Political consensuses come and go. This is the nature of politics. However, some deserve longer shelf lives than others, and austerity is one of them.
After the 2008 financial crisis, austerity meant urgent fiscal restraint from governments, but this is less relevant today with the recovering world economy and improving public finances.
The important lesson from this period is the longer-term reform of public services aimed at delivering high-quality services. The ethos of austerity is more important now to Western policy-makers than ever because of demographic pressures and the complex needs of citizens.
Originally, austerity resulted from the pressure to do the right thing in reaction to a government debt crisis. In the U.K., while running a deficit of £40 billion, the government spent £115 billion averting a banking crisis in 2008 and 2009.
“When the crash came there was no margin to fall back on,” then Labour Chancellor Alistair Darling later wrote in his memoirs.
This created a debt burden, which was then projected to reach 500 percent of GDP by 2040. Come 2010, debt interest payments were greater than school spending, standing at £43 billion a year.
The government responded by reducing public spending. In 2010, newly elected Chancellor George Osbourne aimed to eliminate the deficit by 2015 through a combination of 80 percent in spending cuts and 20 percent in tax rises. This resulted in emergency measures, such as a two-year public sector pay freeze, followed by the limitation of increases by 1 percent, which ended last year.
These temporary measures came to an end as public opinion changed, and the economy recovered. Reform polling found that 59 percent of people would be willing to pay slightly more income tax to fund more spending on the National Health Service (NHS), an increase from 33 percent in August 2014.
The same survey found that 58 percent of people agreed the NHS needs reform more than it needs this extra money. This demonstrates increased public appetite for a limited increase in spending, but also evidence of learning from the past: any funding increases need to be properly costed and accompanied by reform.
Politicians and public servants had little option but to make services more efficient to meet citizen needs. Police numbers were cut by 20,000, or 14 percent, between 2009 and 2016 and yet, crime fell by up to 40 percent. In 2018, the only British police force to be rated “outstanding” had a 20 percent cut in funding and 23 percent drop in staff since 2010. As one police officer put it, austerity “shocked us out of bad habits.”
This effect of the austerity mindset is also illustrated by public sector performance during plump times.
Between 1997 and 2007, the Blair government presided over the second largest increase in public spending out of 28 industrial countries and yet public sector productivity fell. In contrast, there was a rise of 27.9 percent in private sector productivity over the same time.
The U.K. deficit may be lower, but this does not mean the government can neglect longer-term reform of public services. In fact, demographic trends demand its acceleration.
By 2025, there will be a 25 percent increase in those aged over 65, who will need nursing and social care. Spending on state pensions for this group is expected to be £96.6 billion this year, a 50 percent rise in cash terms over ten years. For these reasons, the U.K.’s independent fiscal watchdog has labeled public services “unsustainable.”
The national debt has risen from 62 per cent of GDP in 2010, to 86 per cent of GDP today. The Chancellor, Phillip Hammond, is rightly concerned by this because the IMF has identified “the critical threshold beyond which debt sustainability is at high risk as 85 per cent for advanced economies.”
The opportunity for reform is huge. One recent report claimed digitalization across the U.K. public sector could save £46 billion annually. Another has shown that if 40 percent of management and administration in the health sector used Internet technologies, £7 billion could be saved every year – the equi