Calvert Jump, Robert ORCID: https://orcid.org/0000-0002-2967-512X, Michell, Jo, Meadway, James and Nascimento, Natassia (2023) The Macroeconomics of Austerity. Report. Progressive Economy Forum (PEF), London, UK.

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Abstract

Executive summary
● With the rhetoric of fiscal prudence now returning on both sides of the political divide, there is a need to assess the macroeconomics of austerity.
● The social consequences of austerity are now understood. But austerity was originally, and explicitly, sold to the public as a strategy for rebuilding the British economy.
● A number of strategies are available to governments to manage the public sector finances. Spending cuts do not have to be the primary tool for bringing the path of government debt and deficits under control.
● Yet, spending cuts made up the bulk of the austerity programme. Current public sector spending per person fell in real terms in every fiscal year between 2010-11 and 2018-19.
● George Osborne and David Cameron justified spending cuts using the idea of “expansionary austerity”: the claim that a reduction in the size of the state would raise confidence in the ability of the government to service its debt, leading to lower interest rates, greater macroeconomic stability, and thereby higher growth.
● There is, however, another mechanism of “expansionary austerity” which works via the labour market. Cuts to government spending, particularly on benefits and public sector employees, increase the cost of being unemployed and worsen the public sector employment alternatives available to private sector workers. This reduces the bargaining power of private sector workers so they become willing to work for lower wages. The result is higher employment and economic activity.
● There is no evidence of the improved confidence mechanism of “expansionary austerity” during the post-2010 austerity period. Instead, the effects of austerity operated through the labour market in the form of lower wages and worse conditions. The indirect effects of this were severe and highly unequal: the costs fell overwhelmingly on women and the lower paid. This is exploitative austerity.
● Economic policy after 2010 did not need to be this way. If public spending had increased by 3% a year as part of a balanced budget expansion (meaning that spending increases were matched by increased tax revenues), it would have been over £91bn higher by the end of 2019 - equivalent to the entire education budget in that year. Moreover, under such a scenario, the debt-to-GDP ratio could have been 3 percentage points lower by the end of 2019.
● We do not need a return to austerity in 2023. Balanced budget increases in spending, reinforced by root-and-branch changes to our policy institutions, are necessary to break the doom loop of austerity.

Item Type:	Monograph (Report)
Uncontrolled Keywords:	austerity
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HB Economic Theory
Faculty / School / Research Centre / Research Group:	Greenwich Business School Greenwich Business School > Political Economy, Governance, Finance and Accountability (PEGFA) Journal of Economic Literature Classification > Political Economy, Governance, Finance and Accountability (PEGFA) Greenwich Business School > School of Accounting, Finance and Economics
Related URLs:	http://ferryfoundation.org.uk/report/the...
Last Modified:	18 Feb 2025 13:01
URI:	http://gala.gre.ac.uk/id/eprint/49754

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