Austerity has led food bank use in the UK to increase by almost four-fold since 2012, and there are now approximately 2,000 food banks across the country, up from just 29 at the height of the financial crisis in 2008. But this is only the tip of the iceberg: many in food poverty fall under the radar.

Food poverty results from rising poverty levels more broadly. To tackle food poverty we need to address the root causes that push people into poverty. This means ending austerity. The links between austerity and poverty have long been identified by civil society, in addition to rising living costs, stagnant wages, and a high-cost housing market. In February of 2019, the work and pensions secretary Amber Rudd MP admitted that the UK’s new welfare system, Universal Credit, is pushing people to use food banks.

After decades of campaigning by groups including Sustain, this year the UK Government will finally start measuring household food insecurity. In the absence of official figures, the UN estimates that approximately 8.4 million U.K. citizens struggle to put food on the table.

Food poverty can present itself in a number of ways. It can mean going without meals, limiting portions, constantly worrying where the next meal is coming from, or having to buy poorer quality and less nutritious food. In order to follow the Government’s Eat Well guidelines one in five families would have to spend 40% of their income after housing costs.

This does not mean that we should reduce the cost of food, but rather increase its affordability and accessibility. Farmers currently only receive 8% of the final cost of the food, and many farm workers do not enjoy the paid holiday, sick pay, pension contributions, wage progression and other benefits that workers in many industries take for granted.

Sustain’s research has found that a low-paid workforce has a negative impact on the rural economy, making communities poorer and more vulnerable to decline. The fact that some of those who grow and sell our food are going hungry is shocking, but can be prevented. Behaviour and pricing in the food supply chain needs to be regulated to ensure fair incomes for suppliers, including farmers and growers, and those working for them.

Many people in poverty live in areas classified as food swamps or food deserts. This means that their access to fresh affordable food is limited, and they are often forced to pay a Poverty Premium, meaning that their purchases are more expensive than equivalent purchases in an area with wider food choices.

In order to tackle the lack of choice and the poverty premium, food access needs to be properly considered in town planning decisions. This consideration may take the form of increasing provision of healthy food retail or markets, providing affordable public transportation, or offering meals on wheels provision. Sadly, the latter two have been cut in recent years by many local councils who have been forced to reduce costs.

Children are particularly vulnerable to the effects of malnutrition and food poverty, and this can go on to have both long term mental and physical consequences on their life outcomes.

It costs only £437 per year to provide a child with a school meal during term time. Yet an estimated 1 million children, despite living in poverty, are not currently eligible for free school meals, and are therefore often forced to skip lunch as their parents cannot afford the cost. These children include those who, due to their parents immigration status, are not entitled despite many of them being born in Britain, as well as children who are no longer eligible due to changes related to Universal Credit.

With leadership absent at the national level, many local councils, like those surveyed in our Beyond the Food Bank report, show that a commitment to alleviating food poverty can put money into pockets and meals onto tables.

When the UN Special Rapporteur on Extreme Poverty and Human Rights visited the UK last year, he pointed out that these economic decisions that have affected the worst off in society were politically motivated. Indeed, as he said in his preliminary statement: “Austerity could easily have spared the poor, if the political will had existed to do so”.

We hope that the UK Government starts taking action in order to ensure a fair food system for all by tackling austerity measures that have pushed people into poverty, and by taking its commitments to guaranteeing our social and economic human rights seriously.

This article has also been published on Open Democracy. Photo credit from previous page: Flickr / Kent Kanouse

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What is the poverty premium?

Being poor costs more when the washing machine breaks down and your only option for buying a new one is to approach a payday lender or a rent-to-own company, which can cost up to three times the retail price. This is because you can’t afford to pay up front for a new machine, or are priced out of purchasing contents insurance. And if you manage to get a new appliance, you probably don’t have the best energy tariff as you just don’t have the time to switch providers, meaning that you pay more for your electricity. That’s all before you account for the additional charges incurred for paying monthly and not by direct debit, which is the only way you can manage.

So how many people are we talking about? In the UK there are just over 14 million people in poverty according to Households Below Average Income data and the Social Metrics Commission. The Personal Finance Research Centre at the University of Bristol estimates that nearly three quarters (73%) of people in poverty pay a premium for their energy. That is around 10 million people – or more than 1 in 7 of the UK population – who are forced to pay more because they are poor.

Estimates for the average poverty premium paid annually by low-income consumers range from £256 to £490 a year. The table below shows an estimated breakdown of the poverty premium.

Why does the poverty premium exist?

Firstly, the unfair costs of living. Some people pay a poverty premium if they are considered too risky for, or are excluded from, every day services such as insurance or credit. Is it fair to pay higher insurance premiums because an algorithm has judged a postcode to be ‘high crime’?

Second, the myth of the ‘super consumer’. Very few people have the time or know-how to compare the prices of every product or service that they buy and then switch to better deals. Markets can be complex and overwhelming, particularly for those who struggle to get through each day. Whose problem is this? Is yet ever more competition the answer? Or do businesses, guided by Government and regulators have a responsibility to ensure people in poverty are placed on the cheapest deals by default?

Finally, one size doesn’t fit all. Products and services haven’t been designed with low income consumers in mind. Millions of people are on zero hour contracts, or paid weekly with uneven income levels, meaning they don’t have the money available up front for things like cheaper annual payments. Is it fair that they are charged high levels of interest just to pay on a monthly basis?

How do we get rid of the poverty premium?

The poverty premium has deep rooted causes that can only be solved by bold, structural change. But there are steps that can be taken immediately.

We believe it is vital that Government launches an inquiry into the poverty premium to investigate its causes, its social and human cost, and possible solutions. In addition, an official measure of the poverty premium is needed. We’re therefore pleased that the Competition and Markets Authority (CMA) has recently released its report on vulnerable consumers. This contained an agreement with other regulators to take forward a feasibility study for a data matching exercise that could lead to a universal empirical measure of the poverty premium.

Regulators need to continue to introduce legislation that minimises the poverty premium, such as the recently-announced price cap in the rent-to-own market. Furthermore, all regulators should commit to hosting incubation hubs, such as the FCA’s sandbox, and to support challenger businesses that are working to reduce the impact of the poverty premium.

Eliminating the poverty premium is an urgent priority, but no one institution can achieve it alone. Government, regulators, and businesses all need to act together to design out the extra costs of being poor, to free millions from its grasp.

This article has also been published on openDemocracy. Photo credit Flickr / Jase Curtis.

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Public sector bodies have been under pressure from central government to sell off land. Such pressure is not entirely new. It has existed to one degree or another since the beginning of the 1980s.

What’s new is the intensity of this pressure and the emphasis on a hitherto marginal rationale. Land is being sold off to raise income specifically to reduce the budget deficit. This is the perverse logic of austerity.

Pressure has been especially intense on local authorities, who have sold more than 12,000 sites just since 2014-15. And, as they have disposed of their landholdings, councils have struggled to satisfactorily provide a number of services that have historically been at the core of their operations. This includes youth centres, leisure facilities, allotments, farm tenancies and, last but not least, social housing – all of which need land.

Manchester City Council sold off 673 public properties between April 2014 and July 2018. This included a large amount of social housing, as well as community centres, care homes and schools. While this is the most extreme example of sell-offs, it’s a similar story for many councils around the country.

The madness of austerity

Meanwhile, local authorities have increasingly been buying other types of land. Not the same kinds of property they can use to provide important services for the community. But rather commercial investment property – most notably, shopping centres. This is all about austerity, too – and in two key respects.

First, austerity explains why councils have been doing this: to raise (rental) income in order to continue to be able to fund the provision of local services that have been imperilled by savage cuts in grants from central government as the latter has devolved austerity to the local level.

Second, austerity explains how councils have been doing this. As is now widely recognised, austerity in Britain has ushered in a lost decade of stunted growth. The Bank of England has accordingly maintained interest rates at historically low levels and local authorities have benefited from the availability of unprecedentedly cheap debt. They have borrowed prodigiously to finance their commercial property investment spree, with annual borrowing rocketing to £10 billion in 2017-18 from £4.4 billion four years earlier.

You don’t have to be particularly radical to believe that this state of affairs – councils selling land crucial to what they should be doing (such as providing social housing) while pursuing a land acquisition strategy well beyond their central remit (speculative investment in commercial property) – is absurd.

In 2016 alone, local councils spent more than £1 billion on business parks and shopping centres. Spelthorne Borough Council in Surrey, for example, spent £360m buying an office complex from BP, while Canterbury City Council in Kent made the first of two payments towards the £155m acquisition of a shopping centre.

This may be the new normal but these are bizarre decisions for local authorities. As FT journalist John Plender writes, it makes Spelthorne council more of “a property company with a sideline in providing local government services”. To paraphrase academic and author David Harvey, who has written of the madness that underpins a lot of mainstream economic reasoning, we might say that this is the madness of austerity reason writ large.

Reintroducing sanity

As a first step to reintroducing some sanity, the government should halt the austerity-augmented privatisation of public land. Not only is the income generated by disposal a one-off, non-recurring source of income. But it often removes a source of recurring public-sector income, as was the case with the privatisation of Network Rail’s commercial property portfolio.

Furthermore, there is growing evidence that public land acquired by the private sector is frequently hoarded rather than being used in a productive way – such as for the construction of truly affordable housing. And even where such land is put to use, there is zero evidence that this use leads to economic growth.

If Britain is to chart a navigable and fair route out of austerity, plotting a better path for the ownership and allocation of the ground beneath the nation’s feet is quite simply a political and strategic necessity.

This article has also been published on The Conversation. Photo credit from previous page: SomeDriftwood / Flickr

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We have written extensively, in our books The Spirit Level and The Inner Level, about the damage caused by income inequality to population health and social cohesion, and the need to reduce inequality as part of a transition to a sustainable economy that maximises well-being rather than GDP. But the UK already has a policy framework and (theoretical) commitment to reducing income inequality, as this is in the United Nations Sustainable Development Goals. The UK signed up to those goals – and people must hold the government to account on its progress. But that progress will take time and austerity must end now.

We have also written about the need to embed greater equality into our culture of work through enhancing economic democracy – by which we mean everything from employee representation on company boards to more employee-owned businesses. As well as enhancing productivity, there is ample evidence that greater economic democracy reduces pay differentials within companies, so reducing pre-tax income inequality.

Embedding economic democracy into UK workplaces would be a robust way to create a more equal society. It would make it more resilient to changes of government than policies of redistribution designed to reduce income inequality through taxing and then giving out benefits. But again, this takes time.

So, our top policy for ending austerity (and which will also tackle inequality) has to be action on taxes. The immense damage being caused by austerity – rising mortality rates, the end of gains in life expectancy, the phenomenal and inexcusable increases in food insecurity and hunger, housing insecurity and homelessness – demands urgent and radical change.

We can’t afford incremental change when babies are dying and old people are stuck in hospital to despair and die, as if there is not enough money for health and social care. The UK is the fifth-largest economy in the world and so of course it can choose to provide excellent public services and a generous social security safety net if it wants to. All it has to do is stop allowing the richest to continue to extract disproportionate income and wealth by taxing them properly.

A no-brainer

We’re sometimes told that if we raise top tax rates, the talented elite will leave and those remaining will be the poorer because they are the wealth makers. In fact, there is evidence that business executives who are paid less than the average produce more value for shareholders than executives who are paid more. And the global financial crisis belies the idea that those at the top have special expertise, experience (or moral values) that will protect the country’s economic well-being. Under their watch, a toxic mix of greed, deregulation and fiendishly complex financial instruments are widely blamed for the 2007-08 crash.

So let those who will depart, go. If the country’s social policy is aimed at creating the greatest good for the greatest number of people, then increasing top tax rates is a no-brainer. But a national conversation is needed to think about what – and who – we want to tax more, what – or whom – we want to tax less, and what we want to do with an increased public purse. In the US, politicians including Alexandria Ocasio-Cortez are dramatically changing the public debate by calling for a 70% top tax rate to fund a Green New Deal. That’s exactly the kind of proposal the UK needs to be debating.

The financial journalist, Katrin Marcal, writing in the Financial Times newspaper about Sweden’s system of making all tax records public, made the point that:

the salaries of BBC presenters such as Gary Lineker or John Humphrys are not strictly private matters – they are part of a larger pattern in which the average pay gap between men and women in the UK is 18%.

The same is true for the pay gap between rich and poor. It creates such profound problems that tax transparency can only be in the public interest. Knowledge about earnings and contributions could underpin that national conversation about how the country wants to tax and how it wants to spend. It could also go a long way toward curbing aggressive tax avoidance. Tackling this, along with tax evasion, must also form part of any new tax strategy by the government.

In five years’ time the UK could create profound improvements in its quality of life. It could have a better-funded NHS and more money available for preventive health interventions. It could have more children’s centres and public libraries, and better equipped primary and secondary schools. It could choose to invest in improved public transport and green energy, mend its railways and create beautiful parks and cityscapes.

It could provide properly-funded social care for its ageing population and have more money for research and development. It could probably afford all of these things. Britain simply needs to get its tax policy lined up with its vision of a good society.

This article has also been published on The Conversation. Photo credit from previous page: Kloniwotski  / Flickr. 

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This is in sharp contrast to numerous decades before 2008. For example, from 1998 to 2008 wages, adjusted for inflation, grew by 25%. For most households, wages are the most important source of income, so they can only spend more if they run into debt. This creates a squeeze on living standards for workers and a skewed and unstable economy.

People cannot keep up their spending if their wages are not growing – unless they resort to borrowing. And this is what is happening in Britain. The UK household debt to income ratio is more than 150%. On average people’s debt exceeds their yearly income. Recently, the UK’s national statistics office reported, on average, each UK household spent around £900 more than they received in income in 2017. That amounts to almost £25 billion in deficit for households across the country.

Longstanding debt addiction

Already before the 2007-08 financial crisis, British growth was based on debt. At that time, growth was fuelled by a house price boom and ballooning mortgage debt.

Since the crisis things have changed, but not fundamentally. In fact, mortgage debt has been declining since the crisis, but now consumer credit is expanding fast. Economists speak of debt-driven growth. This is where people need to borrow to get by. It is a reflection of falling wages, and the UK remains addicted to debt.

The basic point is that households can’t spend on basic necessities (let alone luxury items) unless their wages are growing in line with economic growth. This is the essence of the idea of wage-led growth: wages should grow at least with inflation and average productivity growth. Today that would correspond to about 4%. In fact, wage growth is only half of that.

Higher wage growth is good for workers, but under current circumstances it is also healthy for the economy overall. Britain needs to be weaned off its addiction to debt. For that to happen people’s incomes have to grow, and so wages have to grow. Higher wage growth will boost spending as most of people’s wages is spent in the form of consumption.

Plus, higher wage growth creates incentives for companies to upgrade their production processes because higher wage costs motivate firms to modernise machinery. Wage growth speeds up technological progress. A 10% wage increase typically leads to 3-4% higher productivity.

Unlocking wage growth

There are many factors behind weak wage growth. Some of these are global: manufacturing firms can move production abroad where workers cost less. But much of it is homemade and a result of government policy and austerity, like weakening trade unions and allowing zero-hour contracts to spread.

Key to establishing a wage-led growth model is strengthening collective bargaining, labour unions and the rights of workers:

• Extend collective bargaining agreements to non-unionised firms.
• Encourage collective bargaining agreements in various sectors.
• Strengthen the right to strike for trade unions.
• Strengthen worker rights in the gig economy.
• End zero-hours contracts.
• Increase the minimum wage to keep pace with inflation and productivity growth.
• Link the pay of managers to their firm’s performance and keep it in line with average wage growth.

Businesses might initially object, but employers will benefit from the stable growth that this approach offers, even if in the short term they are reluctant to raise wages. Importantly, they stand to benefit the most from a coordinated pay rise across the economy because of the boost it brings to both productivity and demand. This also strengthens the case for the state to take the lead in coordinating – and even subsidising – wage-led growth. It could also lead by example by lifting the public sector pay freeze.

Wages going up for the working population is an effective way to end austerity and boost economic growth. But, for austerity to end in the long term there must also be stricter regulation of the financial sector. Only this will stop the underlying dependence on the debt-led growth model.

This article is part of our 100 Policies to End Austerity series, and was published on The Conversation under the title “Ending austerity: give everyone a payrise“. 

Photo credit from previous page: Flickr / THE DUDE MINDS MAN

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Earlier this month, Professor Philip Alston embarked on a two-week tour of the UK – not to give lectures or to present at conferences, as one might expect of a visiting academic, but rather to investigate the UK in his official capacity as the UN Special Rapporteur on extreme poverty and human rights.

Over the course of his inquiry, Alston spoke to politicians of all stripes; met with civil society groups, community organisations and front line workers; and most notably, listened first-hand to the testimonies of people living in poverty. On Friday 16 November, the UN published a statement summarising his findings – one which can only be described as an excoriation of austerity.

Before moving on to these findings, it is worth noting that this isn’t the first time British austerity has been the object of such UN scrutiny. In 2015-6, the UK had the honour of being the first country investigated by the UN over “grave and systemic violations of the Convention on the Rights of Persons with Disabilities”. The investigating committee found that welfare ‘reforms’ – e.g. changes to Housing Benefit entitlement, the closure of the Independent Living Fund – enacted by the Conservatives in the name of austerity had indeed led to grave and systemic violations of disabled people’s rights.

But of course, the Government rejected all the recommendations made by the committee to rectify the situation.

Findings of the UN inquiry

Professor Alston’s statement – well worth reading in full – is nothing short of damning. It lays bare the extent of misery and poverty that the Government has visited on the most vulnerable people in our society. He has dutifully collated individual testimonies from the victims of austerity, and has interwoven these with statistical evidence showing that these stories are far from anecdotal or anomalous – they are representative.

“I needed full time care, and my husband had to leave his job. Suddenly we were living on disability. Then our landlord gave us eight weeks to vacate the apartment. We discovered that no one will let you view a house when you’re on disability benefits…. I do not know where I’ll be putting my child to bed soon. Should he be made homeless?” 

Erin, Jaywick

“14 million people, a fifth of the population, live in poverty. Four million of these are more than 50% below the poverty line, and 1.5 million are destitute, unable to afford basic essentials. The… Institute for Fiscal Studies predicts a 7% rise in child poverty between 2015 and 2022, and various sources predict child poverty rates of as high as 40%. For almost one in every two children to be poor in twenty-first century Britain is not just a disgrace, but a social calamity and an economic disaster, all rolled into one.”

Professor Alston’s headline summary of the impacts of austerity

Austerity was a political choice

Most importantly, Alston does not accept the logic that such hardship was necessary. He puts it plainly in the conclusion of his statement:

“The experience of the United Kingdom, especially since 2010, underscores the conclusion that poverty is a political choice. Austerity could easily have spared the poor, if the political will had existed to do so. Resources were available to the Treasury at the last budget that could have transformed the situation of millions of people living in poverty, but the political choice was made to fund tax cuts for the wealthy instead.”

Earlier on in his report, Alston warns that discussing post-2010 policy under the rubric of ‘austerity’ risks implying that there was some underlying economic driving force that necessitated the cuts – the need to ‘eliminate the deficit’, for instance. Rather, the motivation for the cuts was “a commitment to achieving radical social reengineering”. He describes this social re-engineering as follows:

“great misery has… been inflicted unnecessarily, especially on the working poor, on single mothers struggling against mighty odds, on people with disabilities who are already marginalized, and on millions of children who are being locked into a cycle of poverty from which most will have great difficulty escaping”.

The Government’s response has been cold. The new work and pensions secretary Amber Rudd chose to respond to the statement by expressing her disappointment – not at the rapporteur’s findings on the extent of deprivation in the UK, but rather at the “political nature of his language”.

100 Policies to End Austerity

Theresa May and Philip Hammond may have flirted with the idea of “an end to austerity”, but there are more cuts to come. Until the government acts decisively to repair the unnecessary damage inflicted in its name, austerity will continue, regardless of rhetoric.

The UN report makes it clear that austerity is unnecessary, that to continue with it would be an explicit political choice. There are many routes from economic crisis to lasting recovery; austerity is not one of them, not least because of its high human cost.

This may be vehemently denied by conservatives, indicating a broader trend (noted by John Lanchester) for conservatives to depend less on moral justifications for their brand of capitalism and more on the insistence that there is no other option. Such obstinacy often translates into a refusal to see the hardships caused by austerity – see Conservative MP Kwasi Kwarteng’s response to the case of Emily Lyndon on The Andrew Marr Show for an example.

The Progressive Economy Forum seeks to present an alternative vision for economic leadership. By curating 100 Policies to End Austerity – a series of succinct, concrete and accessible proposals for elements of a renewed economic programme – we hope to paint a picture of what a better future could look like.

Together, these proposals will show us how we can end austerity for good and redress the harms it has inflicted – more broadly, how we can change the way our economy is run. You can see the first few entries in the series on our blog, and find out more about the series in our launch post here. If you would like to contribute to the series, please see our call for submissions.

Photo credit from previous page: Flickr / UN Geneva

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At the Conservative Party Conference, Prime Minister Theresa May pledged to “end” austerity; more recently, Chancellor Philip Hammond announced that a “good” Brexit deal would “pave the way” for this. But he is also committed to “cutting public borrowing to zero” and “balancing the books” – both code for more austerity.

So let’s get rid of any lingering suspense right away: austerity isn’t over yet – and it’s unlikely that the Budget Statement on the 29th of October will change that. Indeed, Mr Hammond is getting his excuses for continued austerity in early, such as the possibility of a poor Brexit agreement.

But why persist with austerity? It’s clearly not working. And if the need for immediate cuts in 2010 was as urgent as George Osborne assured us it was, we might have expected to see at least some sign of a positive effect in the space of nearly a decade. Since we haven’t – with the deficit remaining a deficit and national debt continuing to be largely unaffected – what’s the point of continuing with austerity?

A cursory look at economic history soon reveals that opting for austerity in a recession will, as we have been reminded since 2010, actually make things worse. Even the feeding frenzy of market panic, predicted by Osborne if there was no credible plan for reducing debt, has failed to materialise – in spite of his plan turning out not to be credible.

Don’t make promises you won’t keep

So could Hammond really bring an end to austerity on the 29th? Whilst tax increases are widely expected in the budget, the mere mention of higher taxes could be enough to further destabilise an already fragile government – highlighting the sharply political (rather than economic) basis of austerity. May’s attempts to undermine Labour’s campaign in the run-up to the 2017 general election – by apparently embracing more progressive policies – also clearly demonstrates the influence of politics on policy; mere weeks after the election, May was making a speech in praise of free market capitalism.

This “U” turn may provide a clue as to the real meaning of “ending austerity”, which may well just mean “not calling it austerity anymore”. If we take this and the failure to address Osborne’s cuts (some of which are yet been implemented) at face value, it’s hard to see how Hammond can change the game in one budget speech – or half a dozen, for that matter. More of the same, in terms of policy, will simply mean more of the same in terms of economic and social outcomes. So we clearly need something better.

Growing out of debt 

As it happens, there is a much better way to deal with public debt – and for that matter, a questionable “Brexit” arrangement, if any at all. It’s called economic growth. A quick look at the various policy responses to the Great Recession reveals that countries which delayed austerity until the economy was in a sustainable recovery – like Iceland, Ireland and the US – were all able to afford a modest reduction in spending without damaging growth. In the cases of Iceland and Ireland, the brunt of austerity was borne by those who could best afford it. Society was prioritized over finance, and the social and political unrest experienced elsewhere was avoided. Contrasting this with the humanitarian crisis in Greece, the rise of “populism” across Europe, and the all too familiar effects of prolonged austerity in the UK, demonstrates the stark difference between austerity in a growing economy, and austerity in a fragile one.

Following Labour’s initial response to the 2008 crisis, the UK was actually experiencing the beginnings of a recovery. But the following Chancellor, Mr. Osborne, decided to go all Tony Blair – “tough on growth, tough on the causes of growth” – a strategy that predictably brought no positive results (but plenty of undesirable ones) for almost a decade.

Economic growth has very obvious benefits. For a start, it’s the only way out of a recession – a recession being defined as two or more successive quarters of negative growth. A growing economy will drastically reduce social welfare costs, and will also significantly increase the government’s tax receipts. Both these things will rapidly improve the deficit, and hence, public debt. This has been the case ever since governments committed themselves to income tax and welfare spending at the beginning of the last century – which is why, if Hammond continues with existing policy after the 29th, he (like Osborne) will be flying in the face of a century or so of economic reality.

Austerity: past its sell-by date

The popular arguments for austerity have been out of date for at least a hundred years. No longer can a nation’s budget be convincingly compared to that of a family or business – nor can state borrowing “crowd out” private investment. Before the 2008 financial crisis there was, after all, enough credit left over to fund yet another bubble of prodigious size. The economic equivalent of the unicorn – the dream of “expansionary fiscal consolidation” – has also been laid to rest by the two most recent UK chancellors. And unless you happen to be a member of the Eurozone, situations like that in which Greece found herself are extremely unlikely.

None of this, of course, means that we won’t still be hearing these arguments for many years to come. But whilst they might have made a degree of economic sense when the likes of Adam Smith and David Ricardo were writing, since that time the world – and economics – have changed out of all recognition. Thus, during the 1930s, when John Maynard Keynes was writing, he didn’t in fact come up with a new theory of the economy – rather, he produced a theory of the new economy. His conclusion was clear, too: “austerity is the policy for the boom, not the slump”.

Our economy needs a gardener

So where does all this leave us? It strongly suggests that what we need is a Prime Minister who knows all about growth. So whilst Jeremy Corbyn has taken a certain amount of stick from the media for tending his allotment, he will be acutely aware that with his tomatoes and potato beds, cutting back on feed and “expansionary” fertiliser before the crop is well established will have disastrous results. He will also appreciate the utmost importance of the environment, and the need to both invest in its protection and ensure that growth is ‘sustainable’ in the fullest sense of the word.

Without growth, it’s hard to see how either our economy or society can improve. But the last eight years of austerity have been driven more by political than economic considerations. Pandering to the ideas of a fragmented Conservative Party, rather than the needs of Britain as a whole, makes as much sense as managing an allotment entirely for the benefit of the whiteflies, red spider mites and caterpillars.

It’s conceivable that Mr. Hammond will talk about expansionary policies on the 29th and actually mean what he says; but given the political rhetoric of the past eight years, it seems unlikely. What we really need now, is a government that is serious about progressive policies for the many – and that means actually ending austerity.

Photo credit from previous page: Flickr / kas d

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When we change our perspective on of the nature, size and ownership of the UK public debt we can see that it poses no threat to economic stability. Its size is modest and its burden on taxpayers is minor. If we treat the national debt as an asset, we can use it as a means to end austerity. 

Give the public debt some respect!

The claim that our public debt is excessive has been used as a major justification for austerity – cuts in spending. That massive debt, we are told, 1) must be repaid, 2) threatens our country with bankruptcy, and 3) is a burden on future generations. All these are wrong. Let me explain why.

When our government borrows it does so by selling a promise to pay, called a bond. For example, a household buys a £100 bond and our government promises to buy it back at the same amount in ten years with interest (at present 2.5% or £2.50 every year). A pound note also is a promise to pay (look at the small print near the Queen’s picture). A pound note is a bond paying zero interest.

Britain’s national currency is managed by our central bank, the Bank of England, owned by the citizens of the United Kingdom (that is, our elected government). As a result, the British government can never default on its bonds. Our government can replace maturing public bonds with new ones. Should private buyers, households and businesses, refuse to purchase the new bonds at the interest rate set by the British government, our government can sell them to the Bank of England. The option to sell to the Bank of England provides a fool-proof mechanism to prevent excessively high bond rates.

Whether the economy is strong or weak, the British government can never default on its debt. The debt is nothing more than pieces of paper that the government promises to buy back on a specific date. These pieces of paper can be bought back with new pieces of paper (new bonds) with later buy-back dates. If the private owners of the debt paper do not want the new bonds (new debt paper), our government can sell those new bonds to the Bank of England for cash and use the cash to pay the bond holders.

This buying and selling of public bonds is not the much-misunderstood Quantitative Easing (QE). QE was a one-way street – our government bought private corporate assets from companies threatened with bankruptcy. In a phrase, QE was “bail-outs” of reckless private sector financial behaviour.

The size of the public debt is not a problem

Figure 1 shows that outstanding public bonds (called “gilts” from the days when the edges of the bond had gold gilt) amounted to £1.9 trillion or 96% of GDP at the end of 2016, which was the UK gross debt.

When we look closer at the national debt, its nature changes. Public sector liquid assets (for example, cash deposits held by the central and local governments and financial assets such as stocks and bonds) reduced this to £1.7 trillion or 86% of GDP. When we subtract the government’s assets from its debt, we have the net debt, the measure of public indebtedness used by the Treasury. The gross/net distinction also applies to households. A household with a £300,000 mortgage and £50,000 in the bank has a net debt of £250,000.

Another 27% of the net debt amount (£466 billion) was held by public sector institutions, the vast majority by the Bank of England. This portion of the national debt is what the public sector owes itself. Subtracting this gives the effective debt, the debt that the UK government owes to others. In 2016, the effective debt was 62% of GDP.

 The public debt is not a burden

Who the government owes is an important factor determining whether the public debt is a burden. In the UK, the public sector itself owns 25% of the £1.9 trillion UK gross public debt (see Figure 2). The government pays the interest on this portion of the debt to itself. Thus, one-quarter of the debt and the interest paid on it are not a burden.

Pension funds hold a large portion of the 75% of gilts not owned by the government. The interest paid on debt held by pension funds is income to retired households. As such, this portion of the national debt is a source of household income, a benefit not a burden to citizens.

Debt held by the government itself and pension funds are long term holdings, rarely bought and sold. They do not represent a speculation danger that might put upward pressure on bond rates. When these are subtracted the remaining “gilts” constitute the market-active public debt, £808 billion, or 45% of GDP.

At the end of 2016, private corporate and foreign gilts holders owned 41% of the UK’s national debt. Only the £524 billion of gilts held by foreign creditors could be considered a “burden” in that the associated interest payments are from UK taxpayers to non-UK creditors. For fiscal year 2015/16 interest payments to foreign creditors were approximately £12 billion, or 0.6% of GDP – quite a small burden.

This analysis of the nature, size and ownership of the UK public debt shows that it poses no threat to economic stability. Its size is modest and its burden on taxpayers is minor. From this come the following policies to end austerity:

1. Sound management of the national debt means more public borrowing for investment and current expenditure, which is justified by the modest size of the effective debt.
2. The minor burden represented by foreign interest payments could be reduced by measures that would limit bond sales to domestic buyers (already applied in several other countries).
3. Implementing a fair and progressive taxation system will ensure interest payments to domestic bond holders don’t have negative redistribution effects.
4. Any speculative pressure on government bond interest rates can be prevented by selling bonds to the Bank of England.

This article is part of our 100 Policies to End Austerity series, and is cross-posted from openDemocracy.

Photo credit from previous page: Flickr / Captain Roger Fenton.

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As a publicly capitalised institution, the national investment bank would be an important element of Britain’s financial system. It would lend to – and invest in – private companies and public bodies, while co-financing with private banks and investors. Small and medium-sized businesses will be major beneficiaries, especially those more likely to innovate and grow. And it will expand finance for key sectors such as renewable energy, which are presently insufficiently funded by private finance.

After the 2007-08 financial crisis, the UK financial sector significantly reduced its support in financing private investment. This was due in large part to austerity measures imposed by the Conservative government, which discouraged private investment as a result of reduced growth. By cutting public investment, so often complementary to private investment, it further discouraged the latter.

The UK has an incredibly low share of total investment relative to its GDP. At only 16.7%, it was the lowest of all G7 countries in 2016. It was also the lowest of 34 mainly OECD countries in the period 1997 to 2017.

Low levels of investment in the UK are a major cause of low increases of productivity, contributing to the weaker growth of wages and living standards for the majority of people.

The purpose of the national investment bank would be to increase lending and investing in sectors that are key for the country’s structural transformation. As well as important infrastructure such as transport and health services, it could help lay the groundwork for a greener economy. It would also provide lending to underfunded creditworthy SMEs which, given that they make-up the majority of UK businesses, are so central for generating jobs.

Launching a national investment bank

In order to achieve a significant loan volume, the national investment bank would require an estimated equity of around £40 billion, which would mainly comprise capital paid in by the government. But it may well see a return on this if the bank profits from its transactions after lending commences. These profits could then be reinvested into the bank as equity, enabling it to continue expanding its lending volume, without the need for further injections of capital from the government.

This is what happens with institutions such as KfW – the German government’s development bank – and the European Investment Bank. An ideal way forward, to achieve high levels of loans soon, is to put significant capital upfront – for example £10 billion a year for four years.

There is a very strong case to be made that, in the UK, future loans made by the national investment bank should not be counted as part of the government deficit target, nor towards public debt. Again, this would be similar to the practice already followed for KfW in Germany. A clear economic rationale is the fact that these loans would be channelled to growth-promoting investment. So they may reduce, and certainly not increase, future debt burdens when debt is measured as a percentage of GDP.

It is important to stress that though the UK national investment bank would be publicly owned, (as the government would provide the initial paid-in capital), it could fund its operations on the national and international private capital markets. Furthermore, it could co-finance many of its operations with private lenders and investors.

Serving the real economy

The UK national investment bank would operate in close collaboration, rather than competition, with the private financial and non-financial business sector. Though publicly owned, it could fund its operations through private capital markets and co-finance operations with private lenders and investors. Thus, with relatively scarce public resources committed as paid-in capital, it could catalyse lending and investment on a far larger scale than its public contribution. This is especially valuable for a government committed to major structural transformation of the UK economy. Making it more dynamic, greener and fairer requires significant investment.

Public development banks are more effective at serving the real economy, as that is their main aim – rather than that of solely pursuing short-term profits. National development banks have been an important feature of financial sectors of most developed and emerging economies – especially the most successful and dynamic ones, including Germany, China, India, South Korea, India and Japan. The UK has been an exception in not having such a public development bank, despite its evident need.

The establishment of a national investment bank will help end austerity because it will create the next generation of technology, infrastructure and services that will lead to a fairer and greener economy in the medium to long term. In the short term, it will provide a much-needed boost to investment, leading to higher aggregate demand, and overall increased production.

This article is part of our 100 Policies to End Austerity series, and is cross-posted from The Conversation.

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What makes households a central pillar of debt-led growth is the amount of money they send each month into global financial markets, either as payments on debts like mortgages and consumer loans, or as income claims on debt securities.

From this constellation of forces, debt has become a cure-all for governments seeking to expand employment and investment; financial institutions seeking capital gains, and the wealthiest segment of households with significant financial assets. But, at the same time, debt has become a poison pill for an ever-growing number of households by destroying their financial security.

As incomes have stagnated (and, for some, even declined in real terms over the last decade), the demand for debt to plug the gap has grown and the burden of repayment has become more onerous.

Since the 2008 financial crisis, unconventional monetary policy and austerity have prevented any systemic reforms of the UK economy to end its chronic dependence on debt. Instead, debt dependence became a strategic silence.

Everyone knows household debt is a major cause of entrenched economic malaise but no one in a position of power is willing to do anything about it. In a cruel political sleight of hand, household debt is reduced to a personal problem or failing, ignoring the stark reality that the UK economy is as dependent on household debt as individuals are.

Cancelling household debt

A comprehensive package of debt cancellation measures available to households will target harmful debt to provide relief to those that are struggling. By extension, this will create uplift in the economy and society, as those who were once struggling to pay old debts can spend and contribute to the real economy instead.

The package will involve rewriting existing ways that debt is written down and written off. It would start by creating a household debt cancellation fund, with the same amount that was offered to bail out the banks ten years ago as its capital. That’s roughly, £500 billion cash and £2 trillion in guarantees in the UK.

My proposal is to use the £2 trillion in credit guarantees to fund a long-term refinancing operation for consumer and mortgage debt loans that have started since 2009. The £500 billion in cash in the household debt cancellation fund will be used to pool together old (originating before 2007) and onerous (those that cause harm) debts for a negotiated settlement with lenders.

This method targets specific types of debt, rather than specific populations of debtors, to amplify the positive impact of debt cancellation across the economy and society.

Everyday experiences

Understanding the effects of debt and locating the harm it can generate begins with the everyday life experiences of people who have personal experience of debt dependence. They cannot buy a home without taking on more debt than they can afford. They can only get a university degree by taking on more debt than they will earn when they graduate. They borrow to get through a family member’s illness or period of unemployment. Credit cards get them to the end of each month – or they live in their overdraft.

For many, debt is a necessity, not an option. Others are not adversely affected by debt; they tend to be older, live near a major city, or they have wealthy parents. For the baby boomer generation, and even most of Generation X, everyday economic life is very different. These people bought a house with a reasonable amount of debt and, in return, have seen its value triple (or more) over their lifetimes; getting a university degree was affordable because they didn’t need loans, and when they graduated, jobs were plentiful and paid well.

Many recognise that times have changed. Debt was once an option, a choice, something that could be managed with buoyant incomes and would deliver wealth gains. Today, debt is a necessity and the prospect of ever being free from it, for many people, is very unlikely.

Cancelling a significant portion of the enormous debt overhang will end austerity on the macroeconomic level by providing households with much needed debt relief. This is the most direct way of ending the financial crisis that continues to grip households, one which means they must simultaneously continue to pay their debts and absorb both the shock of economic downturn and the costs of austerity.

Let’s not forget that the lenders and the entire financial sector received hefty bailouts and direct financing from the central bank to protect them from the consequences of the financial crisis they caused. I contend that abolishing household debt would be more effective than current monetary policy. It would also better enable an end to the UK economy’s long-term dependence on debt.

This article is part of our 100 Policies to End Austerity series, and is cross-posted from The Conversation.

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