The end of austerity?

Austerity is over, The Times tell us. Both the PM’s last chief of staff and her new one agree it’s gone too far. These are big shifts in language, on a subject that has dominated politics since 2010. But is austerity really over? And what are the crunch tests for deciding if the world has changed?

When economists talk about austerity they are generally talking about the deficit – how much more we spend as a country than our taxes bring in. Delivering austerity of this form is what George Osborne was all about. Between 2010/11 and 2016/17 the deficit was cut by an average of just over 1 per cent of GDP each year. Leaving aside some technical issues affecting this year’s borrowing figures, the government is currently aiming to deliver deficit reduction of almost exactly that scale right through to 2020, after which the pace of deficit reduction is set to slow significantly.

So for the economists out there austerity, far from being over, is set to run at the current pace until at least the end of this decade. But for the public, austerity was never just about public borrowing figures, it’s much more about actual policy decisions – specifically spending cuts. A growing economy and tax rises can also cut the deficit, but austerity in the public mind is principally about reducing public spending – be that cutting public services, the wages of public servants or welfare payments.

Here, the public are basically right – spending cuts are the standout feature of austerity this time around, doing much more of the work than tax rises in reducing the deficit while sluggish growth has also failed to pull its weight in this recovery.

For those wondering if this public spending austerity is really over, what should we be looking out for? The first thing to note is that there is no point listening to what the government actually says – because if that was the test austerity died back in July 2016 when Theresa May became Prime Minister. The deficit got a mere 3 mentions in the 2017 manifesto, down from 17 in 2015, even though virtually all of George Osborne’s spending cuts place have remained in place.

So forget the language the key issue is what actually happens on policy. Here’s two big tests for austerity watchers to look out for: where the government goes with the cap on public sector pay and the freeze on working age benefits. The importance of these tests have been rammed home by today’s increase in inflation – which is racing well ahead of wage growth and means millions of families are facing a double whammy of shrinking pay packets and reduced welfare support.

Public sector pay

The pay of public sector workers actually fared much better than private sector pay in the immediate wake of the financial crisis, largely keeping pace with inflation while private sector pay fell almost immediately. However, since 2010 public sector pay has grown more slowly with pay frozen for much of the last parliament. More recently government workers have led the return to falling real pay, with wages falling from the end of 2016 as inflation’s journey back up towards 3 per cent combined with a policy of capping pay settlements at 1 per cent. This pay cap policy is set to last until the end of the decade, meaning that by 2020 average public sector pay is set to be no higher that it was back in 2005 while private sector pay will be creeping back to previous highs. There are serious questions about whether this policy is sustainable either politically or administratively – but whatever your view it’s certainly wrong to say that austerity has ended while it remains in place. With an extra 1% increase in public sector pay costing around £3bn a year, funding an end to pay restraint will be a key challenge for an already constrained Chancellor.

Benefits

The second big test of whether austerity really has ended is what happens to planned cuts to working age benefit cuts. The gradual roll-out of Universal Credit – now less generous than the system it replaces – is set to continue over the next few years, as is the benefits freeze. This second policy means that, even though prices are rising rapidly with inflation now at 2.7 per cent and expected to rise further, most working-age benefits are not set to rise at all until April 2020.

The real value of these benefits has already been cut significantly. Child benefit, for example, has been cut by 13 per cent since April 2009, and is now worth less than it was 17 years ago.

These are not concerns affecting only a minority of the poorest families. The benefits freeze affects over 10 million families, the majority of whom are in work. It is expected to raise the government £3.6bn just from the remaining two years of the freeze between now and 2020 – far more than originally intended due to unexpectedly high inflation. As we’ve set out previously, almost the whole poorer half of the non-pensioner population are likely to be worse off in 2020-21 than in 2016-17, in large part due to these benefit cuts. For the families affected this definitely isn’t what the end of austerity looks like.

So on both pay and benefits we should wait to see what the new government does before making a diagnosis on the health of austerity. And on both they will have to show their hand in the months ahead.

The benefit freeze – meaning no increases in most benefits in April 2018 – will only go ahead if the new Parliament votes for it. Those watching the end of austerity debate should keep an eye out on September’s inflation figure and the fate of the Social Security Benefits Up-rating Order 2018, expected in January 2018, which will determine whether benefits are uprated by this figure or frozen again for the third year running. Public sector workers will be looking out for any softening of the public sector pay cap in the Autumn Budget, with pay settlements also announced early in 2018.

The truth is austerity died in terms of rhetoric a year ago. That’s understandable because it was already losing popular support and Theresa May wanted above all else to look different to her predecessor. After this election the question is whether it dies in policy terms as well. To see if austerity is really over ignore the headlines and keep an eye on the pay packets of your kids’ teachers and the living standards of more than 10 million low and middle income families.