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Government spending that is not investment is like continual partying and drinking.

Tanweer Ali tells how austerity was sold as common sense.

In the early days of David Cameron’s coalition government, historian, David Kynaston 1, warned that austerity had not been all that popular the first-time round, in the aftermath of the Second World War. And at that time it was a somewhat easier sell. Without victory creating a huge feel-good factor, and with trust in politicians at an all-time low, austerity this time would be a much harder sell. Kynaston suggested that the government could do little more than to “construct a moralistic, good-housekeeping, live-within-our-means narrative of future redemption.” And that is exactly what they did.

The narrative to support the politics of austerity described a nation on the verge of financial ruin – the fault of an irresponsible, spendthrift government. In delivering its story the coalition managed to gloss over the fact that the national debt to gross domestic product (GDP) ratio had been relatively stable from 1997 up until the onset of the crisis, and that the increase was the result of bank bail-outs. “This has to be done, it’s not our fault” was the new government’s central claim.

This narrative came with a powerful analogy, that of the state as a household.

Most people understand managing a household budget (even when they don’t actually do it very well) and so this is a way of explaining public finance that makes intuitive sense. The state, like a household, has revenues coming in, and expenses going out. Households, like governments, have to decide how to spend their money, and have to plan for future spending, making budgets in the process. Households and states can borrow money. This is why it is such a powerful analogy.

Famously, Margaret Thatcher, addressing Conservatives in Shipley in 1975, made the analogy explicitly: “What is right for the family is right for Britain. The first priority is to cut Government spending drastically.” It was a favourite for David Cameron too. When addressing the Conservative Spring Conference in 2009, he described the UK as a nation that had “maxed out” on its credit card and referred to his Labour predecessors as a “spendaholic government”.

All this passes off austerity as common sense: if you are in debt, then you have to cut back on spending. It explains how what works for you and me also works for the government. But it doesn’t.

This line of thinking by-passes a long-understood tenet of public finances: the paradox of thrift. The paradox arises from the difference in household and government sources of money. For every household, the money it spends has to be earned, now or in the future, or was earned in the past. But for the whole economy, everyone’s earning is someone else’s spending. So while it is sensible for a household to cut its expenses in hard times, if everyone in the economy, including employers and government, does the same, everyone’s income goes down. This then leads to a downward spiral of lower spending and lower incomes as well as lower tax revenues for government. So in times of recession, the government needs to step into the breach and fill the gap in spending.

“We don’t look down on people who take out a mortgage or a student loan. But we disparage people who use credit to pay for nights on the town.”

The paradox of thrift is the central economic argument against austerity, though those who have used it in public discourse have come up against the common-sense reasoning of the household metaphor. But there is something else going on here. 

Most of us can relate to the advice in Shakespear’sHamlet: “Neither a borrower nor a lender be,” but today we have a more sophisticated attitude to debt. We distinguish between money spent on consumption and money spent on investment.

We don’t look down on people who take out a mortgage or a student loan. But we disparage people who use credit to pay for nights on the town. If we borrow for investment, we can repay our debts. Borrowing for consumption indicates bad planning or short-term pleasure seeking. This is how people “max out” on their credit cards, or turn “spendaholic”.

Former Dutch finance minister (and chair of the group of Euro zone finance ministers), Jeroen Dijsselbloem, said in 2017 that debt-laden Southern European countries had spent their money on “drinks and women.” His view suggests that those governments were like households facing a debt crisis, and which must have been consuming too much, in the same way that an irresolute spendthrift wastes money on frivolities. Government spending that is not investment is, he implies, like continual partying and drinking.

But important attributes of government spending are being backgrounded here.

There are internationally-agreed fiscal rules regarding what government spending can be classified as investment and what cannot. Spending on fixed physical assets such motorways, airports, school buildings, power plants and bridges is classified as investment. Everything else is not investment. The problem with this definition of investment lies in what is not counted. Building schools is investment but employing teachers and dinner ladies is not. Building hospitals is investment, but employing doctors and nurses is not. Pulling children out of poverty is also not investment.

“While we have shown the economic cost of a pattern of thought that oversimplifies the way we conceptualise austerity, we should not forget the human cost.”

However, all of these things involve spending for better future outcomes. Neglect of any of these would create problems for the future that would be more expensive to address. Cutting spending on education leads to a population less prepared for the future, with lower standards of living, lower economic performance – and lower tax revenues for the government. Cutting spending on reducing child poverty leads to higher levels of spending in future decades on health care, tackling crime and providing unemployment benefits. Conceptualising public budgets as equivalent to household budgets, with a simplistic distinction between spending for consumption and investment, blinds us to the actual complexity in play, making it easier to equate paying nurses with drinking cocktails.

While we have shown the economic cost of a pattern of thought that oversimplifies the way we conceptualise austerity, we should not forget the human cost. In The Body Economic2David Stuckler and Sanjay Basu demonstrate the human costs of austerity in several countries. One such example was in Greece where in recent years the incidence of HIV has soared. In 2011, HIV incidence increased by 52% in little more than three months. This was due to cuts imposed by the troika to prevention programmes, particularly the distribution of syringes to vulnerable people. The resulting human and economic costs will have by far exceeded the money saved. What may have seemed unaffordable, turned out to be something that the country could not afford not to do. What looked like fiscal responsibility had turned out to be grossly irresponsible.

The household analogy, far from being an apt shorthand way to describe the public finances, is an inaccurate over-simplification that serves to perpetuate myths about the way in which the economy and society work. Moreover it has helped to support a policy agenda that has caused serious damage in economic and human terms and has built huge problems for the next generation. It is high time that the lie of the state as a household was exposed for the falsehood that it is.

Tanweer Ali is co-editor of Discourse Analysis and Austerity: Critical Studies from Economics and Linguistics (Routledge Frontiers of Political Economy Book 253).

References

1. Kynaston, D. (2010). Austerity was a hard sell in the 40s. Today it’s harder still. The Guardian.

2. Stuckler, D. and Basu, S. (2014). The Body Economic: Eight Experiments in Economic Recovery from Iceland to Greece. Penguin.

Tanweer Ali

Tanweer Ali is a lecturer in finance and economics with Empire State College, State University of New York. His research interests are in corporate governance and the application of linguistic …

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