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.