Austerity Policy Measures in the UK
Introduction
The process of putting into place strategic measures with an aim of reducing of deficit and increasing economic growth in the United Kingdom has taken a paradigm shift from various aspects. The government of UK has put deficit reduction measures, which entail a series of strategically sustained reductions in public expenditure, undertaken towards a reduction of the government budget deficit and the UK’s welfare state. The design of this research paper is structured towards assessing the rationale on which the UK’s austerity policy is based with regards to deficit reduction and stimulation of economic growth (Burns, 2011). This incorporates a focus on how the changes undertaken in the publically funded services generally affect both the places and people across the country now and in the future.
Pre-crisis UK
UK is considered the sixth richest country in the world. The economic period marked between 1993-2008, the UK experienced 15 years of economic growth, supported by the socio-economic reforms proposals of the 1980s. Such a shift to market-based capitalism was a result of financial liberation, deregulation of the nations’ labor market and the erosion of social security. Nevertheless, there have been a dramatic increase among those who live in poverty, a figure that almost doubled from the 7.3 million of 1979 to 13.5 million of 2008. Moreover, the inequality levels reached at stages that could only be compared to levels last seen in the 1920s, due to a growing share of income streaming to the richest, especially, the top one percent (Pitelis, 2014, p. 71). From 1975, the income inequality has risen swiftly among the working-age individuals in the UK than in any other OECD nation, with the inclusion of the United States, making UK rank as one of the most unequal nations in the OECD. In fact, there is a pre-tax income inequality index of 0.52, which is considerably greater than that of the United States, which is 0.49.
The UK’s average annual income for the top 10% of its population in 2008 was approximately £55,000, while for the bottom 10% was just £4,700, making it to a ratio of 12:1. This ratio has shown an increase from 1985’s ratio of 8:1 and seemed significantly higher as compared to the average income gap of 9:1 for the developed nations.
The Crisis
The financial crisis of 2008 led the government of UK to bail out the British banks at a cost approximated to be £141 billion, with an exposure of over £1 trillion liabilities. Such a kind of unprecedented government intervention to instigated in order towards undertaking a prevention on the collapse of the British banking system. The UK government further initiated a £31 billion stimulus effort, which encompassed a reduction of VAT, cutting on capital spending on social housing and schools, and acceding a rise in corporation tax. The government stimulus programs lasted up to 2010, during which the country experienced the fastest growth in incomes for the poorest population.
The UK Austerity Measures
Austerity has been the UK’s primarily dominant fiscal policy since 2010. This has been undertaken in the form of deep spending and cuts with relatively small increases in tax, with less measures geared towards stimulating the economy. As the aim of austerity remains reduction of the deficit in the UK in order to give some level of confidence to the markets and hence deliver measurable growth to the economy. Though, austerity measures have led to some impact on the reduction of the deficit, their impact has led to the realization of little growth, with the public debt rising to 90% of the GDP (approximately £1.39 trillion) in 2013 from the 56.6% of the 2009 GDP. The policy measures had far-reaching effects on the poorest population in the UK (Blyth, 2013). The Conservative-Liberal Democratic coalition government in 2010 announced that country experienced the biggest cuts to the state spending since the Second World War. This measure included some of the biggest cuts to the social security and a 900,000 decrease in public sector jobs within 2011 to 2018 (Moulton, 2013).
The beginning of 2008 financial crisis marked the time when those individuals who were already in poverty witnessed the worsening of their impoverishment, while millions became increasingly vulnerable. The increasing cost of living, economic stagnation, raising unemployment, cuts to public services and social security, and falling incomes have collectively created a deeply demanding scenario where millions of the citizens struggle to make ends meet. Among the many examples, one would give the example of the unprecedented rise in the need to be provided with emergency food aid, with more than half a million individuals using the food banks annually.
The unemployed individuals will experience a loss of income approximately to 7%. There is a particularly damaging effect as a result of the decision to make changes on how social security payments need to be increased; the payments will be linked to a lower inflation index, instead of Retail Price Index of 3.3%, there will be the current 2.9% Consumer Price Index. This means incomes will never rise to match the increasing cost of living (Piketty, 2014). The poorest in the group will be hit by these changes the hardest as they feel the increases in costs of housing, energy and basic foodstuffs surpassing inflation in the last few years. Such an impact is so huge to an extent that it has compounded the poverty premium and the recent measures designed to limit the increases of some of the social security payments which includes Child Benefit, Housing Benefit, Jobseeker’s Allowance to 1% every year for the next three years. This has further affected those in in-work poverty.
The individuals in work have experienced their average hourly wages falling in real terms by 5.5% since mid-2010. The government has taken some considerable shifts in the kinds of jobs created, as about half of the rise in employment since 2010 has been in temporary work and the numbers of those involuntarily in temporary work doubling (Pitelis, 2014, p. 96-98). That is, individuals in search of permanent jobs are unable to get them. On the other hand, those individuals who have been in part-time jobs due to being unable to find full-time jobs have more than doubled since 2008. Additionally, self-employment, which could leave the workers with no employment rights, have increased drastically especially since 2011.
The women are suspected to suffer a greater degree as a result of the cuts to public services since they are comparatively highly represented in the public sector (Stuckler and Basu, 2013). As from the 2008 financial crisis, there has been a rise in female unemployment from 678,000 to 1.08 million in 2013 –which is further expected to rise to 1.5 million in 2018, as the remaining public sector cuts take effect. Women tend to use the public services more than their counterpart males. For this reason, they will be more significantly impacted by the closures of the public services, in their own right, and as the principal carers. A combination of such impacts from austerity measures will result in long-term consequences for the child poverty and gender equality in the UK.
Additionally, the UK austerity policy measure is pegged on the aspects of aggregate demand and economic growth. The previous economic stimulus was cut off soon after the election, despite the economy still being fragile (with the last negative quarter of growth in GDP was 2009 Q2). The Office of National Statistics (ONS) data suggested that the stimulus was working. Each and every area of the private demand were getting out of recession at some relatively quick pace, though, the austerity economics of the government led to slower growth (Bailey and Tomlinson, 2015, p. 109). Chart 1 below represents growth in GDP of UK against growth in the government spending in cash terms. There was a decrease of the annual economic growth rates of between 4%-6% to 2%-4% since the crisis.
Chart 1: Government final demand growth and GDP (%)
Source: ESAD, March 2015
The Alternative Austerity Policy Measures for the UK
The United Kingdom is in a position to explore on various available alternative policy measures to austerity. First, besides the country’s austerity measures geared to ensure a reduction in public sector deficit as its key economic objective through cuts in public expenditure, there is a fundamental alternative policy in which the government makes sure that it develops a coherent investment strategy, towards re-building the economic capacity of UK, as a “post-industrial” low-carbon economy. According to British Broadcasting Corp. (2011), the government must mobilize the talents and energies of all the sectors of the economy as it ensures a pull together since the distribution of rewards is put at less unequal standards. The government must also make strategic decisions on whether the budget surpluses should be used in reducing the national budget and taxes or to make investments in the future economic capacity.
Secondly, the UK government should ensure that it invests heavily in both private and public research and development (R&D) expenditure. The fruits that are derived from the capitalist progress are not merely the reward for the private enterprise alone. The government needs to play a key role in the initiating investment in human capital, infrastructure, and the science base. The modern times call for a shift to a low-carbon economy. It, therefore, needs to establish new regulatory regimes that are necessary to secure the public good.
Moreover, the burden of austerity has shown a disproportionate fall upon the young and the poor. Therefore, there is a need to have a new social contract, which would provide security for all; by supporting a vibrant local community, offering places for learning and creativity for everyone, and by investing in everyone’s capabilities and provision of decent jobs. This would put the market where it appropriately belongs, not as the master of the community but as its servant. If the 21st-century social changes are managed successfully with public consent, then it will require this social contract to underpin them.
Furthermore, the government can explore on developing a fair funding mechanisms for the areas of most need. This paper has shown that the levels of cuts have been disproportionate with particular areas of the United Kingdom. The areas which are most deprived have been previously relying on grant funding formulas, which the cuts have impacted to a greater extent. The national government would, therefore, find it imperative to communicate the urgent essentiality for a fairer settlement for those places having higher economic and social needs, especially, in terms of local government funding (Bailey and Tomlinson, 2015, p. 298). This calls for stepping away from the wholesale uniform approach in implementing public spending cuts and restructuring of future resource allocation towards adopting a system which recognizes the level of differentiated needs; and limits. It should further recognize the impact of reducing expenditures on the most vulnerable in the society, and on such areas which are heavily dependent on the public sector while making a recognition of the significance of a universal access to services.
On the other hand, the UK government can implement the real devolution of resource and policy levers. When it undertakes devolution of resources and the decision-making powers, there would be increased democratic transparency and accountability, and such structures which facilitate effective representation including voices of citizens, unions, and service users.
Conclusion
This research paper has given an all-inclusive evidence on the rationale of the austerity policy measures in the UK. In particular, it has given highlights on the need for the UK government to undertake austerity policy measure in pursuing a stable economy. These strategic measures have not resulted in positive outcomes per sie but have come with great challenges to the recovery of the UK economy especially from the 2008 financial crisis. That is, the effects of spending cuts upon the government have created an array of negative impacts on the government’s ability to ensure delivery of quality services to its citizens (Alesina and Rugy, 2013). It’s of great significance reflecting that a great majority of the people throughout the country will feel the effect of austerity in some way. Concerns about cutting back on funding for social events, increased inflationary levels and drastic rise in unemployment rates are some of the impacts of austerity policy measures in the UK which has cumulatively affected many people in different ways. Moreover, the evidence has shown that the increasing government policy of rapid and deep public spending cuts hugely affect the local communities across the nation, especially some of the most vulnerable individuals in the society.
The impacts of austerity measures within the operations of the UK economy have shown drastic effects, which have to a greater extent derailed the growth rate of the economy. Therefore, there is a need to focus on the cumulative effects of austerity, before the government outlines the various high-level recommendations for both the local public sector and the national government agencies across the UK in order to mitigate the effects of austerity.
Bibliography
Alesina, A. and Rugy, V. 2013. There is Good and Bad Austerity, and Italy Chose Bad. New York, NY: Forbes Publishing.
Bailey, D. K., and Tomlinson, P. (ed). 2015. New Perspectives on Industrial Policy for a Modern Britain Oxford: Oxford University Press.
British Broadcasting Corp. 2011. EU Austerity Drive Country by Country. Nov. 11: http://www.bbc.co.uk/news/10162176. Accessed Jan 15, 2017.
Blyth, M. 2013. Austerity: The History of a Dangerous Idea, London: Routledge.
Burns, J. F. 2011. British Leader Pushes for ‘Can-Do Optimism’ and Faith in Austerity Path. New York Times. Oct. 6: A10.
Eatwell, J. and Murray, M. 2011. The Fall and Rise of Keynesian Economics, Oxford: Oxford University Press.
Moulton J. 2013. We’re paying the price for not cutting harder. The Times, 21 March 2013.
Piketty, T. 2014. Capital in the Twenty-First Century, Cambridge, Mass: Belknap/Harvard University Press
Pitelis, C. 2014. ‘Rejuvenating ‘Old Europe’: Towards a Strategy for Reindustrialisation and Sustainable Competitiveness’, Contributions to Political Economy, 33(1): 69-98.
Stuckler, D. and Basu, S. 2013. The Body Economic: Why Austerity Kills. London: Penguin.
