In response to Ross Baxter’s savaging of austerity, Conservative activist, Stephen McKenzie, explains why now, more than ever, frugal fiscal policy is needed.
Austerity is not fun, it’s not nice, and sometimes it’s not fair, but what it isn’t is evil. These are the terms of the debate that the Conservatives now seem to be fighting the agenda on; the left’s portrayal of austerity as an ideological crusade against the state while the Conservatives set up their stall of fiscal competence.
It is fiscal competence but it’s also the only way to ensure that the pain does not spread to future generations. Medium scale cuts now allow us to bring down the deficit and eventually start to cut into the debt. There’s two important reasons why this is necessary and austerity must be used to balance the budget.
The first main reason is that when a country is running a massive deficit during a period of economic growth, such as we are enjoying at the moment, and which will hopefully last a few more years, it means that the government of that country has far less of an ability to raise spending when a recession hits.
The events of the last decade have shown that there is no end to “boom and bust”; the economy moves cyclically and when the current growth period slows the government needs the ability to temporarily increase spending to boost the economy. With a deficit of just over £80 billion for the last financial year there would be very little room to manoeuvre if a global recession hit in the next year, a possibility if China’s growth begins to slow, as some indications from weak demand for commodities and housing suggest it might, or if eurozone growth continues to remain stagnant.
If the government cannot increase its share of spending in a time of recession it will be unable to help prevent the massive unemployment that might occur should another recession hit when our economy is not yet at peak strength. A bank bailout of the size of Northern Rock or RBS would be impossible considering the current state of the country’s financing and a disaster on that scale would crush our financial system. Whether or not you agree with supporting failing banks it is very likely that had a bailout not occurred that the British financial system would have frozen and it is key that the government of the time has the leeway to act if it feels it needs to.
The second reason is that a continually growing deficit, and thus debt, simply shifts the problem and makes it larger for future generations. Currently 8% of all tax income is spent on paying interest on the debt; estimates suggest that even with the government’s deficit reduction plan this may rise, even at current interest rates. Higher spending now would dramatically raise this amount for future generations. This creates an opportunity cost where money that could be spent on the NHS or welfare-to-work programmes must be used for paying interest. In fact, one of the only things that keeps this country afloat is the fact that our interest rate is so low at the moment, meaning that the dramatic increase in national debt, as shown in the graph below, has not yet caused an equally dramatic rise in interest repayments.
Yet much of the debt that was issued at the point of recession in 2008 to finance the bailouts will come up for renewal around 2018; if the global economy is in good shape it would lead to dramatically higher interest rates at that point, as UK bonds would no longer be as relatively safe as an investment tool compared to other assets. Even if the current interest rate doubles then over the next ten years as the majority of our national debt comes up for renewal (most debt is issued over a 3 or 10 year period), then the percentage of our national budget spent on repayments would dramatically rise.
Simple steps to begin reducing the debt, at least as a proportion of GDP by 2018 and then in real terms by 2020, can help reduce this effect by initially giving the economy more room to absorb increasing costs but also by beginning to address the root problem. A small yearly surplus, as outlined by George Osborne’s new fiscal surplus rules, would over time eat significantly into the overall debt and allow room in the budget for increasing interest rates without affecting other government spending.
We should not ask future generations to pay for our mistakes.
The problem we face in this country in regards to the debate on austerity is too short-term. The country as a whole has to realise that pain, and it should be the opposition’s job to vigorously scrutinise the process which, based on the current deficit of leadership in the Labour Party, will not happen. It will be significantly worse if we simply try and delay the problem for a future generation to solve.
Tough decisions on issues such as welfare spending, pension benefits and the scope of the state will have to be made but austerity simply means that we tackle those issues head on and try and make the fairest decisions possible while accepting that unfortunately there will be social consequences, some of which Ross Baxter outlined in a previous article. While you cannot blame the Greeks for the situation they are in, if their leaders had made tough choices a generation or two ago they would be significantly better off now. We cannot allow a tragedy of that scale to befall our population; if it does then it will be the people calling for higher spending now who will be to blame.