The absurd logic of austerity has been exposed—what should replace it?by Jonathan Portes / April 21, 2020 / Leave a comment
Austerity didn’t cause Covid-19. But the pandemic has thrown into sharp relief the misplaced sense of priorities of those who have governed us since 2010. The idea that the best measure of the country’s preparedness for a crisis—health, economic, or indeed any other—is the size of its fiscal deficit or its national debt was always absurd. Now the Sunday Times informs us of the grim reality of what that meant in practice: “We were the envy of the world… but pandemic planning became a casualty of the austerity years, when there were more pressing needs.
But while the policy errors of the austerity era are now obvious to all, what does that mean for economic policy when the crisis has passed? One thing is certain—we will have a much higher national debt. The Office for Budget Responsibility estimates that our debt-to-GDP ratio will rise to 95 per cent at the end of this financial year. But this assumes a sharp, V-shaped recovery. By contrast, a more realistic assessment from the Resolution Foundation projects increases to well over 100 per cent of GDP on the most optimistic scenario, while on an—admittedly very grim indeed—assumption that the lockdown lasts for a full year, it rises above 160 per cent.
Fortunately, this already seems implausible, as we, along with most other European countries, are beginning to formulate a phased approach to ending lockdowns. But, even if the worst does not materialise, there is no question that debt and the deficit will rise at unprecedented speed. And there will be some who insist that, when the crisis passes, the remedy is yet more austerity. Yet worrying about the size of the debt or deficit misses the point, and risks leading policy astray, just as it did in 2010. Instead, the government needs to focus on two issues in formulating its economic plan.
The first true policy dilemma will be demand management. And here the uncertainties are huge. A “normal” recession—and in this sense the financial crisis, extraordinary in many ways, was still “normal”—is caused by a fall in demand, and the economic response (monetary, fiscal or both) is to increase demand by reducing interest rates, cutting taxes, or increasing government…