The term austerity now has an established place in political discourse in the UK, referring to budget cuts across public services driven by a need to ‘balance the books’. However, such cuts in frontline social services have proved again and again to be false economies. Therefore, even by its own logic, austerity has often proved counter-productive.
The rise of austerity
While austerity has a long pedigree as a set of economic policies, its recent and continued dominance of fiscal policies (the amount the state spends on its activities) directly followed the global financial crisis of 2008. States weathered the financial crisis largely through the provision of liquidity to financial markets including the issuance of public debt to fund losses made by banks, which threatened the stability of global financial markets. This was often referred to as Quantitative Easing (or QE). As the crisis began to pass, many governments perceived the need to rebuild their financial position.
Coined in post-war Britain, austerity refers to the reduction of public expenditure to reduce debt levels. In this century the policies were intended to reduce the public debt used to ease the global financial crisis. In the UK, the incoming coalition government in 2010 made the decision to prioritise reducing the government deficit (the gap between tax receipts and government expenditure), and launched a long-term programme of deficit reduction, now universally referred to as ‘austerity’, to ‘rebuild’ the public finances. The applicability of the term may now be questioned under the Labour government that came to power in 2024, but the logic of austerity remains in place.
The centrepiece of austerity is, and continues to be, the reduction of state expenditure on public services, allied with some increases in taxation, with the aim of bringing the state’s expenditure back into balance with its tax receipts, thus leading to the common political rhetoric of ‘balancing the books’.
The false logic of the state as household
Unfortunately the popular discourse of austerity, of balancing the books and treating the government’s budget in much the same way as a household, rests on a (fatal) misapprehension about the economics of the state. The key difference between the state and a household is that the state has the means to create money. In this sense, unlike a household, it can never run out of money or go bankrupt. Indeed, as the economy requires ever increasing amounts of money to be in circulation, one of the state’s central roles in the modern economy is to create more money and put it into circulation, which it does in part by expanding public debt.
Public debt, as history shows, does not need to be repaid quickly – unlike household debt, which must typically be settled with creditors in the short term. Public debt has a long, potentially multi-generational period of repayment. Moreover, such public debt is used throughout the economic system as a secure and ‘performing’ (in that it pays interest) asset to safely store savings and wealth. Reducing public debt thereby removes safe assets from the economic system.
If the household thinks it’s a good idea to do something, pretty much you can say the government should do the opposite. Because they are the opposite of each other. The household is the microcosm of society. The government is the macrocosm of society. Its job is to manage the overall scene and to compensate for what goes wrong at the household level. It must take the opposite action to ensure that, overall, there is balance within the economy for which it is responsible.
In other words, the use of the household analogy is a political pronouncement not an economic analysis. But, when it comes to austerity, the logic of which is to reduce state expenditure (as a household in crisis might), the specific and different character of the state’s role in the economy, almost always results in a series of false economies.
The false economies of budget cuts
While the state has many areas where expenditure could be cut, the modern welfare state is so extensive that the majority of the areas from which large savings might be harvested are in various social services for the general population. These services are often arranged in three tiers:
- standard social and other services (which might include aspects of prevention);
- intermediate services that deal with those for whom the standard service provision is insufficient to resolve their particular ‘problem’ or is unable to provide a service due to specific personal needs; and
- a crisis level which picks up cases from the intermediate level that require further extensive intervention(s).
For example, schools provide education to school-age children. For a range of reasons school budgets are under strain leading to larger classes often taught by inexperienced teachers (due to the churn in the workforce prompted by declining working conditions). In these circumstances ‘difficult’ pupils (or those with special needs) are often removed into special provision which is more labour intensive but remains within the school (an intermediate level of service). However due to the rise of students being pushed into the intermediate level, and that level’s own workforce and budgeting issues, the ‘worst’ cases are then pushed out to an external crisis level provision (often offered by expensive private providers). While all the levels are required, cuts at the initial level push up the throughput into the higher more expensive levels. Essentially, cuts to school budgets simply shift demand and costs to later stages, ultimately cancelling out – or even exceeding – any savings made at the start.
Cuts to the provision of the primary service result in more people being funnelled into the intermediate level for support, thereby pushing this level of service beyond its capacity, and in turn resulting in more cases developing into crisis and being referred to the third level. So, as demand for crisis intervention increases, so too does the expense.
The same pattern shows up in health and social services. Cuts in programmes targeted at preventing health problems from anti-smoking programmes, to support for families, mean the costs are later picked up by the National Health Service in increased admissions. This also exemplifies the problems with the logic of cuts; the fiscal benefits appear pretty quickly, whereas the rise in costs due to problems not being dealt with early, only emerge and become clear later in the cycle of austerity, and sometimes after the architects of austerity have moved on claiming success.
This short-term approach – saving money now while creating bigger, costlier problems down the line – is one of the core reasons why the UK struggles to fund its public services effectively.
The promise & limitations of Rachel Reeves’ new fiscal rules
While the criticism of austerity’s central cuts is hardly novel and indeed has been made again and again, austerity has become what John Quiggin calls a zombie idea in economics; it may seem dead but keep coming back to life. At first glance, Rachel Reeves’ revised fiscal rules – which allow public debt to rise where public investment is linked to economic growth in the medium term – offer a solution to the problem. However, it therefore requires all investments to be measured against their contribution to economic growth, which for many public investments intended to deal with the false economy of austerity may prove a challenge (in statistical terms if not moral ones).
So, the political aspiration to ‘balance the books’, whether made in good or bad faith, in the longer term does exactly the opposite. By treating the state as if it was a household, not only is the fiscal reality of the state obscured and misrepresented, the very policy aim it promotes becomes increasingly difficult. As Rachel Reeves has recognised in the logic of her new fiscal rules, investing for the future can bring down costs in the longer term, but only after there has been a rise in expenditure first to make those investments. That logic sadly continues to be honoured in the breach even with the new fiscal rules in place.
