laws that would limit human rights and the right to protest, take powers away from the courts and from parliament, and slip a few generous contracts, with no boring competitive tendering, to big business and their personal friends.

Boris may have gone now, but those laws did not get passed by Boris alone. Parliament is filled with right wing Tories who do not want a country with checks and balances, or where the executive, the legislature and the judiciary ensure that no branch of government abuses its powers. Regardless of who is Prime Minister, a major faction of the Conservative Party wants a system where the Tories can take office when they like, perhaps even allowing an opposition party to take office occasionally, just to show that Britain is still a democracy. Of course, by that time, it won't be.