Austerity or growth?

The debate has reached a dead-end; reframing it is key to building a progressive future

Jeremy Green
Jeremy Green

For many of us, our attitude towards the politics of austerity will play a key role in how we vote during the next election. Since the crisis began the media has been buzzing with talk of ‘cuts’, ‘borrowing’, ‘belt-tightening’, ‘prudence’ and ‘savings’. All of us have become more familiar with the everyday language of austerity politics.

The debate has taken a familiar shape; in one corner we have the austerity advocates, calling for cuts, more cuts and faster cuts. Underlying their appetite for austerity is the conviction that cutbacks will prevent public spending from crowding out private investment, reduce government deficits and open the way for a trade-based, private sector escape route from recession.

In the other corner, we have the ‘borrow and spend’ brigade. Proponents of this view point to public borrowing costs at a record low, suggesting that now is a good time to borrow in order to create jobs and get the economy moving again. Their diagnosis of the crisis points to a shortage of demand, as over-leveraged households and companies tighten their belts in order to rebalance the books.

Too many cuts too soon, they argue, will deepen the recession and increase government deficits. The government will be forced to borrow more as it experiences declining tax revenues and covers increased social security payments due to rising unemployment.

With these two sides at loggerheads, the debate has reached an impasse. And as we saw on BBC Newsnight earlier this year, in a discussion between Nobel-winning economist Paul Krugman and an unholy alliance of venture capitalist Jon Moulton and Tory MP Andrea Leadsom, things can get heated. But is there something missing from the way the debate over austerity has evolved?

The answer is a resounding ‘yes’. Neither side of the conversation has really begun to address the critical failings of the neoliberal model that took us into the crisis. It’s a model that should be defunct by now, yet none of the major political parties are daring to look beyond it. This despite the fact that under this model successive governments have presided over a staggering increase in levels of inequality, with the growth in income inequality in Britain faster than in any other OECD country.

Both the austerity and ‘borrow and spend’ antidotes to the recession will likely deepen, not alleviate, the distributional inequalities at the heart of the current model. Cutting back public sector spending through the reduction of benefits, removes the safety net that maintains the income levels of some of the poorest in society. And at a time when private sector fears over future prospects are stifling investment, the current strategy has deepened the recession and choked off possible recovery.

The Keynesian alternative trumpeted by Krugman et. al. is not radically different. Increased spending to fund infrastructure development, with state consumption acting as a locomotive for growth, may create jobs and get us out of recession. But we need more than this for a model that moves us toward a more equitable and sustainable future.

Even if the government did step in as employer of last resort, funding infrastructural projects on a large scale, wages would likely be set at the minimum level. If not, government would inevitably face fierce private sector opposition to perceived inflationary impacts on wages.  If we do move towards a more full-blooded Keynesian recovery strategy, creating good quality and well-paid jobs will be key.

In any case, these measures are not likely to be given serious consideration under the prevailing neoliberal orthodoxy. Aspirations towards full employment were abandoned long ago and it’s now the norm to accept a ‘natural’ level of unemployment within the labour market.

To move towards a more progressive future, we need to fuse the debate about public spending and growth with another: offshore tax evasion. These two separate discussions have been running parallel, but in fact they are different sides of the same distributional coin.

A recent study from the Tax Justice Network has highlighted the massive scale of global offshore tax evasion, particularly by high-net-worth individuals.

And as the controversy around Starbuck’s ‘tax-free’ U.K. operations demonstrates, the longer-term rise in government debt is inextricably linked to the changing landscape of tax politics. Swelling corporate coffers are the flip side of creaking public finances.

Whether or not we move towards a progressive political economy will depend in part upon how the crisis is resolved in distributional terms. Quantitative Easing has been a great boost to the wealthiest members of British society. While the spending cuts will fall hardest upon Britain’s poorest.

Reversing the current trajectory of crisis politics will be key to ensuring a better future.  That’s why SPERI will be holding a conference on Europe’s response to the crisis in July. If we are going to abandon the neoliberal growth model that got us into this mess, for a more equitable and sustainable alternative, we will have to think outside the parameters of the current debate.