In 2008, an economic crash began with a series of banking failures and governments worldwide having to hand out huge bailouts to banks to prevent their collapse. This led to a global recession, and many governments began to cut down on their spending to reduce their spiraling deficits.
Thirteen years later, as the COVID crisis drags on, many countries face financial difficulties, and governments are once more considering austerity measures to rein in deficits and 'balance the books.' But is this necessary, or are there better ways to deal with a stalling economy?
The Post-War Consensus
At the end of WWII, Britain, like most nations, was broke, its national debt having risen from £700 billion to £3,500 billion during the war years. However, Clement Attlee's post-war Labour government didn't cut back on spending - quite the reverse. Instead, they founded the National Health Service, built houses, hospitals and roads, and nationalised critical industries.
By today's economic thinking, this should have resulted in disaster. However, what actually happened was that debt began to fall. The consensus was reached that spending keeps the economy running, and tax receipts would rise when the government put more money into circulation.
This consensus held through governments of either party for over forty years. From 1946 until 1976, national debt as a proportion of GDP fell from 270% to 49%, and, in general, the UK, along with most of the developed world, prospered under this model.
What Changed?
At the end of the 1970s, a new economic orthodoxy began to take over governments across the Western world, symbolised by leaders such as Margaret Thatcher in the UK and Ronald Reagan in the US. After the oil crises of the preceding decade, these new leaders wanted to rein in government spending and massively increase private-sector involvement in areas previously the province of governmental responsibility.
The results seemed positive in some ways - GDP grew, financial markets boomed, investments in housing, stocks, and shares grew rapidly. However, manufacturing was devastated, jobs for the working classes became more precarious, and life for the poorest became harder as state benefits were rolled back and cut, time and time again.
So Why Does This Mean Austerity Now?
The new economic consensus is extremely popular with the wealthy and powerful, as it has hugely increased their share of the economy. The gap between CEO pay and that of the lowest-paid workers has continued to grow, and the political clout of business heads has grown with it. Lobbying from business is at an all-time high, and the career switch between politics and big business has practically become a revolving door.
Having amassed increased power, the monied classes do not want to see it reduced; this means that those in power cannot tolerate any attack on the system that allowed the current economic and political situation to occur. Therefore, if the orthodoxy states that high public spending is wrong, that must be adhered to, despite all evidence to the contrary.
The fact is, austerity wasn't necessary in 2010, and it certainly isn't now. Instead, our economy needs stimulus in the form of infrastructure spending (which gives a considerable return on investment for any economy), a rise in wages for the lowest-paid, whose incomes invariably go straight back into the economy, and better education and training for all. We also need massive investment in decarbonising our economy to meet the challenge of the ongoing climate crisis, the most critical issue facing all of us.
Although it seems that our politicians don't want to listen to this kind of economic advice, e must convince them that it's essential. We must educate ourselves and others and lobby for the changes our society needs. Otherwise, we are doomed to more years of declining conditions for the worst-off and the continuing chronic problems of a society that places immediate financial returns above its security and well-being as a whole.