Chancellor Jeremy Hunt has presented the bleakest prospect for the British economy in living memory. If the official forecasts produced last Thursday come to pass, we are already into a recession that will last for the next two years, pushing up unemployment at the same time as high inflation continues to crush living standards. Once those two years are up, the government’s own plans for stealth tax rises on middle-class earners and harsh new spending cuts for everyone kick in. If you thought the decade of cuts and low wages before the pandemic was bad, the next five after the pandemic are set to be worse.
The government, naturally, is looking for others to blame for this. It is absolutely true that the whole world is being hit by worsening instability, from the rising geopolitical tensions that have seen Russia invade Ukraine to an ecological crisis that is only set to get worse from here on in. The aftereffects of the pandemic are still with us, in the form of continuing lockdowns in China hitting supplies of goods across the world, and rapid increase in energy costs – especially natural gas – across Eurasia. Extreme weather events have hit harvests this year, whilst next year's are likely to be worsened by the restricted supplies of fertiliser from the world’s two largest exporters – Russia and Ukraine. Drought dried up the Ruhr and the Mississippi over the summer, leaving boats and barges unable to transport goods. All of this adds up not only to higher prices, but perhaps even restrictions in the supply of essentials. And all of it, one way or another, affects every part of the globe. If the government points to planet-wide disruption as an issue, they have a point.
But if these problems are affecting everywhere, they are hitting Britain worse than elsewhere. We are the only economy in the G7 not to have recovered yet to its pre-pandemic levels of output. We are forecast by the International Monetary Fund to have the lowest growth in the whole of Europe – pretty impressive when, for instance, this includes countries in Eastern Europe that get 90% or more of their natural gas from Russia.
Brexit is, of course, playing its part in British failure, adding a few percent to the cost of imports like food. It is not, however, the whole story – and not even the most important part of what is going on. At least in principle, the damage done by the current deal could be relatively quickly undone with some reasonable changes. (I don’t doubt that demands to, for example, rejoin the Single Market will grow in volume over the next year – in terms of providing a quick and immediate boost to GDP it can look like a quick win, just as it did in the 1960s when Britain wanted to join the then-European Economic Community.)
Our primary problem is the legacy of a decade of spending cuts that not only left public services teetering on the brink, from the stumbling NHS to our crumbling school buildings – both, rather pointedly, given a small amount of extra funding by Hunt’s Autumn Statement. It drained demand from the economy, undermining labour markets and helping promote low-wage, insecure work throughout the private sector, whilst at the same time hitting long-term government investment in things like renewable energy or transport. We could, if the Coalition government of the 2010s not dramatically slashed its investment spending, have already built Northern Powerhouse Rail. But both spending cuts and a notable, well-documented Treasury investment bias against England outside of London, mean we are today still lumbered with creaking, overpriced trains and a network barely able to meet demand.
It's this record of underperformance and failure, across a whole decade, that ought to have hammered the final nails in the coffin for austerity. It’s not just the social damage, which has been immense – one, truly shocking study from the University of Glasgow estimates that austerity has been associated with 300,000 “excess deaths” over the 2010s, somewhat more than COVID-19 to date. It’s the economic damage, and the wasted potential and blighted lives this represents for most of us – leaving aside the super-rich who have, naturally, done rather well from their low (and avoidable) taxes.
Yet we are being dragged back into the same misery, but worse this time – not in the scale of cuts, which are, overall, less radical than the Tory-led Coalition government attempted, but in the fact they are cumulative, punching the bruise left by George Osborne. The justifications offered have become slippery, but have hinged, at least until last week, on the presence of a so-called “fiscal black hole” in the public finances that (we are told) only spending cuts and tax rises can fill. This, objectively, garbage economics: as work from two economists, Rob Calvert Jump and Jo Michell demonstrated, the so-called “fiscal hole” isn’t some hard economic fact but the product of highly uncertain forecasts and the government’s own target for shrinking the size of its debt. Change the forecasts even slightly, or change the target, and the so-called “fiscal hole” shrinks or even disappears without the need for a single penny cut from spending.
That isn’t to say everything is rosy. Costs of essentials like natural gas and food have risen. Government borrowing costs have risen here and across the world. Life is going to be tougher in the future than it was in the past. But attempting to push through spending cuts to deal with this is trapping the whole country in a terrible doom loop, in which economic weakness today is used to justify spending cuts, which then undermine the economy further, providing the justification for more spending cuts, and so on.
If we want our future prospects to improve, we have to break the doom loop. Step one is to reject the idea that dramatic new spending cuts will help the situation. Step two is taxing the beneficiaries of our low wage growth, high asset price growth economy properly – shifting the burden of taxes away from the money people work to earn and towards wealth. Step three is a plan to invest across the whole country, creating jobs in clean technology like renewables and future-proofing our economy against shocks.