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FIVE
Alternatives to austerity
Dexter Whitfield and John Spoehr
Introduction
This chapter examines the policies and strategies that could comprise an alternative to current austerity policies being pursued in a number of nation states. It outlines the need for a more coherent and robust approach to public investment-led growth to achieve a sustainable recovery that incorporates preventative reforms essential to minimise the occurrence and impact of future financial crises. At the core of this, it is argued, is the need for increased industrial and infrastructure investment, the reform of financial markets, the reconstruction of public services, a redistribution of national income and more stringent controls on the corporate sector. The discussion of these elements of economic management suggests that these policies, rather than austerity, could underpin more effective and more equitable social policies in future.
Most G20 governments responded to the financial crisis with fiscal stimulus initiatives. For example, between 2008 and 2010, 15 governments planned to increase infrastructure investment, mainly in transportation networks (IMF, 2009). The expectation was that such investment would increase economic output and maximise job creation with the package of policies estimated to increase gross domestic product (GDP) by 0.4% to 1.2% in 2009 (Whitfield, 2010). For example, the American Recovery and Reinvestment Act 2009 (ARRA) launched a US$782 billion programme with 19% allocated to infrastructure, 35% for unemployment insurance, 24% for tax cuts and 22% for state and local government education and healthcare. However, the programme failed to generate a strong recovery because it relied too heavily on tax cuts as a means of bolstering private spending; household wealth declined dramatically during the recession which in turn weakened the willingness of households to increase spending. In addition to this, credit markets were locked up, especially for smaller businesses (Pollin, 2012).
This strategic response to the financial crisis was strongly contested by the German government and European Central Bank, which lobbied instead for fiscal consolidation. By the time of the G20 Toronto meeting in 2010 they had the support of the UK and Canada, leaving the US isolated (Blyth, 2013). The G20 agreed a new āfiscal consolidationā strategy for advanced economies (G20, 2010). The resulting austerity measures ranged from deep public spending cuts, privatisation of state assets, the bailout of failed banks and industrial companies, income and sales tax increases, reductions in and/or more restricted access to welfare benefits, to public sector wage cuts and increased pension contributions.
As also discussed in Chapters One and Three, even countries that had initially resisted austerity up until 2010 later embarked on programmes of deep cuts. Australia, for example, imposed its own form of austerity following the election of a new Liberal government in 2014. It had earlier avoided recession through an A$59.6 billion economic stimulus programme between 2008 and 2011, two-thirds allocated to job generation and infrastructure investment (Australian Government, 2009; Barratt, 2011; Leigh, 2012). After five years of austerity it is important to assess its effect on economic output, public debt, public expenditure and employment and the need for an alternative strategy.
The effectiveness of austerity policies
If the objective of austerity is to restore growth and reduce public debt it appears to be failing. Official statistics for 2013ā14 demonstrate that austerity policies failed to stop the rise in public debt in euro area bailout countries ā up 25% and 35% in Ireland and Spain respectively between 2011 and 2013. The failure to restore economies is clear from some of the other key indicators: the investment rate of non-financial corporations in Europe has plummeted; in the Eurozone, bank lending to households and non-financial corporations fell sharply from 23% to 19.7% between 2008 and 2013; GDP and business startup rates declined; mass unemployment soared in Europe ā youth unemployment reached 59.2% in Greece and 56.5% in Spain; deep public spending cuts led to reduced services, extensive job losses and wage cuts; house prices fell sharply in many countries between 2009 and 2013, particularly in Ireland (53%) and Spain (40%); tax increases and welfare state benefit cuts increased poverty and inequalities and further reduced demand in the economy (see Whitfield, 2014a, for further discussion).
Economic output is forecast by Ball (2014) to decline by an average of 8.4% between 2007 and 2015 in 23 developed countries as a consequence of the financial crisis. The loss of potential output has ranged from less than 1% in Switzerland and 2% in Australia to over 30% in Greece, Ireland and Hungary. The potential loss of output in Germany, France, the UK and the US is forecast to be 3.4%, 8.6%, 12.4% and 5.3% respectively. The loss of output is arguably a consequence of the combined effect of the financial crisis, austerity policies and adherence to neoliberal ideology in the public policymaking process.
Nevertheless austerity continues. A further 10.6% real-terms cut (or Ā£37.6 billion) in UK public spending is planned between 2015ā16 and 2018ā19, which will impose further severe constraints on public service budgets (see also Chapter One). This is in addition to the Ā£8.7 billion cut that has already been agreed for 2015ā16 (Institute for Fiscal Studies, 2014). The Conservative-led coalition forecast a small overall surplus in 2018ā19 with only a small decrease in public sector net debt from 76.3% of GDP to 74.2%. The main opposition Labour Party is also committed to a balanced or small budget surplus in the next parliament, although target dates are fluid. UK local authority spending will be cut by about 40% between 2010 and 2015ā16 (SIGOMA, 2013). The planned additional cuts, coming on top of four years of cuts, will be harder to implement and will have significant consequences for services and jobs.
Meanwhile, the International Monetary Fund (IMF) has called for growth- and job-friendly fiscal policies, including addressing tax evasion and more efficient public spending; structural reforms to raise productivity, competitiveness and employment; and increasing infrastructure investment (IMF, 2014b). It called for bolder policies to address the demand and supply side of economies to inject a ānew momentumā because the āworld economy risks getting stuck with a mediocre level of growth ā low growth for a long timeā (IMF, 2014b, p 2).
After five years of austerity policies governments have limited options. Global growth rates for 2014 have been revised downwards by the IMF, which has warned of a ānew mediocreā era. Advanced economies face the risk of secular stagnation (a persistent shortfall of investment relative to saving, even with near-zero interest rates) and low potential growth despite continued very low interest rates and increased risk appetite in financial markets. The euro area risks protracted low inflation or outright deflation (IMF, 2014a). Countries in the Eurozone could continue current policies in anticipation that ārecoveryā and economic growth will accelerate, but since austerity policies have not achieved many of their original objectives this strategy has limited credibility.
A second option would see the adoption of deeper public expenditure cuts, rationalisation of the role of the state by more extensive privatisation in a debt reduction strategy, together with individual and corporate tax cuts. However, this is a high risk strategy that is unlikely to increase overall demand in the economy, would have significant social and economic impacts, including increasing inequalities, and almost certainly intensify political opposition to austerity policies.
The third option is a Keynesian investment strategy significantly larger than the 2009ā11 short-term stimulus policies. This kind of strategy would seek to increase industrial and infrastructure investment, accelerate financial market reform, reconstruct public services, redistribute national income together with more stringent controls on the corporate sector to reduce tax evasion and encourage the release of corporate cash hoards for sustainable investment. Employing proposals put forward by a range of policy actors, the rest of this chapter discusses the key policies this alternative strategy should address.
Industrial investment, innovation and public spending
This section outlines a number of examples of policy proposals linked to industrial investment and representing alternative economic strategies to simple austerity. Public investment in industry can boost innovation, increase employment and produce wider fiscal benefits. For example, the European Trade Union Confederationās New Path for Europe plan for investment, sustainable growth and quality jobs proposed to invest an additional 2% of European Union GDP per year over a 10-year period (European Trade Union Confederation, 2013). In the short term, the investment policies were forecast to increase employment by 1.7 million in 2015 and by nearly 6.0 million in 2019. It forecast that output in the EU-27 countries would increase to nearly 5% per annum after five years. Over a 10-year period the proposals set out in the plan would increase Europeās GDP by ā¬312 billion and create between 7.2 and 8.8 million full-time jobs. Tax revenue would be increased by ā¬83 billion, social security contributions by ā¬45 billion and a ā¬16 billion saving in unemployment benefit would be made. Measures included in the plan would also save ā¬300 billion in fossil fuel imports by cutting carbon dioxide emissions and decoupling Europeās energy supply from fuel imports (European Trade Union Confederation, 2013).
Clean energy economy initiatives are significant in the development of alternatives to austerity. Government investment and regulatory frameworks in clean energy stimulates economic growth with environmental benefits. It creates more jobs, dollar for dollar, than equivalent spending on road construction, fossil fuel energy projects or tax cuts (United Nations Environment Programme Sustainable Energy Alliance, 2009).
Policies that lend themselves to this alternative approach to restoring economies already exist in Europe. In 2013, the French government launched a reindustrialisation strategy to invest ā¬3.7 billion in new technologies in 34 sectors including robotics, renewable energy, medical biotechnologies and electrical transport. Each sector or project has a state appointed āindustrial officerā or project leader, mainly chief executives from major French companies. The strategy aims to create 475,000 jobs over 10 years (Invest in France Agency, 2013; Reuters, 2013). A year earlier it had established a new Bank of Public Investment with ā¬20 billion capital to provide financial support for small and medium-sized enterprises (Financial Times, 2012). These policies are a step forward, but they appear insufficient to improve Franceās fragile economy and have not prevented further public expenditure cuts and liberalisation measures.
The Marshall Plan for Europe by the Confederation of German Trade Unions also planned to increase āinvestments in sustainable power generation, in reducing energy consumption, in sustainable industries and services, in training and education, in research and development, in mode...
