If the new government is to be believed, we stand on the verge of unparalleled fiscal catastrophe. We suffer from an unprecedented ‘debt crisis’ of a scale more egregious than the government knew and with consequences more severe than it could have feared. It demands bold action and tough choices which will effect “our whole way of life”. Therefore they intend to carry out the necessary actions in “a way that strengthens and unites the country” because “ we are all in this together”.
In spite of the quasi-Churchillian rhetoric in which this plea for unity is couched, it’s not exactly appealing stuff. However our new Prime Minister recently offered an intellectual case for austerity presented with a degree of clarity which was heretofore lacking. In short there are three reasons why our new political elite feel compelled to nobly and reluctantly take a scythe to our allegedly out of control public sector:
Firstly David Cameron claims that in and of itself increases in public sector borrowing are bad. As he puts it “the more it has to repay, the more lenders worry about getting their money back; the more lenders start to worry, the less confidence there is in our economy.”
Secondly, investors will withdraw their money from Britain unless “they’re confident the economy is being run properly” and the economy will suffer as a result. Thirdly, any higher interest rates that will result from failure to action will hurt “every family and business in the land” through the higher mortgages and lower employment they entail.
In essence these justification can be boiled down to two core claims: unless the deficit is dramatically cut the markets will punish the British economy (perhaps losing our AAA credit rating in the process) and the brunt of this impact will borne by ordinary people across the country. As an apparent retort to those who might blame this apparently dire situation on the bank bailouts, Cameron argues that this crisis predates the current recession and casts a long shadow over Labour’s entire time in office. Could there be a more damning indictment of the past government and a more pressing case for urgent action? If we accept the claims made by the government then their case does indeed look insurmountable. There’s just a little problem: most of them aren’t true.
Underlying these arguments is an assumption about market rationality. It is assumed that unless governments demonstrate a willingness to engage in ‘fiscal reform’ then markets will foresee a never ending era of profligate spending and, as Cameron argues, lose confidence in the economy and cease lending. Yet Spain recently implemented drastic austerity measures with cuts of €15bn and a government pledge to bring the Spanish deficit down 11.2% of GDP to 3% of GDP by 2013. This involved freezing pensions and significant cuts to public sector wages. However as the prospect of a general strike looms, the country’s debt has been downgraded by rating agencies concerned that the these cuts “will materially reduce the rate of growth of the Spanish economy over the medium term”. Perhaps this suggests that the markets have more sense than politicians are ascribing to them?
The economist Paul Krugman argues that “slashing spending while the economy is still deeply depressed” will be costly because it will depress the economy further and ineffective because this will in turn depress income through taxation. In practice advocates of austerity are arguing that countries must cut “not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn’t) sometime in the future.”
The suffering that austerity brings will worsen our fiscal position rather than strengthen it and yet it is claimed that unless we embrace austerity the markets will punish us for our fiscal irresponsibility. At least in part this may be explained by an irrational veneration of markets as angry gods to be appeased (rather an as aggregates of financial actors). Likewise it can in part be explained by what the economist Joseph Stiglitz has labelled ‘deficit fetishism’: the tendency to focus on one side of the balance sheet without looking at the economic impact of deficit spending. It may be logical for individuals to pay off debts as soon as possible but these
In spite of their deliberate obscurity the government’s plans for austerity are beginning o take shape. All 2.5 million claimants of incapacity benefit will have their work capability reassessed. Penalties for benefit claimants who don’t accept jobs will be more stringently enforced while schemes such as the Future Jobs Fund are likely to be scrapped.
The business secretary Vince Cable has revived plans to privatize the Royal Mail. The new government are pressing ahead with plans to privatize the Channel Tunnel rail link. The bank involved in many of the key privatizations of the 1980s and with close links to the conservative party (NM Rothschild) has pitched for a privatization of the road network which would raise £100 billion. This furthers the impression which emerged last year that behind the scenes the conservatives were preparing for a large scale program of privatization. Similarly outsourcing companies are preparing for a unprecedented boom in their business as the new government is expected to dramatically extend the role of private companies in backend public sector services while education reforms amount to the coming privatization of state education.
What’s going unremarked upon is the scope of the radical right-wing agenda the government intends to push through with the Liberal Democrats an eager party to this spirited attack upon the public sector. This should be no surprise given the ascendency within the party of the Orange Book liberals (Clegg, Cable and Laws) who enthusiastically embrace the dogma of the free-market. Far from the financial crisis heralding the death of neo-liberalism it actually seems to have led to its end game: one last attempt to ‘roll back the state’ and institute the mythical free-market.