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2016 | Book

The Politics of Austerity: A Recent History Read chapter Read first chapter

The Politics of Austerity

A Recent History

Author: Michael Burton

Publisher: Palgrave Macmillan UK

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

This book considers the relationship between public spending and public deficit and the varying successes and difficulties governments have had in recent years to balance the two. As the fiscal crash of 2007/8 turned into the Great Recession and tax revenues tumbled, public finances across the UK, the USA and Europe plunged into deficit. Controversial attempts by governments to balance their budgets, commonly described as austerity by critics, had mixed success, politically and economically. Michael Burton outlines how politicians tackled the worst economic downturn in over half a century, drawing on previous examples of deficit-reduction to see how governments managed public finances in recessions and where austerity worked and where it failed. This two-part book, which for the first time provides an historical context to austerity, analyses firstly deficit-reduction in the UK in the 1970s, 1980s, 1990s and 2010-2016, and then looks at case studies in Europe, the USA, Canada and Asia Pacific. The author concludes that with the ageing population placing greater pressure through health and pensions on the public finances of the developed world, politicians and their electorates will have to learn to live long-term with austerity.

Table of Contents

Frontmatter
Chapter 1. The Politics of Austerity: A Recent History
Abstract
As recession follows the fiscal crash of 2007/8, governments struggle to rebalance their public finances as tax revenues plummet. Their response—spending cuts and tax rises—is derided by opponents as ‘austerity’, yet this is not the first time this measure has been applied. In this introduction to this two-part book, the first half of which is on the UK, and the second more global in concern, Michael Burton outlines recent case studies in the UK, the USA, Canada and Europe to see how governments manage public finances in recessions. He warns that demographic pressures leading to austerity will be with us for many decades to come.
Michael Burton

Austerity in the UK

Frontmatter
Chapter 2. The Rise of Public Spending
Abstract
In his analysis of public spending in the UK, Michael Burton looks at how the Great Depression of the 1930s shaped political and economic policy after 1945 to favour a cross-party Keynesian consensus over supporting the expanding welfare state and an active government role in the economy.
Michael Burton
Chapter 3. The Party’s Over
Abstract
The UK economy is shaken by a combination of industrial decline and the global oil price rise in the early 1970s. Rising public spending and declining tax revenues lead to a public sector deficit that reaches crisis point in 1976 when the Labour government turns to the IMF for a bail-out in return for swingeing public spending cuts. It is a Labour government minister who announces that ‘the party’s over’ and a Labour Prime Minister who says running public sector deficits is no longer acceptable. But a new Conservative leader, Margaret Thatcher, has also concluded that the post-war Keynesian world is at an end and that the state must be reduced.
Michael Burton
Chapter 4. The End of Consensus
Abstract
The election of Conservative Prime Minister Margaret Thatcher signals a sea change in economic policy. The new government sets about to reduce public spending and the size of the state but is confounded by the recession of the early 1980s which causes not just a jump in unemployment but a rise in public spending because of welfare costs. Critics, especially in Thatcher’s own Cabinet, argue that she should pursue a Keynesian policy of expanding, not contracting, public spending during a recession but she says she is ‘not for turning.’ Eventually the economy recovers and bust becomes boom in the late 1980s especially with the deregulation of the City of London, ‘the Big Bang’ in 1986. This, however, proves temporary as the housing and financial services bubble turns to bust again. Thatcher’s successor pursues a policy of austerity that leads to the economy running a surplus, just in time for a new Labour government to benefit.
Michael Burton
Chapter 5. From Boom to Bust
Abstract
The New Labour government headed by Prime Minister Tony Blair inherits an improving economy and a surplus in public finances. At first, New Labour sticks to the tight fiscal policies of the previous government to show it is economically responsible. After 2001 however, it begins almost a decade of above-inflation increases in public spending, much of it funded by soaring tax revenues from buoyant financial services in the City of London. Chancellor Gordon Brown believes that the era of boom and bust is over, but he is proved dramatically wrong with the fiscal crash of 2007/8. The UK, the USA and other affected countries respond by injecting liquidity into the tottering financial system to prevent a repeat of the 1930s Depression, coupled with a Keynesian bout of public spending to offset the impact of the recession which follows. But this leads to soaring deficits which, in the case of the UK, hits 10 % of GDP.
Michael Burton
Chapter 6. Austerity Britain
Abstract
The new Conservative/Liberal Democrat Coalition names deficit-reduction as its top priority and Chancellor George Osborne launches an Emergency Budget of spending cuts within weeks. But this is predicated on the economy emerging from the recession. Instead, GDP growth continues to stall through a combination of rises in energy prices, stagnant or declining salaries, and the ongoing recession in the eurozone, where 50 % of the UK’s exports are sold. Critics of austerity also argue that the spending cuts are too early because the economy is still weak and are dragging down growth. Although the deficit declines, debt reduction targets are missed.
Michael Burton
Chapter 7. Light at the End of the Tunnel
Abstract
Belatedly, the European Central Bank embarks on a programme of quantitative easing in the eurozone just as GDP in the UK picks up and there is a collapse in global oil prices. The UK now becomes one of the fastest growing economies in the developed world, just in time for the 2015 election which sees a Conservative government elected for the first time since 1992. Ironically, George Osborne scales back his election pledges for even more austerity, even though the deficit is still 5 % of GDP. The author considers how much of the recovery is down to austerity and how much to global events. He also examines the changing pattern of public spending in the UK.
Michael Burton

Global Experiences of Austerity

Frontmatter
Chapter 8. Deficit-Reduction in the USA
Abstract
In the first chapter of the second part of his book, which looks at global case studies of austerity, Michael Burton examines the record in the USA. He looks at the major fiscal consolidation programmes under President Clinton in the 1990s which led to a budget surplus and to battles over tax cuts under President Bush in the 2000s. When the fiscal crash occurs the federal government responds with a huge $700 billion relief package in 2008 to stop the financial system collapsing, which prevents another Great Depression but leads to a budget deficit.
Michael Burton
Chapter 9. Austerity in Europe
Abstract
The fiscal collapse and the Great Recession that follows has a devastating impact on European states, especially those in the fixed currency eurozone. Michael Burton looks at the varying responses by European states to restoring the health of their public finances. Some, like the Baltic States, initiate harsh austerity but move rapidly into economic recovery. Ireland, whose booming economy pre-2007 was based on a property bubble, is almost bankrupted by the fiscal crash and has to turn to the IMF and the EU for a loan. After a brutal programme of spending cuts, the Irish economy recovers. The same is not the case for Greece, also dependent on loans, which almost quits the eurozone after austerity policies continue to squeeze the economy.
Michael Burton
Chapter 10. Two Case Studies: Canada and Sweden
Abstract
The UK Coalition often quoted fiscal consolidation in Canada and Sweden in the 1990s as successful examples of how austerity can lead to economic recovery and a budget surplus. Michael Burton looks at both case studies and analyses why and where they worked and where they did not and their lessons for the future, drawing on recollections by leading politicians involved in austerity at the time.
Michael Burton
Chapter 11. Some Asia-Pacific Case Studies
Abstract
Many of the Asia-Pacific countries escaped the fiscal crash in 2008. Australia, whose last recession was in 1990, is sustained by a booming mining industry dependent on China’s expanding economy but in 2016/17 this is under threat as China’s growth stalls. For the first time in 25 years, Australians face the prospect of austerity, albeit modest. In contrast, Japan had the highest debt to GDP ratio in OECD countries in 2015 and has lived with over two decades of low growth and deflation without facing an Ireland or Greek-style crisis. Many anti-austerians argue that in itself, high debt is not a problem as is proved in Japan, but austerians point out that the debt is mainly owed internally and the country is not dependent on foreign loans. The author also briefly looks at the South East Asia financial crisis of the late 1990s which hit the so-called ‘Asian Tigers’.
Michael Burton
Chapter 12. Is Austerity Necessary?
Abstract
Economists and politicians argue furiously over whether fiscal consolidation deepens a recession or in fact the reverse policy, failure to reduce public sector debt, inhibits recovery. Even most Keynesians however believe that high long-term debt is unsustainable and the question therefore is over the timing of fiscal consolidation. As can be seen in previous case studies in this book, there are examples of both scenarios. In this chapter, Michael Burton looks at various studies of austerity to see if there is a consensus over responding to downturns and whether there is a template which can be applied.
Michael Burton
Chapter 13. Conclusion
Abstract
In his summary, Michael Burton emphasises that managing austerity is not purely a matter of applying economic theory, but about how politicians manage the expectations of their voters. Governments must also ensure they are not over-dependent on ephemeral sources of tax revenue such as property and financial services which, when they disappear, plunge public finances into deficit. He looks at the key lessons that emerge from his book’s case studies of austerity programmes and ends by warning that demographic changes, with ageing populations and rising pension costs, will continue to put pressure on public finances.
Michael Burton
Backmatter
Metadata
Title
The Politics of Austerity
Author
Michael Burton
Copyright Year
2016
Electronic ISBN
978-1-137-48285-3
Print ISBN
978-1-137-48629-5
DOI
https://doi.org/10.1057/978-1-137-48285-3