Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 21 July 2016

Osborne's folly

I have an essay in the latest New Statesman marking what seems like the end of UK austerity, or more specifically the end of what I have call 'deficit deceit' in the UK: using a manufactured concern about high levels of government debt as a means of achieving an otherwise unpopular reduction in the size of the state. The article goes through the history of UK austerity because this is important in understanding what has and has not happened as a result of Brexit.

There have been two phases in UK austerity. The first began in 2010, and was mirrored by similar moves in the Eurozone and the US. The second began after the 2015 election, and was very much a uniquely UK affair, as Paul Krugman has remarked. By 2015 measures already in the pipeline had largely stabilised the level of the debt to GDP ratio. However as mediamacro's interpretation of 2010 austerity had helped win the Conservatives the 2015 election, Osborne decided to do it all over again by going for a budget surplus and relatively rapid reductions in the debt to GDP ratio.

It was an economic folly because with very low interest rates now is the time to increase the share of public investment in GDP, yet to achieve his surplus target Osborne planned to do the opposite. It was a political folly because it pushed deficit deceit to far. It is this 2015 austerity plan that the Conservatives appear to have repudiated with Osborne's departure. Their belief that what they did in 2010 was necessary seem to remain in tact.

This will be important in thinking about the fiscal rule that the new Chancellor could adopt. He may well go back to targeting the current balance, as both Labour have proposed and the coalition did, removing the straightjacket from public investment. What he is very unlikely to do is include a Zero Lower Bound knockout, of the kind that John McDonnell has proposed, which would have avoided 2010 austerity.

The EU referendum will go down in history as Cameron's great mistake. But as many have remarked, Brexit and austerity are not unconnected. Not in the direct sense that Brexit was a vote against austerity: the 2015 election result showed that many still believed 2010 austerity was necessary. Many people also erroneously believed the NHS had been protected from austerity: after all that was what the media repeated endlessly. Yet the NHS is clearly in crisis, so that had to be the result of immigration. The only way to stop immigration from the EU is Brexit.

To put it another way, it was Osborne's great mistake to think that he could embark on a new wave of austerity while continuing to remain silent on the benefits of immigration, and yet still win the referendum vote. It has often been remarked, in these posts and elsewhere, that Osborne has been a very political Chancellor. It is therefore perhaps fitting that he has been brought down by an essentially political mistake.


  1. I generally agree with everything you say here - and its a great and thought provoking post. My only quibble was that we cannot entirely blame austerity for the Brexit result, although I also suspect it was a big part of it. The Brexit result, however, was also a vote against the whole establishment including Labour - especially New Labour. The reason was that they promised so much, but delivered so little, to a large proportion of the English population outside London.


    1. Leave won by just under 1.3m votes. So even if austerity swayed only 650k people that would otherwise have voted Remain, it was critical in delivering Brexit. Like you, I suspect it swayed many more people than that.

      Also, New Labour introduced a minimum wage and increased public spending significantly on schools and hospitals. Tony Blair may or may not have knowingly misled the UK into war, but he deserves some credit for delivering social policies that helped people.

  2. "Prime among Cameron’s reasons for doing just that was the belief he would win. When he went to Brussels earlier this year to brief his fellow European leaders about his plans, he is reported to have told them not to worry because he was a ‘winner’ and knew how to get the result he needed" (David Runciman at the LRB Responses to the Referendum).

    I have heard one journalist say, truthfully or not I do not know, that Osborne did not want the referendum and it was Cameron that pushed for it alone.

    It looks like it will take just over two and a half years to have finished the Article 50 process, at which point, based on the likely demographics and assuming the post-Tory government gives a vote to 16 and 17 years olds, it'll probably be able to win a vote to go back in.

  3. Why do we need fiscal rules? As Richard Murphy puts it:

    "It’s a shame that it’s not at all clear that John McDonnell with his dedication to central bank control of the economy within the constraints of fiscal rules that refer to balanced budgets does."

  4. I agree that Osborne and others who want a budget surplus are either liars or they’re ignorant. However the claim by SW-L that interest rates are low ergo we should have more public investment can be questioned.

    Interest rates are low at least partially, and perhaps mainly because government / the Bank of England has deliberately cut them. So to what extent are they ARTIFICIALLY low? To the extent that they ARE artificially low so as to deal with what is hopefully a temporary problem, there isn't a good argument for increasing very long term investments.

    So what’s the genuine free market rate of interest? Well Milton Friedman and Warren Mosler argued that the natural rate of interest of interest is zero – in the sense that the natural rate obtains where the only government liability is base money: i.e. there is no government debt.

    And since interest on government debt is near zero (i.e. government debt and base money have become almost the same thing), I conclude we are somewhere near a genuine free market rate of interest at the moment.

    For Friedman, see para starting “Under the proposal…” here:

    For Mosler, see:

  5. asocialdemocraticfuture25 July 2016 at 14:00

    Simon-Wren-Lewis pointed out in his NS articethat Labour's fiscal rules targeted current rather than public investment (but subject to debt limits) and thus allowed investment to potentially rise 'when the circumstances were right', which in 2015 they were 'right as they can be'; going to say if Ed balls was now Chancellor 'we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the UK Referendum and Brexit itself'.

    Really? Thats a big claim, when neither Milliband nor Balls actually challenged the austerity case or made a positive case for public investment in an electoral understandable way. One example was the accepted need for investment in affordable housing to be considered infrastructural investment; the Lyons report made a lot of micro-policy recommendations, but Balls refused to commit on resources; no integrated economic and housing policy case was made for such increased investment by Labour during the election.

  6. As a non-economist who is arguing with a friend over this article: what do you say to the claims that ZLB is an outdated concept?

  7. brexit was about home rule,to claim back laws given away to the unelected undemocratic EU freedom of movement was uppermost in most peoples minds and the constant suppression of wages, big business was very comfortable creating a divide which these current politicians where and are out of touch with the people and have shown nothing but contempt for the people after brexit,to point of demanding a second referendum because (the people dont know what they were voting for)bollocks we did and we do


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