Austerity 2.0 would be
truly cataclysmic,
James Meadway says

The clown show at the top of government shouldn’t obscure us from the hard economic realities the rest of us face. While Liz Truss’s political career lies in tatters, the cost of living crisis worsens.

The headline rate of inflation has risen back up to just over 10 per cent, but this headline figure is just an average. Underneath it, food prices have risen 14 per cent on last year – the biggest increase in over 40 years. Food is an essential – no one can avoid eating. But that means food price increases do far more damage to people’s spending power than price rises for other goods and services.

Yet on top of this disaster for living standards, and with the National Grid warning of electricity blackouts early next year, the government has decided to threaten a new round of austerity spending cuts.

With Kwasi Kwarteng’s so-called “mini-Budget” sparking such a panic amongst financial markets that British pension funds were at risk of collapse, a U-turn was always likely. Once the Bank of England stepped in to warn that its support for government debt sales would be withdrawn, sparking fresh market panic, the U-turn became all but inevitable. Kwarteng was sacked and his replacement as chancellor, Jeremy Hunt, wasted little time in reversing almost the entirety of the Kwarteng plan. Liz Truss, who supported Kwarteng every step of the way, saw her authority as prime minister shredded and resigned after just a six week premiership.

Whether Hunt remains in post under a new prime minister remains to be seen, but at the time of writing he is still set to deliver his fiscal statement on 31 October. His plan would only compound the economic crisis for most of us. Hunt represents a lurch in the Tory leadership back to the faction closest to financial services. His “economic advisory council” is entirely made up of economists drawn from the financial services industry – not a single person on there comes from any other business, let alone trade unions or even academia. They include Rupert Harrison, former chancellor George Osborne’s chief advisor and a key architect of his austerity programme.

Austerity is the main reason we are in such a mess today. The government’s Brexit deal has had some impact, notably on trade, but it is austerity spending cuts that for a decade mashed up public services, with school and local governments battered, slashed investment in much-needed infrastructure like railways and renewable energy, and left the British economy dramatically weaker than it needed to be – particularly for those of us who can’t rely on owning wealth for their earnings, but instead have to work or depend on benefits (or, increasingly, both). Living standards, as measured by the value of wages and salaries taking account of inflation, had already stagnated or worsened for most people even before the cost of living crisis erupted.

A repetition of Osborne’s cuts would be truly cataclysmic. It’s not just the social damage that they would do, on top of a decade of misery. There’s also a point where the basic functions of modern society – like roads you can drive on, courts that can run trials, or bins that get collected – start to become difficult, once spending cuts push far enough. Whatever free market fantasies some in the Conservative Party have, once the lights start going out – as is now a serious possibility according to National Grid – there’s little choice but to spend government money.

It’s deeply unlikely any government would be able to push cuts as far as Osborne did. The financial markets certainly don’t believe so. When Kwarteng tried to cut taxes for the rich and for corporations in his mini-Budget, the market reaction was so severe because traders just did not believe he would be able to make the future spending cuts that they implied.

With Hunt having ditched nearly all the tax-cutting measures in the mini-Budget, the so-called “black hole” in the public finances has been reduced. We still haven’t been given the official forecasts, but a rough guess suggests the government would need to find £28bn of spending cuts to meet its own targets for shrinking the debt in three years’ time.

But that’s the issue here – the target the government wants to hit for reducing the debt is one it has set itself. The “black hole” is one they have invented. If the government moves its own three year target, perhaps aiming to shrink the debt in five years’ time instead, the supposed need for cuts today will be reduced, and with a few tax increases on unpopular targets– perhaps a windfall on oil and gas companies – he can close the rest of the so-called “black hole”.

Hunt and the Treasury will know this. It’s quite likely they are talking up dramatic cuts now so we will all be relieved and grateful if the cuts don’t seem so bad when actually announced. The cynical people running the country call it “expectations management”.

No one should fall for this: not a single cut is necessary and, at a time when the NHS is on its knees, schools are struggling, and we need to raise pay, pensions and benefits to beat the cost of living crisis, we should be looking for more government spending, not less. No to cuts – tax the rich.

James Meadway is an economist and director of the Progressive Economy Forum, an independent thinktank (progressiveeconomyforum.com)