The Political Economy Review 2017

The general public have made their feelings on the policy of austerity very clear in recent months, as is shown most recently by the 2017 General Election where Theresa May and the Conservative party failed to win an overall majority and lost 13 seats from the last general election in 2015. The relaxation on the policy of austerity by the Conservative party is one way in which it could be said that the age of austerity in the UK is effectively over. This mitigation of their policy is firstly shown by the fact that the speed of deficit reduction under George Osborne, when he was Chancellor of the Exchequer, was downgraded in 2016 from the initial 2010 target. His successor, Philip Hammond, the current Chancellor of the Exchequer, has created headroom for public spending as he can now meet his new target for deficit reduction and also announce high profile increases in government spending. In order to reduce a budget deficit, an economy must either decrease government spending or increase taxes so, if government spending is increasing, the budget deficit isn’t being reduced and thus the policy of austerity isn’t being fulfilled. What could appear to be a Conservative U-turn on their own policy is lastly shown by the fact that, as Torsten Bell at the Resolution Foundation notes, the reduction of the deficit only got three mentions in the 2017 Conservative manifesto compared to 17 mentions in their 2015 manifesto. This Conservative change of attitude towards the policy of austerity does seem to suggest that the age of austerity is in decline or possibly over in the UK. The Labour party is vehemently opposed to austerity, as shown by Jeremy Corbyn’s first conference speech as Labour party leader in 2015, where he said ‘Labour will challenge austerity; it will be unapologetic about changing our economy’. The Labour party’s less restrictive fiscal rules allow much higher government spending, whilst allowing for a substantial increase in infrastructure investment. These policies don’t reduce the budget deficit as the Labour idea of increasing taxes on the rich will not fully pay for these investments and thus they in fact increase the budget deficit. The reason that the Labour party is less committed to the idea of reducing the budget deficit is that they believe that the government should take advantage of a time like this where the interest rates are very low (currently 0.25%) to boost the economy with increased borrowing and spending. Their anti-austerity front has proved popular with the voters as shown by the 9.6% increase in votes for the Labour party in the 2017 general election. When you pair the current high level of uncertainty in the UK post-2016 referendum with the rapid increase in support for the Labour party, which gained 30 more seats in the 2017 election than in the 2015 election, there is a possibility that if another election is called the Labour party may win and hence the age of austerity would be over. However, there are also signs that the policy of austerity is not over in the UK. Firstly, it seems highly unlikely that any government will give up on the idea of reducing the budget deficit in the UK given that the current budget deficit is large and estimated to be around £69 billion and government debt now stands at an even higher 80%. One of the disadvantages that a budget deficit brings is that it implies that government spending is high so therefore crowding out is likely to occur. This is when the large spending by the public sector means that there is less investment by the private sector as there is less room to invest in the economy. Because of this and other disadvantages that a budget deficit brings to an economy it seems as if government attempts to reduce the deficit and therefore austerity will be around for a while longer. George Osborne argues that after the outcome of the 2017 election that a so-called ‘end to austerity’ would lead to a ‘loss of economic credibility’. He argues this as if the government ends the fiscal programme that has ‘underpinned Britain’s economic success’ for the past few years than ‘a loss of economic credibility’ would make the current problems facing the UK economy (e.g. Brexit), worse.


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