In 2007/8 the impact of the global financial crisis hit the UK, leading to a period of significant economic downturn. To deal with the effects of this crash, the government prescribed a strong dose of austerity, with the intention of reducing public spending and bringing the deficit under control.
Twelve years later we are still dealing with the aftermath of this decision, which, when combined with the uncertainty of Brexit, is said to have left the UK in a particularly precarious economic position when the COVID-19 pandemic hit in March this year.
In this blog, Procure Partnerships Framework Director, Robbie Blackhurst explores the implications of returning to austerity when planning our post-covid economic recovery.
How will COVID-19 Impact the UK Economy?
Minimising the potentially disastrous economic impact that COVID-19 could have on the economy has required unprecedented levels of public spending, including the furlough scheme for workers, loans and grants for businesses, and a rise in welfare payments. In April 2020, the UK borrowed more in one month (£62bn) than it was forecast to borrow in the whole of 2020 and it is anticipated that government borrowing will increase to levels not seen before during peacetime.
Alongside the high cost of government support, uncertainty and fear may see businesses holding back from making investments and households reducing their usual spending, and of course we face high levels of business collapse and unemployment after the furlough scheme ends, all of which are expected to negatively impact the economy.
Given the likelihood of a shrinking economy and a rise in government borrowing, many fear that once the immediate health crisis eases, a return to austerity is a likely option for the government. However, it is an option which has received significant criticism over the last 10 years, and, as more evidence of the negative effects of austerity begin to surface, exploring other avenues to boost the economy is essential.
The Effects of Austerity on Society
The 2010 to 2019 period of austerity is set to be the longest pause in real terms spending growth on record and there is a growing consensus that austerity has failed on multiple levels. Reducing public spending at a point when businesses and individuals were also cutting their costs due to the financial crash, is believed to have stifled economic growth.
The New Economics Foundation has found that the UK’s economy is approximately £100 billion smaller than it would have been without these cuts. Public sector spending on services went from 42% of GDP in 2009-10 to 35% in 2018-19, and these cuts in public services have had a significant impact on some of the most deprived communities in the UK. In fact, the most deprived 20% of authorities suffered some of the biggest funding cuts, only widening the existing north-south divide.
Sir Michael Marmot’s 2020 review (10 years after his ‘Fair Society, Healthy Lives’ report which warned that growing inequalities in society would lead to worse public health) found that health inequalities have widened since 2010 and life expectancy for the poorest women has actually gone into reverse, particularly in Northern England. Marmot says:
“Austerity has taken a significant toll on equity and health, and it is likely to continue to do so. If you ask me if that is the reason for the worsening health picture, I’d say it is highly likely that is responsible for the life expectancy flat-lining, people’s health deteriorating and the widening of health inequalities…. You talk to local authority after local authority around the country, and they say, ‘We can’t do any more.’ We are closing youth centres, we’re closing Sure Start children’s centres and we are closing libraries, and parks and recreation centres. We can scarcely do what we have to do to fulfil our statutory duty,”
The detrimental impact of health inequalities can be felt for generations, limiting opportunities in areas such as education and employment and suppressing social mobility. If we return to austerity post-covid, we run the risk of allowing these gaps in society to widen even further.
Creating an ‘Investment State’
As the saying goes, ‘money doesn’t grow on trees’ and the high levels of public spending to support businesses throughout the pandemic must be addressed in a long-term plan to cut debt to GDP ratios. However, Jonathan Portes, Professor of Economics and Public Policy at the School of Politics & Economics of King’s College, London, reported in his article for Prospect Magazine that there is no rush to achieve this;
“If—as seems most likely—consumer and business spending is depressed, then the last thing we should worry about is the deficit. Even in a normal downturn, the right prescription would be—as we learned after 2008-09—for the government to keep on spending.”
After World War Two, the Labour government implemented the opposite of austerity, and increased public spending to set up the NHS and the welfare state and to nationalise many industries. Despite the debt to GDP ratio continuing to rise until early 1950s, the 1950s and 60s were actually periods of high economic growth. Debt to GDP began to fall steadily as higher economic growth helped to chip away at the debt ratio. The post-war period shows you can have a very high level of debt and reduce it without resorting to austerity.
It may seem counter-intuitive, but spending our way out of debt will not only provide a more buoyant economy but will also prevent the health inequalities in society from worsening. The IPPR Commission on Economic Justice believe we need investment in what they call ‘four killer social deficits’;
1. Care, focused on the young and the old
2. Skills, addressing low pay and productivity
3. Health, in particular inequalities and rising mental ill-health
4. Security, to end poverty, growing levels of debt and economic insecurity
Closing these ‘social deficits’ will require significant investment in our social security system and public services, but there is growing evidence that suggests higher levels of social investment can actually act as a catalyst rather than a drain on economic growth.
Out of Adversity Comes Opportunity
COVID-19 has left no part of society untouched, which has the potential to be a great ‘societal leveller’; regardless of wealth or status, we have all had to come together to help stop the spread of the virus. However, COVID-19 has also laid bare the many weaknesses and inequalities in our society, and as is often the case, it is the vulnerable who have been hardest hit.
As the stark inequalities in our society have been exposed, a desire to ‘build back better’ has blossomed, hoping to ride on the current momentum to push through changes and create a fairer, more equal system. To ignore the inequalities in our society when rebuilding the economy would be short-sighted, as would the continual underfunding of the critical public services needed to level up. In order to provide a society that delivers both prosperity and justice for everyone, we need investment.