Spring Statement: ‘Austerity is not the answer to Britain’s stagnant economy’

All the signs are that Britain is heading for another round of austerity. The BBC has today reported that Chancellor Rachel Reeves is weighing up welfare cuts. Following the Spring Forecast from the Office for Budget Responsibility on 26 March, the Chancellor Rachel Reeves will make a parliamentary statement in response.

With the economy worsening since the budget, there is no question that Reeves and Starmer face limited choices. But further austerity should not be one of them. Labour inherited a dismal economic situation, a mix of stagnation, broken public finances and crumbling public services, but renewal does not lie in another round of spending cuts.

Fifteen years of austerity economics, launched by George Osborne in 2010, have done immense damage to the economy, living standards and the public accounts.

Further spending cuts in unprotected areas, would mean a slowing of renewal, a further erosion of key public services from the court system to youth services, and a growing list of bankrupt councils. Labour’s historic achievement in power since 1945 has been to build a stronger social state, a central source of social resilience.

On the two occasions when it has imposed spending cuts to tackle economic crisis, as in 1931 and in the late 1970s, the impact has been explosive. The party split in 1931 and faced a decade of electoral decline.

In the 1970s, the cuts imposed by the Callaghan Government as the price of an IMF loan, contributed to the election of Margaret Thatcher in 1979. Austerity would be an equally perilous political option for Labour in 2025. It would alienate backbenchers and large sections of the Labour movement.

‘Austerity economics is embedded in Treasury thinking’

The decision to boost defence spending by cutting foreign aid has already brought the resignation of the International Development minister, Anneliese Dodds. Austerity economics has become a central tool of economic management, not just in the UK, but in Europe and the United States.

By slashing state spending – and overturning Jo Biden’s strategy of public sector led renewal – Trump is imposing an extreme version of this strategy, one which risks slowing the American and world economy.

The effect of rolling austerity across the continent since the 2008 financial crisis has been a weakening of economic and social strength, if more so in Britain than in most other European nations.

Austerity economics is embedded in Treasury thinking, and its commitment to balanced budgets and tight fiscal rules. In 2013, at the height of the first austerity round, the department’s permanent secretary, Sir Nicholas Macpherson, set out the department’s priorities only too starkly: support for markets, scepticism of government intervention, adherence to ‘sound money’ and disciplined spending.

READ MORE: Spring Statement: ‘Politically painful’ welfare cuts loom as Reeves briefs OBR

This bias to austerity is based on several false assumptions. These include the century old idea of ‘crowding out’ – that public sector activity crowds out more productive private activity. Yet each time this doctrine has been applied – in the 1920s, 1930s, 1970s and since 2010 – economic activity has been further suppressed.

The current strategy also assumes that it is supply constraints that limit grown, not a lack of demand. Yet while there are bottlenecks in some parts of the economy, Britain’s bias to weak demand means that Labour’s emphasis on supply-side measures alone – aimed at raising productivity and labour supply – to boost growth is like driving with the hand brake on. This bias to contraction is even being questioned by mainstream economists.

‘It would pose big questions about Labour’s purpose in government’

As the former chief economist at the Bank of England, Andy Haldane, has warned, further austerity would generate a ‘deeply counterproductive’ doom-loop. Economic renewal requires a major rethink of Treasury orthodoxy, and a recognition of the dynamic impact of better public services on economic capacity.

The government’s argument is that growth alone is the solution. Without faster growth, higher spending in priority areas such as the NHS and defence will come, through a zero-sum game, at the expense of poorer social care and maintaining benefit caps, such as the two child limit.

READ MORE: ‘The PM channels Attlee on defence. But a wealth tax, not aid cuts, should fund it’

Yet austerity imposes downward pressure on demand while acting as a restraint on faster growth, and leaving resource allocation too heavily in the hands of private markets.

The road the Chancellor takes to balance these competing pressures – between spending cuts, tax rises and relaxing the fiscal rules – will be the defining act of the government. It will have a profound impact on the course of the economy, on living standards and social resilience over the rest of the decade.

Failure to deliver a stronger and more resilient society, and raise the incomes of the poorest, will surely also have severe consequences for the party’s electoral future. It would pose big questions about Labour’s purpose in government while emboldening the populist right.

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