Is austerity ending?

Cllr Tim Pickstone, Association of Liberal Democrat Councillors and Campaigners (ALDC) Chief Executive, provides the local government perspective.

For the Prime Minister, and the Chancellor of the Exchequer to announce, as they both have in recent weeks, that austerity is ending is an insult to everyone involved in local government.

As all ALDC members will be too painfully aware, funding for local government has been cut by almost 60% since 2010 and there’s further reductions to come too (and let us not forget that local government cuts were happening pre-2010 too).

The reality of this squeeze on local services is evident everywhere. It is easy to point to the visually obvious like roads, while lines, cleaning, but behind the scenes the picture is even worse. Adult care services have failed so utterly to keep pace with rising demand that only the extremely needy can access support. Youth services are, in most areas, a chapter in a history book. Our local police services have seen 20,000 officers cut over the past eight years and they do not have the resources to investigate a high number of crimes. Local education authorities are a hint of their former selves.

And austerity is very much continuing. Despite the Chancellor’s announcements, in the next financial year, local government will have to make £1.3 billion in cuts. The LGA states that just to stand still and deliver the same services currently being provided – which have already been significantly cut in the last decade – councils would need an additional £7.8 billion more than they are expected to have in 2024/25. Extra bits of money for social care, schools, potholes and town centres are nowhere near enough the amounts needed to meet the rising level of demand or costs. None of these, of course, allow local government to make its own choices about local priorities. We’re being given crumbs and being told what to do with them.

The impact of this reduction in local services is now becoming painfully apparent. Not enough police = crime is rising. No local services = loneliness, particularly in older people, is at shocking levels. No youth services or children’s centres = mental health problems in children and young people is rising horrifically. No buses = congestion and air pollution are rising.

Local government is, of course, doing its best. Some councils, including our Liberal Democrat run and led ones, are finding innovative ways to get the best deal and the best services for their areas. When we are in opposition, or campaigning from outside the council, Liberal Democrats are championing their areas and standing up for the issues that matter for local residents.

Austerity, Mr Hammond, has created massive consequences on our communities and on people’s lives. Impacts that will last much longer than our memory of your few years at Number 11.

You had an opportunity to start to make this better. Instead you gave higher rate tax payers a tax cut and keep pushing on to the cliff edge of Brexit.

To find out more, join or support the work of ALDC, go to www.aldc.org.

* Tim Pickstone is Chief Executive of ALDC (the Association of Liberal Democrat Councillors) and is National Spokesperson on Grassroots Campaigning

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20 Comments

  • Is austerity ending? Is the leopard changing his spots?

    No – but the Tory messaging around it is changing because it has to.

    From 2008 until last month it was, in Tory eyes, the necessary policy response to the financial crisis; in other words, it was voluntary. That was – and is – terrible economics that wrongly imagines that a monetary sovereign (a country that has its own currency) is subject to the same rules as a currency user (a private individual or company).

    I infer that sometime in the last month the Cabinet received updated forecasts of the public finances that were shockingly bad. What was to be done?

    The rosiest of the scenarios presented could be pimped and dished up for public consumption but that wouldn’t do going forward. Truth will out, and I think the forecasts showed a dire situation with a political choice between either (a) swingeing extra cuts or (b) pretending that ‘austerity is ending’.

    If the former, then the Tories’ carefully cultivated image as the party of good economic management would go out of the window and their bête noire, Corbyn, would come in. If the latter, then they have a chance of getting through Brexit and the next election – or so they must calculate, especially as Corbyn is unlikely to challenge any deficits they may rack up.

    In other words, what the Tories now propose amounts to a deficit that is politically involuntary. It’s deficit-spend or die for them.

    But, before all the Modern Monetary Theorists (MMT) break into applause for the Tories’ apparent late conversion, a word of warning. MMT is fine as far as it goes but it is, at best, only half the story.

    If it is to work in the long-run, deficit-spending must add to the economy by more than the interest cost – for example by increasing output with better infrastructure, training or whatever else is needed. So poor schemes like HS2 and Hinckley Point don’t cut the mustard, nor does having so much of the potential workforce so under-skilled nor favouring financial investment over productive investment etc. etc.

    The Tories are terrible economic managers and always have been. So why do we let them get away with it?

  • Debt friendly stimulus involves increasing taxes and raising government expenditure in the same proportion. That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines.

    Keynesian stimulus policy is habitually described as deficit spending, not tax-financed spending. The fundamental economic problem that currently troubles much of the world is insufficient demand. Businesses are not investing enough in new plants and equipment. They are not adding jobs, largely because people are not spending enough – or are not expected to spend enough in the future – to keep the economy going at full tilt.
    Debt-friendly stimulus might be regarded as nothing more than a collective decision by all of us to spend more to jump-start the economy. Simply put, Keynesian stimulus does not necessarily entail more government debt, as popular discourse seems to assume. Rather, stimulus is about making collective decisions to get aggregate spending back on track. The spending naturally involves different kinds of consumption than we would make individually – say, better public services, rather than more dinners out. But that should be OK, especially if we all have jobs.
    Balanced-budget stimulus was first advocated in the early 1940s by William Salant, an economist in president Franklin Roosevelt’s administration, and by Paul Samuelson, while an economics professor at the Massachusetts Institute of Technology. They argued that, because any government stimulus implies higher taxes sooner or later, the increase may as well come immediately. For the average person, the higher taxes do not mean lower after-tax income, because the stimulus will have the immediate effect of raising incomes.
    Some form of debt-friendly stimulus might ultimately appeal to voters if they are convinced that raising taxes does not necessarily mean hardship or increased centralisation of decision-making. When people understand that it means the same average level of take-home pay after taxes, plus more jobs and products of additional government expenditure (such as health and social welfare spending), they may well wonder why they ever tried stimulus any other way.

    Equally important s raising taxes in the least harmful way i.e. with a focus on minimising deadweight costs. This implies reform of the tax system to ensure all forms of income and consumption (including consumption of housing services) are taxed on a equal basis with only areas like alcohol and tobacco duty and carbon emissions singled out for additional levies.

  • Peter Martin 6th Nov '18 - 9:48am

    @ Gordon,

    Good to see someone else make the same point about currency issuers and users!

    The Lib Dems are still wedded to the idea that the Westminster Govt is a currency user though.This needs to change if the Lib Dems are going to be able to break free of artificial neoliberal constraints.

    At the moment most Lib Dems agree that councils, education , the NHS etc needs better funding. So, the inevitable question of “where’s the money going to come from?” is asked. Out come the used envelopes and the pencils, and see calculations to the effect that if we put a 1p on income tax, or whatever, we’ll raise £N billion.

    Of course it doesn’t work like that. Govt creates money when it spends and destroys it when it taxes. The difference between the two is what people save. So extra spending produces extra revenue. Increased tax rates only produce more revenue if everyone else saves less.

    So yes we may have to increase taxes if we spend more on the NHS, education etc, but that’s because we’ll need to cool an overheating economy.

    It’s really very simple but for some reason Lib Dems, supposedly the party of Keynes, prefers to think it’s the progressive wing of the neoliberals.

  • Peter Martin 6th Nov '18 - 2:01pm

    @ Joe @ Gordon,

    ” …deficit-spending must add to the economy by more than the interest cost ”

    This was the one questionable sentence in Gordon’s comment. It was good to see someone on the same page as myself at last so I decided not to say anything . But as Joe has seized up on it…..

    The interest cost to Government is negative at the moment when inflation is factored in. And there is no reason this need ever change. The Government and not the market sets interest rates. By committee at the BoE in the short term and by open market operations, QE if you like, in the longer term.

    So what are we saying? That deficit spending has to have some benefit which is higher than a negative quantity? That’s not too difficult.

  • David,

    the budget has set out the additional funding to be made available to councils for adult social care and children services. The budget allocated will not deal with the growing funding pressures. The central government grant will continue to be cut (in may cases to zero) and local authorities will become responsible for raising funds directly via council tax, business rates and direct charges.

    What is needed is the ability for local authorities to raise adequate funds to meet their statutory responsibilities – that’s not theoretical that is what is happening over the next couple of years.

    As Larry Elliott concludes in his piece “Various excuses have been trotted out over the past 25 years for leaving council tax in place, none of them especially convincing. The real reason for inertia is political cowardice: a deep fear of a backlash from those doing well out of the status quo. And that’s not a good enough.”

  • Peter Martin 7th Nov '18 - 9:42am

    @ David Raw,

    ” this problem can’t wait for any theoretical land tax – What is needed is an immediate input of central government funds into local government to shore up the few services still run by local government”

    Absolute right. There’s a place for a sensible land tax, in the mix of other taxes, but it’s not a magic ‘silver bullet’ type solution.

    You’re still going to have to have a sensible answer to the question of “where is the money going to come from?” You can’t put a penny on income tax for local councils and the NHS and Social services and education and better pensions and the roads and the railways. That’s 7p on income tax already and there’s bound to be something else later. Its’s not going to work anyway.

    Cuts in spending means cuts in revenue and a more depressed economy. Increases in spending means increases in revenue plus a more active economy at the possible risk of higher inflation if we are calling upon resources which aren’t present in the economy

    That’s not Laffer -ether care or curve! That’s sensible economics!

  • Peter Martin 7th Nov '18 - 9:56am

    @Joe,

    “What is needed is the ability for local authorities to raise adequate funds to meet their statutory responsibilities – that’s not theoretical that is what is happening over the next couple of years”

    This might be possible in Kensington and Chelsea or the more prosperous parts of the Thames Valley but it’s not going to work in Middlesbrough or Sunderland!

    In any common currency union, and the UK is exactly that, money will always gravitate to other money. It is the job of central government to push it back again to where it is most needed. Significant central government equalisation funding of local government is a very good example of how it should happen.

    It’s a simple lesson that the EU needs to learn as regards the eurozone too. There’s too much money ending up in the prosperous parts of Germany and Holland and too little money in the peripheral regions.

  • Peter Martin – Re: ” …deficit-spending must add to the economy by more than the interest cost ”

    That’s not questionable at all. When deficit spending doesn’t add more than the interest cost the country becomes poorer because of that spending.

    At present, with negative real interest rates that’s a pretty low hurdle – hence in part the traditional Keynesian emphasis on building infrastructure as a response to a depression. High cost/long life infrastructure projects benefit particularly strongly from low interest rates. So, in principle it’s a win-win – more employment plus new infrastructure that wouldn’t normally have been justified.

    (A caveat: with much more international trade than in the 1930s and an economy devastated by years of mismanagement, much of any traditional infrastructure spending is likely to finish up in Germany, China etc. So, we should prioritise infrastructure equivalents not prone to leakage. I am not convinced that this point is adequately understood as yet.)

    In better times interest rates are higher. Government could arbitrarily set itself an arbitrarily low interest rate but doing so would crowd out private investment – not in financial terms of course but via real-world capacity constraints. In that scenario interest would have a ‘shadow price’ that would create opportunity costs for the real economy.

    For many years the Conservatives have specialised in making the country poorer (while making their friends richer) by playing fast and loose with the basic investment rule I set out earlier by creating artificially high interest rates via PFI and the like on entirely specious grounds.

    I am astonished that, although neoliberalism has zilch intellectual coherence or integrity and has no practical benefit for 99% of us, the Lib Dem establishment, when given the chance, signed up to support it and even now remain incapable of effective opposition despite what the military call a ‘target-rich environment’.

    The care services crisis David Raw points to is just one of many places where Tory policies combine with dismal opposition to create real harms.

  • Peter Martin 7th Nov '18 - 6:35pm

    @ Gordon,

    The reason I would say it was questionable is that there is an implicit assumption in your argument that the Government doesn’t control interest rates and that they are in the same position as, say, the owner of a business. Naturally, a business owner has to show that the rate of return on any borrowed capital is greater than the interest paid on borrowing the capital. But the Government is neither a business nor a household.

    Unlike a business or a household, the Government can set its own interest rates. It is possible that it could choose to set real interest rates (ie after inflation is factored in) at a relatively high level. This, though, would be very unusual. As we all know, when interest rates were higher we also had higher inflation. So real interest rates were still negative. Usually. This is a normal state of affairs.

    But not always. This, though, would be entirely the Government’s choice. The last time I remember this occurring was in the early years of the Thatcher govt. Whether the Tories should have done this is debatable. The justification was to squeeze inflation out of the system. But rightly or wrongly it was entirely their call. As a currency issuer it didn’t actually cost the Govt anything.

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