All is not well in Britain. Last week the Children’s Society reported the results of a study of 15-year-olds’ life satisfaction, which has steadily declined over the past decade. The findings showed that British 15-year-olds had the lowest life satisfaction levels of 27 European countries.
In a 2023 report on global mental health, the UK ranked the second worst of 71 countries, with only Uzbekistan scoring lower. My own research also makes for grim reading: my co-author and I found a collapse in the mental health of the young, and especially young women, in the UK. Scotland looks especially bad. Meanwhile, there are millions of people of all ages on waiting lists for surgeries, GP services are in decline, dentists are scarce and social care is in disarray.
New governments usually come into office with an agenda to try to move on from the sorry past – but not this time. Last week Keir Starmer told the country that things were “worse than we ever imagined” and that the public should prepare for “short-term pain for long-term good”. In other words, the government is preparing us for unnecessary cuts.
Defending the government’s decision to radically restrict winter fuel payments, Lucy Powell, the leader of the House of Commons, said cutting the payments was a necessary measure to avoid a run on the pound (it wasn’t). There was also no mention in Starmer’s speech of the biggest destroyer of revenues and growth and one of the main causes of our sharp drop in living standards: Brexit. Reeves’s October budget won’t help matters: what the chancellor appears to be advocating is completely unnecessary and will slow the economy with spending cuts and tax increases. People didn’t vote for this.
A great example of how to come to power with a positive vision was demonstrated by Clement Attlee’s Labour government of 1945. Attlee took up William Beveridge’s bold plans for the creation of a “cradle to grave” welfare state, putting in place an entirely new system of social security and building houses. He also nationalised many of the commanding heights of the economy including electricity, coal and the railways, and as a result won re-election in 1950 (albeit with a dramatically reduced majority).
George Osborne’s response to the 2007-08 financial crash, in contrast, was disastrous. The former chancellor’s solution was to repudiate John Maynard Keynes, who believed that you could crowd in private sector investment by boosting public investment.
Osborne did the opposite: he slashed public investment and spending based upon a mistaken belief that high debt-to-GDP ratios killed growth. The basis for this suggestion, acknowledged in his Mais lecture of 2010, was a paper by the US economists Carmen Reinhart and Kenneth Rogoff, which later turned out to contain a serious error.
The graduate student Thomas Herndon showed the evidence that Reinhart and Rogoff provided was undermined by a mistake in the spreadsheet – the whole furore came to be known as Excelgate. Their findings could not have been more wrong: a later paper analysed their work and found that “over the period 1946–2009, countries with public debt/GDP ratios above 90% averaged 2.2% real annual GDP growth, not −0.1% as published”.
The economy was growing fast in 2010 – but austerity killed off that growth. Will Labour learn from Osborne’s mistakes? I am not betting on it. Before the election, I signed a letter in support of the prospective Starmer government, in large part because I thought it was time to be rid of the Tories – but also in the hope that Labour would offer a new way forward.
My hopes were soon dashed. Reeves apparently has told Whitehall departments to prepare for punishing cuts before the austerity part two budget in October. There is every expectation that local authorities’ spending will be hit hard again, which will have a huge impact on social care. The government has already made a mistake in cutting the winter fuel allowance. Why did it not go after those who got the country into a mess, such as the water companies? There is no economic basis for hurting the poor again.
It doesn’t have to be this way. The story of the gold standard is instructive. The former Bank of England governor Montagu Norman, who reigned supreme from 1920 to 1944, fought tooth and nail to keep it. But eventually the unthinkable happened, and the rise of unemployment and widespread economic distress meant Britain was forced to abandon it in 1931 to avoid societal chaos.
Tom Johnston, in his role as lord privy seal, was quoted at the time as saying: “Nobody told us we could do that.” Sometimes the politically unthinkable is the only sensible option. It seems nobody told Starmer or Reeves that you don’t need to deliver further rounds of damaging austerity.
I had hoped that while in opposition Labour would have done the hard work of analysing what could be done to improve public services and raise the wellbeing of working-class men and women. I do recall that on 6 May 1997, days after Tony Blair won the general election, Gordon Brown and Ed Balls announced their plan to make the Bank of England independent. In contrast to Starmer and Reeves, they had done the hard preparatory work, and the move resulted in the lowered cost of government borrowing. It also reassured the markets that the new government was economically serious.
The question now is why Starmer and Reeves are idiotically trying to balance the budget. When Covid hit, the Tory government borrowed easily – why not do that again? There are all kinds of options for funding public services, including the Treasury issuing a bond that the Bank of England buys. That is quantitative easing, used in the great recession of 2008-09, and which I voted for when I was a member of the Bank of England’s monetary policy committee.
There is no reason not to do it again to avoid painful and avoidable cuts. Investing in the British people is smart economics. “Nobody told us we could do that” would be no excuse.
David Blanchflower is a professor of economics at Dartmouth College. He was a member of the Bank of England monetary policy committee from 2006 to 2009
