Lessons from a decade of failed austerity
A decade on from the global financial crisis, the British economy faces increased risk of renewed recession. Alongside weak domestic growth, global economic growth is at its weakest since the crisis and the risk of a no-deal Brexit remains high.
Any preparation for recession must involve learning the lessons of the government response to the last one.
This paper shows how the cuts imposed after the last recession, both in the UK and in much of the developed world, harmed economic growth, with a heavy impact on workers’ pay.
Overall, pay growth has halved across OECD countries in the decade since the GFC. In real terms, annual pay growth has been below one per cent a year for two thirds of countries.
Policymakers and politicians wrongly attribute this entirely to ‘productivity’, despite a failure to find convincing supply-side explanations for the change in growth at a time when controversial policies are acting on demand.
Calls for government expenditure in the face of renewed recession are already widespread, but ‘austerity thinking’ still constrains the options for fiscal policy going forwards.
- The government should ask for an independent review of how the Office for Budget Responsibility and Bank of England judge the impact of government expenditure on the economy, assessing the critical assumptions on multipliers, the output-gap and the ‘NAIRU’ given the international experience of the austerity decade.
- Immediately deploy fiscal policy to support aggregate demand according to this changed view, expanding government (current) expenditure on public sector salaries and services.
- Fast-track increases in public infrastructure spending to the OECD average of 3.5 per cent of GDP.
- Increased expenditure should be financed by borrowing rather than increased taxation in the first instance. This is not equivalent to deficit spending, as a stronger economy will improve the public sector finances.
- Use fiscal policy as part of a wider plan to deliver sustainable growth across the UK, including investing in the public services families rely on, the skills workers need for the future, a just transition to net zero carbon emissions, and giving workers a real voice at work.