When the current government took over in 2010, the UK economy had begun to recover from the Great Recession. In 2010 Q2, real GDP was about 2% higher than a year earlier. The new government embarked on a programme of enhanced fiscal consolidation (austerity). Growth over the next two years was less than 0.4% at an annual rate. The imminent debt crisis that was supposed to justify austerity never materialised - interest rates on government debt fell significantly.
On the face of it, this looks rather bad for the government. So it has been really important for its spin masters to manufacture a consensus that there was no serious alternative to this policy. This has involved three strands. First, that the recession was somehow the result of the previous government’s fiscal profligacy. Second, following on from this, that the government therefore had to ‘clean up the mess’ - austerity was inevitable. Third, that the economic recovery, when it came, was the reward for austerity.
The first strand is untenable. Yes, fiscal policy might have been tighter after 2000, particularly if we had known what we know now. But it played no part in causing the Great Recession. The second strand therefore does not follow. Among informed commentators on the UK economy, there is certainly no consensus that austerity was necessary. The third strand is complete and utter nonsense. To suggest that this story is self evident is a lie. So how did the government manage to convince almost everyone to accept the story as true?
First, it was vital that other governments were telling similar stories, and that real debt crises were happening not too far way. The idea that the Eurozone crisis is all about fiscal profligacy is equally untrue, but Greece provided the cover. Second, economists in the City tended to go along with the story, in part because it was in the interests of finance to do so. Third, most journalists and newspapers were happy to toe the party line. The occasional eminent journalist or academic would complain, and the Prime Minister revealingly described them as ‘dangerous voices’, but in truth they would only become dangerous if the political class took them seriously. They did not, as we shall see. The ultimate success of the lie was that political opposition to austerity died away.
There was just a little tidying up to do for the spin masters. The IMF had originally supported the 2010 austerity programme, but soon began to have doubts. As the economy continued to stagnate, those doubts grew more vocal. The IMF has an authority which really was dangerous. So when everyone, including the IMF, failed to forecast the strength of the 2013 recovery, the spin masters saw their opportunity. Before the 2014 Article IV assessment, they put out the line that the IMF really should apologise to the government for getting its forecast so wrong, and for daring to criticise the need for austerity.