My View on …

Austerity

Richard J Murphy

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This post is part of an ongoing series in which I set out my views on significant issues in economics, political economy, politics, taxation, and accounting. It should be read in that context. It provides an overview of a position that I have developed over many years of writing and analysis, rather than a comprehensive treatment of the subject. If you would like to explore these ideas in more detail, the reading list at the end of this post provides a good place to start.

The whole View On series is available here. 

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Introduction

Austerity is the single most consequential economic policy pursued in Britain in my lifetime, and it was built on a lie.

For fourteen years, and counting, we have been told that the state had no choice but to cut spending, freeze wages, and shrink services because the country could not afford to do otherwise. I have spent much of the last decade and a half arguing, in as much detail as I can muster, that every part of that claim was false.

It was false when George Osborne first made it in 2010, it remained false when successive Conservative chancellors repeated it, and it is false now that a Labour government is making a version of the same argument while trying very hard not to use the word.

In what follows I want to set out what austerity actually is, how the narrative that sustained it was constructed, why the household analogy at its heart cannot survive contact with how a currency issuing government actually works, what austerity delivered when judged against its own stated aims, and why a change of governing party has not, so far, meant a change of underlying economics.

What austerity is

Austerity is often confused with the existence of a government deficit, and that confusion does a great deal of work for those who want to defend it.

A deficit simply means that a government has spent more in a year than it has raised in tax. Austerity is something else entirely. It is a political choice to restrain public spending relative to the needs of the society and the economy it serves, regardless of whether a deficit exists, regardless of whether the economy needs support, and regardless of the damage that restraint does to the people who depend on the services being cut. The two things get run together constantly, most often by people who want to suggest that because deficits are common, austerity cannot really be happening, or that because a deficit exists, austerity must be the only responsible response to it.

Neither claim survives scrutiny. Britain ran a deficit in every one of the fourteen years I am discussing here, and for most of that period the government told us that it had no choice but to cut spending as a result. That was never a fact about deficits. It was a choice about priorities, dressed up as a fact about arithmetic.

It matters to be precise about this because the vagueness of the language used by those denying austerity serves a purpose. If austerity can be redefined at will, first as eliminating a deficit, then as reducing debt as a share of the economy, then as merely restraining the rate of growth in spending, then whichever definition is convenient at the time can always be used to claim that austerity has ended, or never really existed, or was simply prudent housekeeping.

What I mean by austerity, and what I think anyone honestly describing the last decade and a half should mean by it, is the deliberate restriction of public spending below the level needed to maintain and improve the services, social security payments, and public investment that a functioning society requires, pursued in the name of fiscal responsibility when no such responsibility required it.

How the narrative was built

The version of austerity most people in Britain remember begins in 2010, when David Cameron and George Osborne arrived in office having inherited a deficit that had grown sharply because of the global financial crisis of 2008.

That crisis, it is worth remembering clearly, began in the private banking sector of the United States and spread through interconnected financial markets around the world. It was not caused by British government spending on schools, hospitals, or social security. Cameron and Osborne nonetheless built a narrative in which the outgoing Labour government had been reckless with public money, in which that recklessness explained the size of the deficit, and to which the only responsible response was a sustained programme of spending cuts described, at various points, as necessary to prevent Britain running out of money, to protect the country's ability to borrow on international markets, and to restore what was called fiscal credibility. Every element of that narrative was wrong, and the evidence for saying so was available at the time to anyone willing to look at it honestly.

The United Kingdom issues its own currency and borrows in that currency. It was never at any real risk of being unable to service its debts, because a government in that position can always ask its own central bank to create the money needed to meet a payment falling due.

The comparison Osborne frequently drew with Greece, which had no currency of its own because it used the euro and could not create money to meet its own obligations, was economically illiterate rather than merely rhetorically convenient.

Meanwhile, almost all serious economic opinion holds that in a recession, or in the face of one, a government should increase its spending to offset the collapse in private sector activity, not reduce it and risk a deeper downturn. Osborne did the opposite, and in practice a great deal of the additional government expenditure of those years was in any case financed through the Bank of England's quantitative easing programme rather than through the kind of borrowing the austerity narrative implied was pushing the country toward ruin.

The narrative also depended on framing certain groups as the source of the problem. Cameron and Osborne, and much of the press that supported them, described social security claimants as people taking more from the state than they contributed, using language about strivers and skivers that had no basis in the evidence about who claimed support and why.

That framing did real political work. It attempted to make cuts to social security look like fairness rather than cruelty, and to make anyone who objected to those cuts look as though they were defending abuse of the system rather than defending people who needed help. I have watched a version of that same rhetorical trick play out again in the current decade, and I will come back to that.

The household myth underneath the narrative

None of this austerity narrative would have worked without a deeper and more persistent myth sitting beneath it, and that is the idea that a national government's finances work like a household's.

A household has to earn or borrow money before it can spend it, and if it spends more than it earns for long enough, it becomes insolvent. Politicians and commentators repeat versions of this comparison constantly with reference to the government, telling us that the country must live within its means, that we cannot spend money we do not have, and that a responsible chancellor has to balance the books in the same way a responsible family does. It is an intuitive comparison, and it is entirely wrong when applied to a government that issues its own currency.

A currency issuing government does not need to raise money through taxation before it can spend. It spends first. Every time the Treasury instructs the Bank of England to make a payment, whether that payment is a pension, a doctor's salary, or a payment to a construction firm building a hospital, new money is created in that moment.

Taxation happens afterward, and its purpose is not to fund the spending that has already occurred. Its purpose is to manage the level of demand in the economy, to prevent inflation from the money that has been created and spent, and to shape the distribution of income and wealth within society.

This is the framework that modern monetary theory has done more than any other body of economic thought to make clear, and once it is understood, the entire architecture of austerity economics starts to look very different. A government that cannot run out of its own currency cannot be forced into austerity by the size of its deficit. It can only choose austerity, for political reasons, and then dress that choice up as necessity.

This distinction is not a technicality. It explains why the debt that austerity was supposedly designed to control in fact rose from around one trillion pounds in 2010 to close to two and a half trillion pounds by 2023 and £3 trillion by 2026, even as spending on the services people rely upon was cut year after year. The claim that austerity would deliver fiscal discipline failed on the government's own chosen measure. What it delivered instead was a decade of weaker growth, in turn meaning that lower tax revenues than would otherwise have been collected were recovered from the economy, which meant the deficit persisted regardless of how much was cut, because cutting government spending in a weak economy shrinks that economy further and reduces the very tax base the cuts were supposedly protecting.

What fourteen years of austerity actually delivered

The record of what happened after 2010 is now long enough, and well enough documented, that there is little excuse for pretending it is still contested.

Local authority funding was cut by close to forty per cent in real terms in the years that followed, and the effects showed up first in social care, where councils reduced the support available to elderly and disabled people who depended on it, and then rippled outward into other services that depend on functioning local government, from libraries to road maintenance to children's services.

Real incomes for most working people barely moved for the best part of a decade, even as incomes at the top of the distribution continued to rise, so that inequality widened through a period that was supposed to be about shared sacrifice.

The reduction in social security payments, including the introduction of measures such as the so called bedroom tax, took income directly away from some of the poorest households in the country at the same time as quantitative easing was inflating the value of assets disproportionately held by the wealthy.

Public services that were underfunded through this period entered the pandemic in a weaker state than they should have been. The National Health Service, which did not see its budget cut outright but did see funding grow far more slowly than demand required, went into 2020 with less capacity to absorb a shock than a properly resourced service would have had.

The same is true of adult social care, of local public health teams, and of the wider infrastructure of preparedness that a well-funded state maintains precisely so that it can respond when something unexpected happens. Austerity did not cause the pandemic, but it left Britain considerably less able to cope with one, and the human cost of that should not be treated as a footnote.

It is also worth setting out plainly what did not happen, because the promises made in support of austerity were specific and testable. Osborne argued that cutting government spending would free the private sector to invest and grow, filling the space vacated by a smaller state. Instead, businesses facing weaker consumer demand, because the people who would otherwise have been spending had less money to spend, cut back their own investment and hiring.

The theory behind this idea of Osborne's, which is sometimes called expansionary fiscal contraction, held that reduced government borrowing would lower the cost of capital and boost business confidence enough to offset the direct hit to demand from public spending cuts. It did not work in the United Kingdom, it did not work in the eurozone countries that pursued similar policies with even greater severity, and the economists whose work was cited to support it, particularly a paper on debt and growth by Carmen Reinhart and Kenneth Rogoff, were later shown to contain basic errors that undermined the conclusions politicians had built policy upon.

A different chancellor, the same rulebook

It would be convenient, and it would fit a simple political story, if austerity had ended when the Conservative government that began it eventually left office. It did not. Rachel Reeves, as Chancellor in the Labour government elected in 2024, has bound herself to fiscal rules that require day to day spending to be covered by tax revenue within a rolling period, and treated compliance with those self-imposed rules as though they were laws of economics rather than political choices she alone has made. When forecasts suggested her targets might be missed, the response was not to question whether the targets made sense, but to find further reductions in spending, including changes to disability benefits that would have pushed hundreds of thousands of people, including tens of thousands of children, into poverty according to the government's own impact assessment, an assessment that was not published until after the policy had already been announced.

I want to be precise about the continuity here, because it is often obscured by language. Reeves avoided using the word austerity, and her government has sometimes claimed that austerity ended under the previous administration's. But if spending remains constrained relative to what services and social security recipients need, and if the constraint is being imposed to satisfy a fiscal rule that the chancellor herself invented rather than any genuine financial limit, then austerity is what is happening in practice, whatever label is attached to it.

Winter fuel payments were withdrawn from millions of pensioners before a partial reversal.

Disability benefits were targeted for cuts that were only partly abandoned after a backbench rebellion.

Departments have been told to find savings against a backdrop in which the chancellor insists, repeatedly and wrongly, that there is no money to do otherwise.

The fiscal rules themselves deserve scrutiny, because they are treated in political and media discussion as though they are fixed features of the economic landscape rather than inventions with a short and undistinguished history.

Gordon Brown introduced the first modern version in 1997 to reassure financial markets that an incoming Labour government would not behave irresponsibly. Since then there have been at least five substantially different versions, created by chancellors from both main parties, revised whenever the previous version proved impossible to meet, and none of them has succeeded in delivering the stability or discipline they were supposed to represent.

Reeves inherited this tradition and, rather than breaking from it, added her own version to the list. There is no law of nature or of economics that requires a government to balance day to day spending against tax revenue over five years, or over any other period. It is a preference, chosen because it signals seriousness to commentators and financial institutions who have themselves absorbed the same household analogy that underlies the whole austerity narrative.

Answering the sceptics

There are objections to the argument I have set out here that deserve serious engagement, because they come from people who have thought carefully about these questions rather than from those simply repeating a slogan.

The first and most persistent objection is that if the government really can create money without financial constraint, then nothing stops it spending without limit, and the result would be runaway inflation that would harm exactly the poorer households the argument is meant to protect. This objection matters, and it should not be waved away. But it misunderstands what the modern monetary theory framework claims.

The argument is not that money is an unlimited resource that can be created without consequence. It is that the genuine constraint on government spending is not financial but real, meaning the availability of labour, skills, materials, energy, and environmental capacity in the economy at any given time. If a government spends beyond what the real economy can supply, the result is inflation, and taxation exists precisely to manage that risk by withdrawing money from circulation when demand threatens to outstrip what the economy can produce.

This is a framework for disciplined spending guided by real resource constraints, not a licence for unlimited spending. The difference between saying money is the limit and saying real capacity is the limit sounds abstract, but it changes everything about how a responsible government should behave in a recession, when real capacity is idle and spending should increase, compared with how it should behave when the economy is close to full employment and inflation risk is genuine.

The second objection, raised most forcefully by those who remember the nationalised industries and public finances of the 1970s, is that governments freed from the discipline of fiscal rules have historically proved unable to control spending, and that the fiscal rules first introduced in 1997 were a necessary response to a real and recent history of profligacy that preceded them. There is some substance to the underlying concern, even if the historical account is less straightforward than it is often presented.

The economic difficulties of the 1970s had multiple causes, including oil price shocks and a fixed exchange rate system that constrained policy in ways that no longer apply to a government operating with a floating currency, and the loan sought from the International Monetary Fund in 1976 is now understood by many economic historians to have been unnecessary in scale, and was sought and granted amid confusion about the true state of the public finances rather than because of the scale of overspending itself.

The lesson to draw from that period is not that a currency issuing government must submit to arbitrary rules invented decades later by chancellors seeking political cover. It is that spending decisions should be made with reference to real economic conditions, assessed honestly and continuously, rather than governed by fixed targets that take no account of whether the economy is in recession or in a boom, and that have in practice been revised or abandoned every time they proved inconvenient.

The third objection is that emphasising the state's role in creating money and managing the economy risks understating the genuine value of restraint, and that a government unconstrained by fiscal rules would lose the discipline that keeps waste and inefficiency in check. This is a fair point, and nothing in the argument set out here denies that public spending should be scrutinised, that waste should be minimised, and that value for money matters in the delivery of public services.

The argument is not that discipline is unnecessary. It is that the discipline currently imposed through fiscal rules has almost nothing to do with genuine efficiency or value for money, and almost everything to do with an arbitrary target for the relationship between spending and taxation that bears no necessary relationship to whether particular spending is well judged or badly judged.

A government could scrutinise spending rigorously, demand evidence of value for money in every department, and still reject the idea that overall spending must be capped according to a rule with no basis beyond the political preference of whichever chancellor happens to be in office. Recognising that the state can create money is not an argument against good management. It is an argument for judging spending decisions on their merits rather than against a fictional financial ceiling.

Conclusions

Austerity was never a response to economic necessity. It was, and remains, a political choice dressed up as one, made first by David Cameron and George Osborne in 2010 and continued in substance, if not in name, by Rachel Reeves and Keir Starmer since 2024. It now looks as if Andy Burnham will perpetuate the tradition.

The narrative that sustained it from the beginning rested on a household analogy that does not describe how a currency issuing government actually functions, and on a set of specific claims about debt, borrowing, and fiscal responsibility that have not withstood scrutiny at any point in the fourteen years since they were first made. The debt austerity was meant to control more than doubled. The growth it was meant to unleash did not arrive. The public services and social security system it weakened went into a global pandemic less able to cope than they should have been, and the people who bore the greatest cost throughout were disproportionately those who could least afford to bear it.

I do not believe the answer is a government that spends without regard to the real capacity of the economy, and I have never argued for that. What I believe is that the discipline government finance requires should be grounded in the genuine constraints of labour, skills, materials, energy, and environmental capacity, managed honestly and continuously, rather than in arbitrary fiscal rules that change every few years and that have consistently been abandoned the moment they became inconvenient to the chancellor who invented them. Until politicians of every party are prepared to say this plainly, we will keep repeating the same mistake, restricting the spending that people and public services need while calling it prudence, and pretending that a choice made in Westminster is in fact a law of economics that leaves no other option. It is not, and it never was.

Reading list

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