Austerity Isn’t Working

(This is the original draft of an article I wrote for the University Observer. A counter argument was also written.)

Whenever someone tells you there is no other option, don’t believe them. There are always other options and when people pretend otherwise its usually because they want to shut the debate down. So when Michael Noonan grimly announces that we have no choice but to implement austerity, we shouldn’t blindly accept this. There is always an alternative.

Let’s take a moment to talk about the numbers. In 2009, the budget deficit was €25 billion, a figure the government declared too high and began introducing austerity. Since then roughly €25 billion has been cut from the budget mostly in the form of spending cuts but also tax rises. Surely that would mean that we now have a balanced budget and don’t need to cut anymore, right? Wrong. The deficit is €12 billion this year. How does that add up? Contrary to what the government implies balancing the budget isn’t as simple as cutting the budget until the deficit shrinks away. You see policies of austerity actually make the economy worse, which in turn makes the deficit worse.

Let me explain why austerity is a false economy. Let’s say the government cuts public sector pay and thinks it has made a saving. What actually happens is that these public sector workers now have less money to spend. So let’s say they decide to spend less money on eating out. This might sound like being sensibly frugal, but if everyone does it, then local restaurants will go out of business. Now we have more people unemployed, who now have less money to spend and so more businesses go bankrupt and so on. So austerity, far from improving pour economic position puts us into a vicious cycle of economic decline.

Worse still, the budget has not improved. So although the government is spending less on public sector wages, it is now spending more on unemployment benefits and receiving less on taxes. In this way, budget cuts can actually make the budget deficit larger, not smaller. For example the €6 billion in cuts in the 2010 budget merely pushed the economy back into recession and undid most of the proposed savings. This is why austerity is self-defeating, not only does it inflict pain on the most vulberable members of society, but it fails on its own priority of reducing the deficit.

But don’t we have to cut the budget? Isn’t it better to get the pain over and done with? Actually, no. There are two ways to reduce the national debt. We can either implement austerity in the form of spending cuts and tax rises or we can grow the economy. For example, if the national debt is 100% of GDP and the economy grows by 10%, then the debt has fallen to 90% of GDP. The crucial point is that austerity policies prevent the economy from growing and only make the recession worse. So imagine if we cut spending by 10% but the economy contracts by 10%, then we are no better off. We would have suffered the pain in vain.

This is actually how most countries deal with deficits. Developed economies were heavily burdened with debt after the Second World War. However, instead of focusing purely on cuts and austerity to reduce the debt, they focused on growing the economy. By delaying repayment, their economies were able to grow into a stronger position making the debt far easier to pay. Inflation also wore the debt down so that by the 70s, although little of the debt had been paid back, the debt was reduced to a low percentage of GDP.

This is the worst recession since the Great Depression so it seems logical to examine it to find solutions to our current crisis. Back then there were problems over deficits too and many people called for austerity. However, the countries that recovered fastest were the ones that ignored the calls for austerity and instead launched a stimulus. By spending money, the government was able to give private businesses a boost and put people back to work. Then once the economy had recovered, government could easily pay back the debt.

It is worthwhile to examine how Ireland got out of the high debt doldrums of the 1980s. Little of this debt was paid down, instead the economy grew at such a rate that the debt seemed tiny in comparison. In a growing economy, deficits are not the main concern. If people have jobs and a decent income, then tax revenue will be high and there will be less need for government services. Growth, not austerity is key.

The emphasis of the three main parties on austerity cuts has been very damaging to the economy. Thanks to austerity, the economy has continued to stagnate and unemployment has remained disgracefully high. Continuing to cut is preventing the economy from recovering and is keeping us mired in recession. Even if you put aside questions of fairness or sharing the burden equitably, the simple fact is that poorly planned cuts don’t reduce the deficit but can actually increase it. Austerity isn’t working; it is only pushing us back into recession.


Filed under Economics

9 responses to “Austerity Isn’t Working

  1. There is also the rationale that from a corporate point of view when you create economic suffering with labor then you can justify paying lower wages and offering fewer benefits. When you spend millions to get your media buddies to lay a large amount of the blame on a poor economy on the labor unions with their guaranteed high incomes and “extravagant” benefit packages you wound up creating a labor force whose share of income wounds up going into the pockets of the wealthiest 1% as it diminishes the middle income class.

  2. Robert,
    I agree with you wholeheartedly in the short term but I am becoming concerned about the long-term future of “growth.” In Nature a biological community is limited by its resources and the population of that group adjusts itself over time to be in balance with the food supply, etc. Economically we agrue growth, growth, growth and consume resources willy-nilly. At what point do we stabilize? Or does our population keep growing and the economies keep pace (or better) and . . . ? Growth for growth’s sake is said to be the philosophy of a cancer cell; what is our “equilibrium scenario”?

    • namnack

      I think most economists including Mr. Nielsen agree that our current system of growth dependency is a pyramid scheme. Sooner or later our natural resources well be so severely depleted (I’m not just talking fossil fuel here) that it´s too late to put them to use to find alternatives in our solar system. By that time, I would imagine, the Earth will not be able to sustain 7+ billion people unless in the severest of poverty conditions. The equilibrium concerning the Earth’s population and population prosperity will be that what it will be. That is, if there’s even an Earth left to sustain human life of this order of magnitude or even significantly less.

      We are not like cancer, we are just living on borrowed time. It took many millions of years to form the oil we are cavalierly turning into fuel, tires, electronic gadgetry and package materials only to squander it all in 300 years.

      What we need is a natural enemy that is not ourselves. But we needed that a long time ago.

  3. I suspect austerity is really just scapegoating forced into action. The pattern goes that public relations people will redirect blame for society problems, caused by their clients, onto some other component of society. This colours public opinion. Sooner or later politicians have to implement policies based on that rhetoric (either because they are mirroring public opinion or are being lobbied by the same clients). The result is austerity, ‘go-home’ vans, bedroom taxes etc.

    The whole story of debt is mostly a fairy-tale. Public debt isn’t the problem and never has been. Even talking about it in household analogy terms is ridiculous. We lend money off ourselves to buy things off ourselves for ourselves? Any politician or economist who draws analogies between that and individual’s finances, or talks about ‘saving money through austerity’ should be fired on the spot. The problem is private debt. It’s completely uncontrolled and generated at will by a financial sector that profits from creating it and then funds public relations consultants to trick us into thinking something else is the problem. And actually, though households are at risk because of this, house-hold debt is actually quite low (despite beyond-our-means propaganda). The majority of real debt is in the good old financial sector. Much more than in the public sector.

  4. At first I cringed when I read “Our government was about to run out of money.”, but then I remembered that Ireland is a member of the EU. She might actually be right.

    Her overall response wasn’t very good, but when you consider the EU angle, she does make a few legitimate points. If she were talking about the US, I would have stopped reading after the first sentence.

    • In fairness someone else was supposed to write the article but it fell through so Liz had to step in to the counterargument. I don’t think she fully believed it herself.

      Its true that the main argument for austerity would not hold if we still had our own currency in Ireland.

  5. Good article. Have you ever checked out I’d be interested on your opinion on it.

    Marcdhall is entirely right that the problems across the western world originated with excessive private debt, not public. Of course, this then became a problem for governments when the decision to nationalise the banks was made.

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