This week, the Chancellor, Rachel Reeves, has confirmed plans for significant cuts to disability benefits. The controversial move is being presented under the banner of a necessary reform of the social support system. The government claims that with ‘no money left’, a worsening economy and its own rigid fiscal rules, they had little choice but to impose another round of austerity.
Although Labour inherited a dismal economic situation, a mix of stagnation, broken public finances and crumbling public services, the fundamental goal of social renewal will be undermined by another round of spending cuts. Fifteen years of austerity economics, launched by George Osborne in 2010, have done immense damage to the economy, living standards and the public accounts. Further spending cuts in unprotected areas would mean a slowing of renewal, a further erosion of key public services from the court system to youth services, and a growing list of bankrupt councils. The proposed benefit cuts will also add to poverty amongst some of the most vulnerable citizens.
Labour’s historic achievement in power since 1945 has been to build a stronger social state, a central source of both social and economic resilience. On the two occasions when it has imposed spending cuts to tackle economic crisis, in 1931 and the late 1970s, the impact has been explosive. The party split in 1931 and faced a decade of electoral decline. The spending cuts imposed by the Callaghan government as the price of an IMF loan, unnecessary as later public account figures showed, contributed to the election of Margaret Thatcher in 1979.
Labour could draw on the record of the 1945 Attlee government. Despite a shattered economy and record debt, Labour launched a remarkable and transformative programme of social reform and reconstruction. Its strategy drew on the thinking of the distinguished economist John Maynard Keynes, the leading architect of post-war economic strategy. As Keynes told BBC radio listeners in 1942, ‘Assuredly we can afford this and much more. Anything we can actually do we can afford. Once done, it is there. Nothing can take it from us.’
His message of hope was that economic recovery is perfectly possible if resources are used effectively. Despite financial constraints, it would be a mistake, he argued, to take accounting figures of debt and deficits as a lack of national economic potential. It was a message embraced by the post-war Labour government. The political and economic conditions may be different, but Keynes’s lesson – that success depends on maximising the value of resources – should be embraced today.
Austerity is a perilous political option in 2025. It will alienate backbenchers and large sections of the Labour movement. The decision to boost defence spending by cutting foreign aid has already brought the resignation of the Minister of State for Development, Anneliese Dodds.
Austerity has become a central tool of economic management, not just in the UK, but in Europe and the United States. By slashing state spending – and overturning Joe Biden’s strategy of public sector led renewal – Trump is imposing an extreme version of this strategy, one which risks slowing the American and world economy. The effect of rolling austerity across the continent since the 2008 financial crisis has been a weakening of economic and social strength, especially in Britain.
Making social spending pay for economic crises is embedded in Treasury thinking and its commitment to balanced budgets and rigid fiscal rules. In 2013, at the height of the first austerity round, the department’s permanent secretary, Sir Nicholas Macpherson, set out the department’s priorities only too starkly: support for markets, scepticism of government intervention, adherence to ‘sound money’ and disciplined spending.
This bias to austerity is based on several false assumptions. These include the century-old idea of ‘crowding out’ – that public sector activity crowds out more productive private activity. Yet each time this doctrine has been applied – in the 1920s, 1930s, 1970s and since 2010 – it has suppressed economic activity. The current strategy also assumes that it is supply constraints that limit grown, not a lack of demand. Yet while there are bottlenecks in some parts of the economy, a weakness of demand means that Labour’s emphasis on supply-side measures alone – aimed at raising productivity and labour supply – to boost growth is like driving with the handbrake on. The way spending cuts will accentuate contraction is even being questioned by mainstream economists. As the former chief economist at the Bank of England, Andy Haldane, has warned, further austerity would generate a ‘deeply counterproductive’ doom loop.
Economic renewal requires a major rethink of Treasury orthodoxy, and a recognition of the dynamic impact of better public services on economic capacity. The government’s argument is that growth alone is the solution. Without faster growth, higher spending in priority areas such as the NHS and defence will come, on current plans, through a zero-sum game, at the expense of poorer social care and maintaining benefit caps, such as the two-child limit. Yet austerity imposes downward pressure on demand while acting as a restraint on faster growth, and leaving resource allocation too heavily in the hands of private markets.
The road the Chancellor takes to balance these competing pressures – between spending cuts, tax rises and relaxing the fiscal rules – will be the defining act of the government. It will have a profound impact on the course of the economy, on living standards and social resilience over the rest of the decade. Failure to deliver a stronger and more resilient society and raise the incomes of the poorest, will surely also have severe consequences for the party’s electoral future. It would pose big questions about Labour’s purpose in government while emboldening the populist right.
Stewart Lansley is a visiting fellow at the School of Policy Studies, the University of Bristol, and a Fellow of the Academy of Social Sciences.
The Richer, The Poorer How Britain Enriched the Few and Failed the Poor. A 200-Year History by Stewart Lansley is available on the Bristol University Press website. Order here for £19.99.
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