I have published this video this morning. In it, I argue that like almost all economic truths, austerity works in the opposite way to that which most people think. It does not save money. Instead, it prevents the government from creating the money required to deliver what the economy is capable of.
The audio version of this video is here:
The transcript is:
It's an economic truth that austerity on the part of the government does not save money.
Most people ask the question, where's all the money that was saved by austerity gone? And the answer is, there is no money saved by austerity, because austerity is not about saving money. Austerity is about refusing to create money, and that's something quite different.
Like so many of the economic truths that I talk about, the truth, in this case, is the opposite of what most people think. That's why economic truths are so hard to deal with because they appear counterintuitive when you first talk about them.
But let's understand this idea that austerity saves money. The reality is that when a government does austerity, it spends less. Now, that doesn't mean to say that there is more money sitting around because tax does not fund government spending. Tax cancels the impact of government spending once money has been put into the economy, to prevent inflation taking place.
So lower levels of government spending should mean lower levels of taxation, which is why so many politicians are fixated on delivering low levels of public service. But if we have austerity - the sort of thing that George Osborne, Philip Hammond, Rishi Sunak, and now Rachel Reeves are dedicated to - then what happens is that money that should be spent to put resources to use in our economy is not spent.
Let me use an example. Rachel Reeves is not going to pay out roughly £3 billion of winter fuel payment to pensioners as from the winter of 2024/25. That is austerity. She has done this to supposedly balance her books by cutting her spending, but the reality is that she has not saved any tax revenue as a consequence.
What she hasn't done is put that three billion pounds into the economy for people to spend. So, there is less money available. rather than money saved. That is what austerity does.
But when there is less money available, there is, of course, less spending going on in the economy. It's inevitable, isn't it?
If people have £300 less, if they're pensioners, in the coming year, they will probably spend less. £300 less, in a great many cases, because a great many pensioners spend everything they get. So, Rachel Reeves is denying the economy the money that it needs to function, by denying those pensioners that cash, who in turn won't then spend it with whoever they might have done, whether that be an energy company, or their supermarket, or whatever.
So, austerity works by cutting the amount of money in the economy. It's not a saving of tax revenue. There's no little pile of money set aside as a result to spend one day. What austerity does is remove money creation from the government's spending agenda. And as a consequence, we're all worse off. But that was always the plan. And that's why it's wrong.
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Rubbish, you’ve taken a grain of truth and extrapolated it beyond all recognition to basically conclude that the government spending more money is always better than the government spending less money, regardless of what it is spent on.
Which is blatantly untrue.
I have never made such a claim
Biut, austerity by definition requires that projects of agree public value should not be done. Therefore my suggestion is always true, and yours is utter nonsense.
“Rubbish, you’ve taken a grain of truth and extrapolated it beyond all recognition”
Mr Williams,
No, that is what you have just done; with one exception. there wasn’t even a grain of truth in your comment. It was completely gratuitous drivel.
Scammer & Co exist to help prevent the rich having to pay their fair share of taxes, they’re simply politician shills!
‘The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism’ by
Clara E. Mattei (2022).
That is the book we should all be reading.
And don’t forget Mark Blyth’s book either ‘Austerity: The History of a Dangerous Idea’ (2013).
But Mattei hits the ball out of park. For example, she notes how austerity can destabilise labour movements and the like. Highly recommended.
Great post BTW.
Thanks
I acknowledge Mattei’s influence
The thing about austerity I have never got is precisely the point you are making.
I wager that anyone who has delayed going to the dentist, fixing the car, fixing something on the house has had to pay more later.
When you have assets – teeth(!), a vehicle, a house, infrastructure, people – you have a commitment/obligation to something. If you don’t meet that commitment/obligation, there has to be consequence.
Austerity just flies in the face of this.
It goes against what we know to be common sense.
Agreed
https://www.dissentmagazine.org/online_articles/the-dawn-of-austerity/
That is an especially highly relevant reference.
This interview gives a quick rundown of Mattei’s positions in a five minute read.
As she appears to blame technocrats and liberal economists for considering austerity in a depoliticised way, as well as the dogmatists, then the obvious conclusion (and longstanding concern) is that there is a value-free approach where economics is seen as solely mechanistic and divorced from an ethics based set of political beliefs and values.
We’ve touched on that theme on this blog, and that lacuna has been a subject for both Chantal Mouffe and Murray Bookchin.
Bookchin even went as far as to blame the ultimate failure of Marxism on its lack of an underpinning ethical base.
So.. when even liberal democracies can and do actively facilitate fascism through macroeconomics, by reinforcing both social and capital owning orders, we evidently need to apply a coherent set of values that provides an ethical purpose for political economy, that aims to restrict and limit such abuse.
I’d far prefer an ironclad fiscal rule that prevents social harm, than some artifice on debt ratios. “Do No Harm” seems to work for medics..
I’d argue that the current centre right Labour party is redolent with technocratic amorality, and that Blair’s ‘we’ll do what works’ techno-rationality has already cancelled out the Labour party ethos of being a party with a moral crusade.
Substantially, that is now a void.
It’s worse than that, because austerity always creates extra costs in other places. In the case of Winter Fuel Payments, for example, the NHS will incur extra load from pensioners suffering hypothermia. We have seen under-maintained buildings crumbling. We have seen expensive ambulances and crews stuck idle because of underfunded A&Es. We have seen extra policing needs because youth clubs have been closed. And so on and so forth.
Austerity costs a fortune.
If the government spends less money in to the economy then the tax take will reduce. This is never taken into account.
Wrong
That need not be the case
It might foolishly, try to reduce debt by keeping tax up
Fully agree. What puzzles me is that the-powers-that-be don’t want to admit this to us, the general public. I can only conclude that they couldn’t take the heat from the mainstream media that would probably ensue. But it all seems to me to come from the fiction that is fed to us about government spending.
“£3 billion of winter fuel payment to pensioners”
If the payment is spent on fuel, for heating (to prevent frozen grannies) most of that is gas.
5% comes back as tax immediately. But the rest is mostly money for gas (network costs are very small). We also know that gas companies pay derisory taxes.
One recent blog did a fine job showing how gov spending on salaries comes back very rapidly as assorted taxes. But not all gov spending is like that.
This is not an argument against NOT having winter fuel payments – but rather a note that gov has failed to get top grips with how energy is taxed.
Arguably, 5% tax (for gas and elec) is a transfer of tax revenues to the bottom line (profit) of energy companies.
The UK @ 5% has the lowest level of taxes on energy of any European country – energy is normally taxed at circa 20%.
Thanks
The Winter Fuel Allowance was a sticking plaster of protection to ordinary people, covering an ill-regulated, phoney market in energy that serves the producer first, not the consumer; in order to protect monopoly producers; that Rachel Reeves has just ripped off, leaving consumers to be ripped-off this winter; oh, and lots and lots of frozen grannies.
Britain voted for a Single Transferable Party. Enjoy.
Taking up your point on the money that ‘returns’ via tax on gas, I wonder how many noticed that the cutting off of winter fuel payments – a penal assault on milions – coincided with the news of the over £2.4 billion extra profits payout and share buy backs by BP!
It is very hard to imagine a more lurid way of displaying Reeves/Starmer and LINO’s priorities – and they have zero to do with fairness, let alone economic competence.
HI Richard,
Thank you for this. I have always wondered where the money that was supposedly saved by austerity went. I note that we have had austerity for the last 14 years, and the assumption is that the money saved in this way would pay down the national debt. But over the same period, it has increased (as far as I am aware).
What I find most unacceptable, is that no journalist, financial or otherwise, has ever raised this question with anyone in government, or indeed in opposition, in that time. It seems such an obvious question
Regards
@ Sean. Once you start to see the UK is dominated by journalist and political shills you have your answer why so much has been going wrong in the country. Clearly an honest and economically literate political party is badly needed!
Q. Where did the austerity “savings” go?
A. Between 2020 and 2022, the increase in wealth of UK billionaires increased by £150-billion.
There are only 177 billionaires. Source: https://equalitytrust.org.uk/evidence-base/billionaire-britain-0/
The Tories claim that this wealth “trickles down” and generates jobs. If that were the case, they wouldn’t be billionaires.
Billionaires don’t provide wealth for the country, they provide wealth for themselves.
Thanks Ian.
As has been said before, the UK is increasingly a ‘poor country with a quite a few mega rich at the top’.
Great post Richard.
It throws up one obvious question to me which I’ve not heard discussed of late. All we hear about is growth and that means one thing these days – an increase in GDP. The formula for GDP tells us that government spending makes up part of that figure; indeed 45% in the UK’s case. So, if we cut government spending, we – by definition – get a GDP decrease. I’d like to see Reeves wriggle her way out of answering that.
I hope I’ve got this next bit right, but is it not the case that making or doing something does not, in and of itself, create wealth. There has to be the demand and money available in the economy to pay for it. So, either there needs to be enough savings freed up to pay for it, enough available credit, OR the government needs to spend some money into the economy. If my thinking is correct, then I would suggest that the government’s prime function is to ensure there is enough active money available for a functioning economy, by whatever means.
Pretty much 100% OK
Perhaps you ought to do one on the formula GDP = C + I + G + (X – M). Politicians don’t seem to understand that GDP derives in part by the G element (government spending). Mostly people’s eyes glaze over when it comes to formulae but that’s the most important one in economics and you don’t need advanced level applied maths to understand it. Very simple arithmetic.
It’s on my list
With that equation, for me, what’s missing is feelings, people’s sense of safety, security, fear, and so on, and material outcomes. Also, Government, really, is the letter in that equation that underpins and drives the rest, without it, everything else would freeze (2008 comes to mind) and much that is good would not happen. It is, in my view, an inherently political equation, intended to frame government spending as just another form of spending and all the rest as somehow mechanically occurring facts of the matter, devoid of decisions and choices driven by thoughts and feelings. It’s an equation that says nothing about the value or worth of what each letter amounts to – GDP includes highly destructive activity that runs counter to human need, indeed the need of all life on earth. As equations go, it does a lot of leg work in erasing much of what’s important in favour of a cold and callous totting up. Trying to understand what happens by describing it is a deliberate sleight of hand, since what happens is always what’s made to happen by beings with intentions, and that’s where understanding lies. That equation is intended to erase from consideration all the power relationships that ultimately lead to the numbers fed into it. If you can know people by their actions, it tells us a lot about certain kinds of economists. Nothing is ever “technical”, it’s only ever political.
It may be cold and calculating, but I think it’s true
Tax cancels the impact of government spending once money has been put into the economy to prevent inflation taking place.
Pedantry moment. I think there should be a comma between: “….. put into the economy, to prevent inflation …..”.
Edited….
Based on the mention of the GDP equation.
As an Engineer I depend upon equations so I was thinking to tease out the consequences of the Deficit equation.:-
(Deficit) = (Government Spending) – (Taxes)
The first one is that this equation demands that government spending must come before the Taxes can be leaved.
Yes
Surely there’s some foundational literature out there on this? I know the BoE and the Bundesbank have made statements about money creation, bank lending creates deposits, but do they explicitly support the notion that a nation with a fiat currency must still behave like a household with income and outgoings? And do the markets or rather the corporate economists who help trade them have the same opinion?
Excellent question, but for others I hope in the morning as I am drained now and have a heavy couple of days coming up.