What is a working person? This is the question Keir Starmer and other members of his Cabinet struggled to answer over the past week or so. Labour’s flip-flopping is in many ways emblematic of the clash between political rhetoric and fiscal reality.
And there is another term that is probably much harder to define, one that has dominated the conversation about the public finances over the last 14 years. That word is austerity. It has been a convenient catch-all for critics of the coalition’s attempt at fiscal retrenchment, and arguably subsequent Conservative fiscal policy. But with Labour about to announce its first Budget in 14 years under somewhat gloomy circumstances, they may find it difficult to avoid being tarred with that brush.
It is important that politicians are clear about what they mean
But what does austerity really mean? The traditional definition is taking measures to reduce the deficit. So when Keir Starmer said yesterday that tax rises were needed to prevent austerity, too few pointed out that tax rises are private sector and taxpayer austerity. But it’s come to refer only to spending in the UK, largely due the coalition’s decision to tackle the deficit largely through spending measures rather than tax (the so-called ‘80/20’ split).
At Labour’s party conference in September, Chancellor Rachel Reeves confidently proclaimed that ‘there will be no return to austerity’. The argument goes that austerity has been to blame for our deteriorating public services; spending cuts have starved the public sector of much needed funding. In order to fix it, all we need to do is restore spending to where it was before the Conservatives messed everything up. Reeves echoed this sentiment when pressed as to what no austerity actually means, stating that ‘there will be no real-terms cuts to government spending’.
However, on closer inspection this narrative quickly falls apart. A new briefing note from the TaxPayers’ Alliance shows that real-terms spending was higher just prior to the pandemic than at any point under the previous Labour governments: about £33 billion higher, in fact. Excluding the pandemic, real-terms spending grew on average 0.24 per cent a year from 2010-11 to 2019-20. Individual departments may have experienced cuts and spending may have fallen in some years, but above-inflation increases in other departments and in other years means that real-terms spending has risen overall. If austerity means real-terms cuts to government spending, then austerity did not occur under the coalition or the Conservatives.
The future chancellor had to be using a different definition when she complained of the ‘failed experiment of austerity for ten years’ in 2020. One alternative measure of austerity is to compare spending increases to those under the previous Labour government. The Progressive Economy Forum, for example, simulated how much higher public spending would have been in 2019 if it had continued to increase at the same rate as under the last Labour government. Spending increases under the Conservatives certainly fell well short of the 3.99 per cent average increase from 1997-98 to 2010-11. Yet avoiding austerity under this definition would require the Chancellor to spend nearly £40 billion more in 2025-26 alone, almost double the size of the supposed black hole in public finances – to say nothing of restoring it to what it would have been if spending had increased at that rate from 2010 onwards.
Austerity has also at other times been defined by those close to the Chancellor as a ‘political choice with the ideological objective of a smaller state’. Indeed, owing to the relatively high baseline in 2010, spending as a percentage of GDP did fall under the Conservatives. By 2019-20, it returned to pre-2008 levels before subsequently spiking once more due to the pandemic. Currently, it is on track to fall to 2013-14 levels – which in this definition would mean austerity. In order to avoid this decline, the Chancellor would have to boost spending by £13 billion in 2025-26, with larger increases in the following years. And this would merely maintain the size of the state. If she wants to increase it, as Labour did the last time it was in power, it would require spending even more.
It is curious then, that despite fierce criticism of Conservative spending choices while in opposition, the Chancellor has chosen to make such tepid commitments on spending in government. This will likely provoke discontent among Labour’s supporters, many of whom have much more ambitious expectations.
The Chancellor’s changing definition of austerity points to a major problem with political rhetoric, which is that it rarely survives contact with fiscal reality. Spending as a percentage of GDP in 2010 was not only the highest it had been since the mid-1970s, but the deficit was 10.3 per cent of GDP – five times the then postwar average. To increase spending at the same rate as before was unrealistic. Avoiding austerity when it is defined as ‘spending growing more slowly than before’ implies the state consuming an ever-growing share of the economy.
Yet in deciding to blame Conservative spending choices for the crises facing the public sector, Labour has painted itself into a corner, creating impossible expectations for the Chancellor. In order to match the rate of increase under the previous Labour government or even simply to maintain spending as a percentage of GDP, the Chancellor will need to find an additional £13 billion or even £40 billion in the upcoming year, and a total of £100-400 billion by 2028-29. This will mean massive tax rises – even as taxes are already on track to reach an 80-year high, and potentially breaking manifesto commitments on income tax, national insurance and VAT.
Alternatively, Labour could simply redefine austerity as avoiding real-terms cuts – allowing them to actually reduce spending by up to £8.6 billion, just like they constantly redefined working people and look set to redefine debt.
Some commentators have signalled their disapproval over the debate about ‘working people’. They argue it is a fuss over semantics, and ignores the serious policy discussions. But it is important that politicians are clear about what they mean – as with austerity, the definitions can have a huge impact on the numbers.
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