The UK faces some significant belt-tightening following Chancellor Jeremy Hunt’s autumn statement, which announced spending reductions and tax rises of around £55 billion. Much research has been done into the best ways to do fiscal austerity in terms of reducing debt, avoiding economic damage and not exacerbating inequality. So how does this attempt measure up?
That £55 billion retrenchment includes over £30 billion of reduced annual government spending by 2027/28. Over the next couple of years, the government is actually going stick to previous spending plans and even increase them for core departments like health and social care. But from 2025-28 there will be a crackdown, with maximum 1% real-terms increases for day-to-day (current) spending, and infrastructure (capital) spending only being maintained in cash terms.
Our research, which looked at the US finances between 1985 and 2016 but is applicable to many countries, has found that austerity based on public spending cuts often costs the overall economy less than tax rises. Spending cuts are usually followed by reduced interest rates, which can spur consumption and business investment.
