Anti-austerity protest Glasgow

To Austerity and Beyond

Published: 21 June 2015
Author: David Eiser
What’s the fuss about austerity?
 
Is all the concern about austerity misplaced? The latest labour-market statistics published on Wednesday contained more good news. There was another increase in the employment rate, in both Scotland and the UK. Scotland’s 74.4% employment rate is at an all time high. The economic inactivity rate has fallen and is at a historic low.
 
Average weekly earnings are also up across the UK. Latest figures show wages growing at 2.7% per year. Combined with inflation of -0.1%, this represents the highest real terms rate of pay increase since pre-crisis. Pay inflation was even higher in the private sector, at 3%.
 
Optimists argue that businesses will increasingly be able to pass on lower bills to employees through pay increases, feeding higher spending and growth.
 
But there is a lot of uncertainty about how sustainable this good news will be. The Bank of England expects inflation to begin rising later this year, as the impact of last year’s fall in oil prices drops out of the calculation. Even a modest rise in inflation would return us to fairly weak wage growth. 
 
The positive news on headline employment masks weaker underlying labour market performance. Even after recent rises, average pay is still some 7% below its pre-recession peak in real terms, and lower than it was in 2005. The unemployment rate, at 6.2% in Scotland, remains higher than pre-crisis. 
 
Despite the rise in employment, there are 50,000 fewer full-time jobs in Scotland now than prior to the recession. 16% of part-time workers in Scotland would like full-time work but cannot find it, up from 10% pre-crisis. 
So the economic recovery is much weaker than is often claimed. How concerned should we be about further austerity? 
 
We won’t know the detail of the UK Government’s fiscal consolidation programme until George Osborne publishes the Budget on 8 July.  But it is likely to create strong headwinds for the economy overall, and widen the gap between rich and poor.
 
The Conservative Manifesto spending proposals imply cuts in UK public sector employment of at least 8% over the period to 2018/19. An equivalent reduction in Scotland would equate to around 40,000 public jobs (48,000 public jobs were lost in Scotland during 2010-14).
 
The UK government’s own spending watchdog, the Office of Budget Responsibility (OBR) estimates that the austerity programme implemented in the last parliament significantly slowed the pace of the economic recovery. There is little reason to think the effect of further fiscal austerity will be different this time.
 
The UK Government has also committed to making savings worth £12bn to the welfare budget. But with pensions and child benefit protected from cuts, it is inevitable that the axe will fall heavily on working age households with low-incomes or out of work. Cuts to Working Tax Credits will increase rates of in-work poverty and make employment a less attractive option for some. 
 
There is a distinctively regressive feel to many of the Conservative proposals. Proposed cuts to Child Tax Credit will disproportionately affect the poorest 30% of households, according to the Resolution Foundation, with almost none of the cut falling on the richest 40%. And there is little economic logic to the proposed rise in the inheritance tax threshold which is simply a tax-cut for the wealthiest.
 
The austerity measures are justified on the grounds of reducing the national debt. But the speed of deficit reduction is likely to be counter-productive. And there is no reason why the emphasis should be so heavily on spending cuts, rather than closing the many tax loopholes that currently exist.
 
Public spending as a percentage of national income fell from 45% to 41% in the last parliament. Conservative manifesto proposals imply a further fall to 36%, taking spending as a percentage of national income back to 2001 levels. But our ageing population, and the decision to protect health and pension spending from cuts, means that the shape of the public sector will look quite different in 2020 from how it looked then.
 
So no, the concern about austerity is not misplaced. It is undermining the recovery, widening the gap between rich and poor, and changing the role of the state.