Austerity will be with us for some time, but for how long will the nation be prepared to live with it?
Six more years of economic pain”; “Permanent austerity”; “Nightmare economic outlook”: such were the headlines on the most dire set of growth and deficit forecasts ever put before parliament outside of war-time.
Let’s set aside the warnings from independent forecasters yesterday that the autumn statement figures erred on the side of optimism, or as the Office for Budget Responsibility’s chairman Robert Chote put it: “The chances of a much worse outcome are greater than the chances of a much better one.”
The big question this begs is whether public tolerance will be exhausted long before these six years are out. To quote the Institute for Fiscal Studies: “Until now we had been thinking of four years of cuts as unprecedented in modern times. Six years looks even more extraordinary.” No austerity regime can prevail unless there is a measure of public acquiescence. Without this, it cannot be enforceable.
The next big question centres on the longer-term political implications. The autumn statement projects expenditure cuts running into the next parliament – specifically, £8.3 billion of extra income to be found in 2015 and £15.1bn in 2016 – and with only £1.3bn a year so far costed.
An incoming Labour administration, swept to office by an electorate fed up with the thin gruel of austerity, may pledge to toss all this out the window. But how would it meet the continuing debt overhang?
Such questions would also hang like a black pall over the SNP’s independence referendum. For voters to be assured Scotland will not end up as the next Italy or Greece, an independent Scotland needs to have a plan in place that will pass the exacting tests of the bond markets.
So if this is a crisis for the Conservative/Liberal Democrat coalition, an austerity of this duration is no less one for policymakers on the centre left. What is the credible alternative to be offered? For without one, the UK, too, may succumb to government by technocrats because of a lack of political will to tackle a debt mountain now set to hit 78 per cent of GDP – making the UK the most indebted country with a triple A rating on the world’s credit markets.
Shadow chancellor Ed Balls may have been on fiery “I told you so” form when he laid into George Osborne on Tuesday. But ironically – and not at all comfortably for him – government borrowing has already risen by default to the level envisaged by Labour chancellor Alistair Darling when he left office. Thus, through factors largely beyond its control, the coalition has presided over spending and borrowing rises that have effectively embraced Labour’s current position. Labour could, of course, continue to call for yet more spending and more borrowing on top of the new eye-watering OBR totals in the pursuit of growth.
But how much higher does borrowing and debt interest have to go before they start to have the mooted stimulus benefits – and without sparking a sterling and bond market rout on a credit downgrading?
Since the start of the Blair era, Labour enjoyed largely benign conditions throughout, enabling it to increase spending over a decade by some 53 per cent in real terms. Schools, hospitals, roads, rail, welfare benefits: we had it all – and then some. Now the explosion in personal and government debt has snapped back. We are in a new era.
The centre left has to adjust, not to some passing cyclical downturn of the type experienced in the early 1980s and early 1990s treatable by conventional Keynesian borrowing, but an epochal sea-change that will affect a generation. Given its forecast duration – 27 successive quarters compared to the 16 of the 1930s, it not unreasonable to apply the word “depression” to today. And the most troubling feature of periods of economic depression is that they are not responsive to traditional “stimulus boosts” and fiscal “packages”.
So what does the centre left represent that does not involve a return to a borrowing binge, given that the last one turns out to have been bigger than expected, and with a consequent bust bigger than economists first thought? Profound policy adjustments have to be made lest the perception gain ground that social democratic politics as we know it is so defenceless in the face of a global downturn and mired in the resort to debt that it is incapable of retrenchment: it requires the intervention of technocrats to act as a purgative to undertake and see through the necessary spending and debt reduction programmes that politicians are understandably reluctant to undertake.
The arrival of the technocrats in Greece and Italy may have upset the political elites. But there are many citizens in both countries mightily relieved that some financially credible leadership has now replaced the politicians who led their countries into the mire. The danger, of course, is that the technocrats may come to stage a permanent putsch.
“Fairness” will be one central preoccupation of a Labour counter-offensive in the period ahead: protect those out of work or at the bottom of the income scale and let more of the burden be carried by those with broader shoulders. It is a fair and reasonable appeal to make in these bleak times, particularly with the continuing blaze of anger over bankers’ bonuses.
But addressing inequality by further taxes on the rich may prove a road with little mileage. Remember that almost four and a half million people are already liable for tax at the higher 40 per cent rate, with 275,000 subject to tax at 50 per cent. We may consider these figures too low. We may feel they should pay more. But how many more? And how much more?
The top 1 per cent of taxpayers in the UK are already providing 25 per cent of tax revenue. Back in the 1970s when we last faced economic misery, the top 1 per cent accounted for just 11 per cent of tax revenue. How much more could the wealthy be made to pay before the “Four Ds” kick in – Disincentive, Demotivation, tax Dodging and Departure? For Labour to rebuild a winning base of support outside of its core support, it may find that higher tax rates will deny it as many votes as it hopes to win.
One route out of this box is to follow the changing public mood. Figures yesterday showed that for the 13th successive quarter home owners paid down more mortgage debt than they took on in extra borrowing, bringing the total paydown since the second quarter of 2008 to almost £93bn. Keynesians see this as an extension of the problem, but in truth it is the only means to secure future recovery in household confidence. It is being driven by a gathering revulsion against excessive debt and its consequences.
The mood in the country four years from now may well be an overwhelming determination never to allow ourselves to get into such a debt and borrowing mess again. That is the political legacy that year after year of austerity may well leave in its wake.