Was Austerity Necessary in 2010, and were Osborne's austerity policies successful?

A recent essay written by myself for the 'Blair to Brexit, Britain 1997-2016' module on my MA.

The 2008 Financial Crisis had a huge impact on the UK economy (Kickert, 2012), (Sawyer, 2012), causing significant damage to the UK budget deficit, as well as to both GDP and employment rates (Sawyer, 2011). In his 2010 emergency budget, Chancellor George Osborne spoke of the dire need to reduce the size of the UK budget deficit, standing at around 12% of GDP, or ‘face disastrous consequences’ (Osborne, 2010a), this figure was however revised to 10% (Keep, 2021). Osborne announced numerous packages to remediate this issue in his 2010 budget, and these deficit reduction packages were the beginning of the coalition’s ‘austerity’ programme. Austerity can be defined an ‘adjustment of public spending, best achieved by reducing the state’s budget, debt and deficits’ (Blyth, 2012), or more simply as ‘deficit reduction policies’ (Alesina et.al., 2015). This essay will examine whether the concept of ‘austerity’ was a necessary remedy to the situation facing the UK economy in 2010. Whilst the answer may depend as to the nature of the exact policies enacted under the austerity programme, this essay will determine whether ‘austerity’ was conceptually required. There was an apparent consensus on austerity policies at the 2010 election, with all 3 major parties promising budget cuts in order to reduce the deficit (BBC, 2010), (Kickert, 2012). Alistair Darling, the Labour Chancellor from 2007-2010, even went as far to say ‘we will cut deeper than Thatcher’ (The Guardian, 2010) in an interview with the BBC, referencing the extreme extent to which fiscal tightening was necessary. However, political consensus on economic issues in Britain is often wrong (Balls, 2011), and the benefit of hindsight provides an invaluable perspective (Alesina, Favero and Giavazzi, 2020) when judging whether austerity policies were necessary over the duration of the coalition government. Many proponents of ‘Modern Monetary Theory’ (MMT) such as Stephanie Kelton, who argues in her bestselling book ‘The Deficit Myth’ (Kelton, 2020), that governments should encourage deficits and not resort to austerity tactics despite large budget deficits. Many modern Keynesian economists would also propagate such a view, believing that recessions are correct environments for deficits (Krugman, 2019), and that austerity should be used as a fiscal tool during growth periods (Krugman, 2012).

This essay will also evaluate the success of George Osborne’s austerity policies during his chancellorship between 2010 and 2016. Dubbed as the ‘Austerity Chancellor’ (Ganesh, 2012), Osborne’s policies were viewed by some to be widely controversial (Burton, 2016). Furthermore, there is even ‘consensus that austerity failed’ (Quilter-Pinner and Hochlaf, 2018), with Osborne’s successors; Phillip Hammond, Sajid Javid (briefly) and Rishi Sunak all manoeuvring away from Osborne’s strict programme of austerity, which has become ‘a dirty word’ according to some commentators in the UK, (Bourne, 2020). On the other hand, Fairclough (2016) describes the success of Osborne’s austerity policies, answering ‘critical questions’ made of them. Additionally, this essay will examine Osborne’s austerity policies from not just an economic angle, but a political angle. One may argue that the ultimate success in politics is winning an election, with the electorate providing an incoming government with a mandate to implement their policies, an endorsement of the winning party’s manifesto. With the Conservative party winning the 2015 election on a manifesto of further austerity, after 5 previous years of Osborne’s austerity programme, it is appropriate to conclude relative political success from Osborne’s policies.

With the budget deficit reaching around £163billion (Webb, 2010), it was clear that urgent action was necessary to avert ‘dire consequences’ (Osborne, 2010a). The support of all three major parties towards deficit reduction policies provides an early indication of the necessity of some form of austerity in 2010. The arguments in favour of austerity being necessary are threefold. Firstly, and most simplistically, austerity was necessary due to the overwhelming support given by the British electorate for parties offering deficit reduction policies as part of their manifesto. Britain’s political system is dominated by two rather opposing parties, making economic consensus difficult to achieve (Williamson, 1993). Furthermore, it is rare for British politicians to reach a consensus at all (Pimlott, 1988). This highlights the rarity seen in all three major political parties reaching a consensus by all pledging to embrace austerity as part of their 2010 election manifestos (BBC, 2010), (Ferry and Eckersley, 2011). From a practical standpoint, with a coalition being formed of the Conservatives and Liberal Democrats, both of whom pledged deficit reduction policies in their manifestos, austerity was clearly both inevitable and necessary. With austerity being and spending pledges being the dominant debating factor and issue in the 2010 election (Clarke et.al., 2011), and both parties in the coalition promising significant spending cuts to the tune of at least £50billion over the course of the parliament, it was clear that austerity was a necessary policy. Politically, austerity and deficit reduction policies received resounding support from the electorate, highlighting the necessity of the implementation of these policies over the course of the 2010-15 parliament.

Secondly, austerity policies had significant economic support domestically from UK economists, political parties and the public. Looking wider afield, austerity policies were embraced throughout capitalist economies (Farnsworth and Irving, 2012), (Edmiston, Patrick and Garthwaite, 2017) and a form of austerity was the default position of all countries seeking IMF support (Conley, 2012). Furthermore, in their infamous study, Reinhart and Rogoff (2010) concluded that economic growth continues at reasonable levels ‘until the debt to GDP ratio reaches 90%’. This generated significant support for austerity policies in multiple countries, with George Osborne interpreting the findings as proof that ‘all crises arise from high levels of public debt’ (Osborne, 2010b). This provided significant weight to the argument that austerity policies were required in order to reduce both the deficit and the stock of national debt, despite the historically low interest rates at the time. These historically low interest rates would allow for exceptionally cheap borrowing and servicing of debt, perhaps providing an alternative to the direct and fast cuts enacted by Osborne within weeks of becoming Chancellor. However, with notable academic economists reaching conclusions that some form of austerity was necessary, as well as a political consensus on deficit reduction, it is clear that austerity was indeed necessary. Giles and Harding (2013) add weight to this conclusion, arguing of the need to correct public finances in order to ‘have sufficient ammunition’ with which to fight future crises. One might argue that austerity was necessary throughout the 2010-2015 parliament in order to prepare the economy for a crisis such as the Covid-19 pandemic, although this is postulated with the benefit of hindsight. With both international and domestic opinion reaching an apparent consensus, it was abundantly clear that some form of austerity was necessary for the British economy.

Thirdly, alongside the evident political and economic support for austerity in 2010, perhaps the clearest indicator that deficit reduction policies should be followed is the underlying data at the time of the 2010 election. The financial crisis was an unprecedented event, requiring unprecedented actions (Fender and Gyntelberg, 2008). As previously mentioned, the UK budget deficit stood at £163billion in 2010 (Webb, 2010), which was the highest absolute value reached on record, as well as the highest deficit measured as a percentage of GDP (Keep, 2021). This represented unchartered territory for the British economy, with economic conditions like these previously thought of as reserved only for wartime. Additionally, and perhaps most worryingly, debt to GDP as a ratio stood at its highest level since 1966, at 74.6% and rapidly rising. With Reinhart and Rogoff’s (2010) assertion that economic growth is not viable past 90% as a debt to GDP ratio, this provided overwhelming backing to the notion that austerity was necessary for both short and long term economic recovery. Furthermore, the stark nature of the scale and size of both the deficit and stock of national debt warranted an emergency budget in June 2010 in order to urgently implement austerity policies, highlighting just how necessary austerity was. These three vital statistics plunge into doubt any notion that austerity was not necessary, and provide weight to the argument that austerity was a critical component in economic recovery in the aftermath of the financial crisis. Finally, the unease felt within financial markets was also viewed as a reason to as to why austerity was necessary in 2010 (Skidelsky, 2015). Osborne himself added weight to this view in his 2010 budget speech, as did Kitromilides (2011) who argued that austerity was required to calm the financial markets and reinstate confidence in the British economy.

Despite apparently overwhelming evidence that austerity policies were well needed and indeed necessary in 2010, there has been significant subsequent evidence to suggest the contrary. Perhaps the most traditional theoretical argument against austerity is the traditional Keynesian argument that spending is the appropriate way to lift an economy securely out of recession, regardless of the national debt implications. Whilst this argument may have initially been made in 1936, it does lack context of the economic conditions underpinning the choices regarding austerity in 2010. However, Keynesian theory should not be completely discounted, with prominent economists such as Paul Krugman (2011) supporting the view that Keynesian policies do have a place in current economies. Giles and Harding (2013) whilst being generally coy on austerity conceptually do note the significant importance of the Keynesian ‘multiplier’ effect, as do Alesina, Favero and Giavazzi (2020). Keynes (2018) described the multiplier effect as being a key reason as to why austerity should not be used to lift economies out of recession, and why austerity can have significant effects. The multiplier effect (Keynes, 2018) explains that for every pound of government spending, greater than a pound is seen in total national income. For example, an initial investment made in an infrastructure project may support new jobs, which in turn leaves new employees with more disposable income spend in, for example, local businesses leaving the initial government investment multiplied as the investment is felt throughout the economy, of course dependant on the size and scale. This can also be applied in the opposite context. For every pound the government cuts in spending, there are likely to be business previously holding government contracts who can no longer support employees, causing redundancies, causing these ex-employees to have less disposable income to spend in local businesses. This is a key theoretical argument against austerity in times of recession or low growth, arguing that through cuts to government spending, tax receipts and economic growth will also be negatively affected. This is the argument put forward by Giles and Harding (2013), with a negative multiplier effect potentially having significant and disproportionate effects on the economy. This view is also shared by McKee et.al. (2012), who postulated that the UK’s initial recovery from recession was ‘halted significantly’ by austerity policies. This proposes that as an alternative to austerity, policymakers should have reconsidered the financial retrenchment seen in the aftermath of the financial crisis and adopted a more stimulus based recovery. This may have taken the form of a more traditional tax and spend approach, as opposed to the lower tax, lower spending seen under the Coalition’s austerity programme. The negative multiplier as described above may have had a significantly adverse effect on the British economy, and provides a significant argument against the severe and unprecedented (Levitas, 2012) spending cuts seen under George Osborne.

Whether or not austerity policies were necessary is foremost dependent upon the economic objectives. Whilst austerity may be necessary from a deficit reduction point of view and to adhere to deficit reduction objectives, the argument can certainly be made that austerity was a hindrance to economic growth and lifting the British economy out of recession. Indeed, soon after the election, the political consensus on the best economic direction for the British economy soon deteriorated, with Labour Shadow Chancellor Ed Balls (2011) repeatedly asserting his belief that deficit reduction should be a priority, but only after meaningful growth had been achieved. Additionally, despite initial support for short term fiscal deficit reduction in 2011, IMF Managing Director Christene Lagarde supported the notion that ‘the best way to create jobs is through growth’ (Largarde, 2013). Corsetti (2012) also spoke of an ‘emerging tide against austerity’. These significant interventions from renowned economists call attention to the fact that austerity was not entirely necessary as a policy in 2010. Furthermore, modern economic theory in the form of MMT developed by economists such as Stephanie Kelton provides significant opposition to the notion that austerity and deficit reduction is necessary at all. Kelton (2020) asserts that as the provider of fiat currency, countries such as the UK should focus on controlling inflation as opposed to budget deficits, with the consequential debt being serviced by the printing of small volumes of extra currency, with the primary focus being on inflation.

To provide nuance to the debate, it should be stated that whilst there was opposition from some economists to austerity at the time (Stewart and Wintour, 2010), much of the major criticism of austerity has come with the benefit of hindsight as policies and events have unfolded, as opposed to direct criticism at the time. Additionally, to answer the question ‘was austerity necessary’ we must consider several factors. Whilst there was a general consensus that deficit reduction policies were necessary in 2010 (Ferry and Eckersley, 2011), debate remained as to the speed at which the deficit should be eliminated, with each major party proposing a different package of cuts, with a different deficit elimination date. This was a significant argument made by Giles and Harding (2013), who argued that whilst austerity was broadly working, the speed at which cuts were being made was too sharp to support a profound economic recovery. Schui (2014), also weighed in, adding that cuts were too sharp, and longer and deeper than necessary. At the time of the 2010 election, with budget deficit elimination being the priority, austerity policies were clearly necessary in order to achieve this goal. However, the rate at which austerity policies and budget cuts were implemented remains up for debate. Whilst austerity was necessary to reduce the deficit and secure long term growth, it can be argued that the speed of which austerity was implemented was too fast, endangering the recovery in economic growth and overall performance of the economy. A more long term austerity project, focused on ensuring growth through stimulating the economy, then followed by more gradual cuts to public spending may have been a more favourable approach to have taken. However, it remains evident that the UK budget deficit did need to be cut, whether in the short, medium or long term. So whilst austerity was in fact necessary, the way in which George Osborne implemented deficit reduction policies leaves much to be desired.

Hindsight has allowed us to more effectively evaluate austerity policies (Alesina, Favero and Giavazzi, 2020) and judge whether George Osborne’s version austerity was in fact successful. George Osborne’s austerity programme can primarily be judged by whether he achieved the two overarching aims set out in his 2010 budget speech, shortly after the general election. The primary tenet of Osborne’s austerity programme was to ‘eliminate the deficit’ by the end of the 2010 parliament, with the budget being in surplus by 2014 (Osborne, 2010c). The secondary aim of the austerity programme was that public sector debt as a percentage of GDP would be falling by 2015. These were lofty ambitions to accompany a significant deficit reduction package, but they provide a significant anchor to judge Osborne’s success or failure against. Osborne’s first austerity policy, to eliminate the deficit, can be regarded as a failure, with the government remaining in a deficit, not matter how small, throughout his tenure as Chancellor, and in the years since. With Osborne making specific promises to eliminate the deficit (Osborne, 2010c) and bring Britain’s budget back into surplus, it is clear that this section of his austerity programme cannot be viewed as successful. In addition to this, with borrowing to the tune of £100billion in the latter years of the parliament (Gamble, 2015), it is absolutely evident that Osborne did not meet his own targets, and therefore cannot be viewed as successful, and nor can his policies. Furthermore, whilst the secondary aim of reducing public sector debt as a percentage of GDP by 2015 was met, the solitary decrease between 2014 and 2015, before a further rise in 2016 (ONS, 2021), (Statista, 2021), illustrates that Osborne was largely unsuccessful in this venture as well. Despite achieving this stated objective, the fact that the debt to GDP ratio was unable to keep falling as planned highlights the lack of success seen by Osborne’s policies. Moreover, whilst there was a solitary fall in the debt to GDP ratio between 2014 and 2014, the percentage of debt to GDP rose significantly under Osborne’s tenure, from 69.2% to 82% (Statista, 2021). As the deficit continued to fall throughout his tenure as Chancellor, the significant lack of GDP growth during this time period is the likely cause of the fall in the debt to GDP ratio and this represents a policy failure for Osborne.

There was also considerable criticism of Osborne’s policies at the time of implementation, with traditional conservative commentators such as Fraser Nelson, who claimed that many of Osborne’s planned cuts in the 2014 budget were not regarded as deliverable, or even credible (Nelson, 2014). Additionally, academics such as Krugman (2011, 2012), Corsetti (2012) and Schui (2014) all voiced concerns over both the austerity agenda, and specifically the speed at which cuts were made. Subsequently, there is a strong viewpoint that Osborne’s policies failed (Quilter-Pinner and Hochlaf, 2018) and the evidence supports this view. The significant economical critique facing Osborne’s policies demonstrates the lack of success seen from them. Ironically, whilst Reinhart and Rogoff (2010) warned of the inability of economies to grow with above a 90% debt to GDP ratio, the UK economy did see negative economic growth across Q1 and Q3 in 2012 (ONS, 2021) as a result of Osborne’s austerity policies. Whilst this does not by definition constitute a recession, it does however provide a significant argument against the notion that Osborne’s austerity policies were successful, due to the observable economic harm caused by them (McKee et.al., 2012). With Osborne not meeting his primary target of eliminating the deficit, it is difficult to argue that Osborne’s austerity policies were successful, as by his own measure he was not. Additionally, the wide range of criticism from both commentators and economists illustrates the lack of success seen by Osborne’s policies.

Whilst Osborne’s policies do not appear to have been successful in meeting the objectives set for them, it is important to analyse these policies from not only an economic perspective, but a political perspective. Politicians are ultimately judged on their policies at elections, with the electorate having the power to endorse politicians and their policies. Whilst the Conservatives did not achieve an overwhelming mandate in 2010 due to not receiving an electoral majority, the case was much different in 2015. The unexpected (Curtice, 2015) Conservative win in the 2015 election, in which much of the debate remained centred around the economy (Curtice, 2015), was a significant public endorsement of George Osborne’s austerity policies. This time achieving an electoral majority, it is clear that public opinion was in favour of Osborne’s austerity policies, which dominated the economic section of the Conservative manifesto, providing him with a mandate to continue with the austerity programme. Whilst there was significant economic criticism of Osborne’s policies, and they did not meet the targets made for them, this does provide contrarian evidence as to the success of Osborne’s austerity programme, in the clear form of political success. As aforementioned, Giles and Harding (2013) spoke of the need to gather ‘sufficient ammunition’ in order to fight future crises. Osborne’s austerity did reduce the deficit by a significant amount, arguably preparing public finances for the Covid-19 pandemic, and providing the current Chancellor Rishi Sunak with a better base from which to rebuild the economy after the pandemic. This exemplifies a previously unforeseen way in which Osborne’s austerity policies did provide significant benefit to the UK economy. Additionally, whilst Osborne’s policies are generally viewed as being unsuccessful, his policies did in fact reduce the budget deficit for 6 consecutive years. Whilst this did not meet his initial objective, it represents significant progress and a betterment of the state of UK economy, which should be viewed as a significant success for any chancellor.

It is difficult to judge the success of such a broad suite of austerity policies seen under George Osborne, but through focusing on the two key policies outlined in his first budget speech (Osborne, 2010c) of deficit elimination and falling debt to GDP ratio, clear judgements can be passed. Politically, it is evident that Osborne’s policies were a resounding success, being a key principle in the Conservative’s winning manifesto in 2015. Measured against the specific targets Osborne placed on his policies, it is easily discernible that his policies did not live up to the targeting placed upon them and were wildly unsuccessful. Thirdly, his policies were broadly unsuccessful economically, with extremely low growth and for the most part an increasing debt to GDP ratio. Whilst unemployment figures did improve, the lack of growth in the UK economy was likely a result of the austerity policies implemented under Osborne. This underpins the lack of success seen from George Osborne’s austerity policies, despite the favourable political outcome of enacting them.

To conclude, despite austerity becoming a ‘dirty word’ (Bourne, 2020) the concept of deficit reduction and austerity was certainly necessary in 2010. With the deficit standing at an astronomical £163 billion, urgent measures were needed to ensure that the deficit was reduced, and that the debt to GDP ratio was also reduced. However, whilst this is true, it can also be argued that the speed of which Osborne’s austerity programme cut spending was far too fast and caused significant damage to economy (McKee et.al., 2012), particularly in terms of economic growth (Corsetti, 2012), (Schui, 2014). Whilst austerity was necessary, there were other ways to achieve a significant reduction in the deficit, and the timeframe in which the deficit was aimed to be eliminated within could have been widened, as argued by Balls (2011), and the speed at which cuts were being made could have been slowed (Giles and Harding, 2013). Whilst some economists such as Kelton and Krugman may argue that austerity was not necessary at all, at a time of unprecedented budgetary pressure (Levitas 2012), cuts did need to be made, and austerity in some form was evidently necessary. Furthermore, the appetite displayed by the British public for greater fiscal tightening encouraged all major parties to support deficit reduction plans at the 2010 election, highlighting the necessity of austerity. Whilst the degree of austerity and the speed of implementation can and will be continually debated, the fact that austerity was necessary in 2010 remains intact. Some of the continuing debate over austerity and it’s worthiness as an economic tool stems from the way in which major economies, particularly the UK and Europe, conducted austerity programmes. Osborne’s austerity policies were clearly unsuccessful measured against the targets he laid out in his 2010 budget speech (Osborne, 2010c). Furthermore, many respected economists have questioned the viability of his deficit reduction plan, with Krugman (2011) even questioning the motives behind the austerity programme. Whilst Osborne may not have been successful in eliminating the deficit, he was able to see a sustained decrease in the size of the deficit, showing some shoots of success. Furthermore, the austerity programme was evidently politically successful, with the Conservatives winning the 2015 election against most expectations. However, the subsequent disregard of austerity policies by successive Chancellors questions whether in the long term, austerity and specifically Osborne’s austerity policies, were successful policies to have implemented. Whilst austerity in some form was necessary in 2015, it is evident that Osborne’s policies were not the form required. Politically successful, economically questionable and, based on objectives, failures George Osborne’s austerity policies were not the remedy required for the British economy in 2010, and were ultimately unsuccessful.