The government need to learn from their austerity mistakes, as the economy plunges into recession.
In 2007 a ripple was sent through the world’s economies causing mass recession. Thirteen years later, the coronavirus pandemic is looking to be even more deadly to the economy here in the UK. GDP in March fell 5.8%, a record monthly fall, due to a number of factors such as redundancies and less confidence in the consumer spending market. Most business, excluding perhaps home workout retailers and video conference organisations, have seen a reduction in demand and this has left millions of jobs at risk.
UK unemployment has surged to 1.33 million by June. The Chancellor so far has done well in protecting jobs via the furlough scheme, but unemployment is expected to increase when some of the furlough burden is given back to bosses as they will have to pay 20% of furloughed workers salary. However, the mini budget announcement has given incentives to bosses as well as consumers to try to reinvigorate the economy, a grant of £1000 is given to a business for each member of staff brought back full time from furlough. Spending incentives include the dramatic cut in VAT from 20% to 5% in the hospitality and tourism industry as well as a discount for meals out, funded by the government.
However, a big question arises over how this will affect the economy at a later juncture. The reaction to the financial crash in 2007 resulted in the Conservative government implementing austerity, a policy of cuts in government spending which had dramatically climactic effects on Britain. Poverty became more widespread with 14 million people(1/5 of the population)are in poverty and homelessness has seen a rise of 250% from 2010 to 2019. Food bank usage is a further indicator of the expanding poverty; since the beginning of austerity increasing from 61,000 users in 2010 up to 1.5million in 2019, with a reliance on public generosity when it should be government responsibility.
Furthermore, councils claim the cuts took away crisis capacity, chief scientific advisor Patrick Vallance said countries who invested in their public health system have coped better with the Coronavirus pandemic. This is evidence of the damaging effect of cuts to public spending, and how it causes suffering.
A further case of this is the worsening effect on the education system, total school spending per pupil in England has decreased 8% in real terms from 2010 to 2020. Lower funding in schooling leads to lower skills and the eventuality of lower productivity, giving further degradation to economic performance.Evidence shows on average each extra year of schooling boosts a person’s income by 10%.
Austerities supporters claim austerity was necessary to remove budget deficits and therefore stop piling on debts. Fears were spread of a Greek styled debt crisis, this comparison however is inaccurate and unhelpful. Unlike in Greece or Spain, the UK has control over their own currency. As explained by former Chief economist on the US senate budget committee Stephanie Kelton, the state can create money to spend without the need to use bonds to borrow from the private sector. It was also claimed government spending crowded out private investment, when actually the opposite is true. A study from the university of California, Berkeley, and MIT has found that public research and development spending leads to an increase in private sector spending.
On top of this, economically the austerity programmes have a damming effect on growth. A negative correlation was shown between harsher austerity and GDP growth, the US and Germany for example had higher GDP growth then the UK. (Shown on IMF graph). After research into the effects of austerity, the IMF (international organisation focused on facilitating trade and sustainable economic growth) concluded that austerity economics increases inequality and undermines growth, a consensus of most of the world’s economists.
Austerity was successful in getting out of a cycle of budget deficits, thus reducing debt and growth rates eventually caught up with those of other developed nations. However, this cannot be seen as a success as government debt has been proved to be sustainable and not an imminent risk. The repercussions of suffering and hardship faced by so many in our country are incomparable to any benefit achieved by austerity, inevitably the least fortunate in society were the most affected.
It is important these mistakes are not repeated, and people’s livelihoods aren’t sacrificed for unproven illogical economic reasons. Instead the government should continue to fund vital public services and focus on keeping demand high to sustain GDP.