Public debt and budget deficits seem to have suddenly become a major political problem in the aftermath of the Global Financial Crisis (GFC). Yet many advanced economies have long sustained high levels of public debt and persistently run budget deficits. What has changed?
In many parts of the world, the 1970s, 1980s and 1990s were punctuated by various crises and tranches of neoliberal reforms. These were supposedly designed to address the causes of the previous crisis and prevent further crises. Yet even by the third time this cycle repeated, the neoliberal project was not abandoned or even seriously questioned. Rather it continued to be furthered. With many major centre-left political parties acquiescing to, embracing or even championing this emerging orthodoxy, there has been minimal debate about alternative courses of action.
By the 2000s, neoliberals were vindicated as many countries experienced high and apparently endless economic growth. Finally, the previous reforms were having an effect. However, we have not witnessed the effective operation and triumph of the market and all its promised benefits. Rather one of the significant revelations has been the diminished ability of governments and public institutions to deal with the biggest financial crisis in decades. Againâalbeit with a brief flirtation with Keynesian-style responses in some countriesâthe familiar narrative of the necessity of reform is being reiterated, but this time with the dramatic device of unsustainable debt and deficits.
At what level is government debt considered âunsustainableâ? Is it ever acceptable for governments to run budget deficits, and if so, how big and for how long? Economists may have âanswersâ to these questions, but they are actually political problems with many possible ideological responses. Hall best articulates this idea:
Hall was reflecting on the movement from Keynesianism to monetarism in Britain, beginning in the mid- to late 1970s. Similar shifts occurred in many other countries and accelerated during the 1980s. While inflation levels were the initial focus of monetarists, government borrowing was also implicated, and debt and deficit increasingly became the subject of targets and rules, particularly during the 1990s. More recently, debt levels have become a major political, and, by default, public concern, even though the private sector is largely responsible for the crisis.After all, the economy is simply a set of human relationships and material flows that cannot be perceived by the naked eye. It must be interpreted or modeled to be understood, and from divergent models flow different prescriptions for policy. (1992, p. 92)
This is not to diminish the implications for public finances and broader society, beyond the expedient âtoo big to failâ justification for bailing out banks. In Capital in the Twenty-First Century, Thomas Piketty presents a detailed historical analysis to show how debt is used to redistribute wealth from the least to the most wealthy. He argues that debt has become a significant factor since the 1970s because economic growth has slowed and interest repayments comprise large proportions of budgets. In some countries, it can be larger than spending in other areas, such as higher education.
In this chapter, I examine the ideological underpinnings of the macroeconomic and budgetary policy changes after the economic instability of the 1970s. I show that while all governments adopted a crisis narrative and relinquished economic power and control, centre-left parties generally demonstrated a stronger commitment to financial sustainability. Yet centre-right parties often mastered the political rhetoric and have been more effective in establishing enduring cults of economic supremacy. While the world knows of Thatcherism and Reaganomics, reforms emanating for non-conservative parties have received more generic labels, such as the New Zealand model or the Third Way. I conclude the chapter by evaluating the fiscal performance of the Anglophone countries, and briefly, some selected European countries, over the past few decades. This provides further evidence of a politically confected debt crisis and exposing the mixed records of self-proclaimed fiscal conservatives.
Post-Keynesianism
British economist John Maynard Keynes theorised that decreased demand for goods and services caused recessions and depressions, and that governments could bolster demand through increased spending, such as public works. The end of the post-war economic boom in the 1970s, the 1973 Oil Crisis and corresponding weaker economic conditions caused many countries to rethink Keynesian economic policies. One of Keynesâ most cited intellectual adversaries, Milton Friedman, opined that:
There were four broad neoliberal responses, which are by no means mutually exclusive or an exhaustive list: Anglo-American monetarism, personified by Thatcherism and Reaganomics (followed by the Third Way); radical Antipodean New Public Management (NPM), commonly known as the New Zealand model; Nordic liberalisation and crisis management; and dogged German ordoliberalism, characterised by discipline and rules.Only a crisisâactual or perceivedâproduced real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable. (1962, p. xiv)
Thatcherism, Reaganomics and Beyond
During the 1970s, economic growth in the UK was anaemic compared to other European countries, while inflation and unemployment soaredâa dilemma that became known as âstagflationâ and exposed the limitations of Keynesianism. The monetarist turn actually began under Labour in 1976, with Prime Minister James Callaghan frankly announcing at his party conference that: âYou cannot spend your way out of recessionâ (cited in Evans 2013, p. 13). The Labour government proposed cuts in government spending with the aim of balancing the budget, and encouraged wage restraint.
At its core, early Thatcherism was monetarism, with the money supply restricted and government borrowing reduced to combat inflation. Evans remarks that: âMonetarism, as implemented, appeared the ultimate triumph of ideology over common senseâ (2013, p. 22). The deflationary effect of the 1980 budget saw manufacturing production and gross national product fall, while unemployment rose more sharply than in any other year since 1930 (Evans 2013). Yet government spending did not fall due to demand for unemployment benefits. However, rampant inflation of 20 per cent did come under control to less than 5 per cent by 1983â84 (Fry 2008). Economic growth also picked up and continued for the next eight years.
Once inflation was controlled, Thatcherism become associated with NPM, beginning with the Financial Management Initiative in 1982. Public managers were delegated with more budget authority, and responsible for making the best use of resources to produce assessable outputs and performance to meet clear objectives (Fry 2008). Throughout the 1980s, more private sector techniques were adopted including competitive tendering and contracting out services.
The Thatcher governmentâs momentous achievement in controlling inflation also needs to be put in the context of falling inflation throughout the world in the early 1980s, although the extent of the fall in the UK was still remarkable (Needham 2014). Yet tax revenue as a proportion of gross domestic product (GDP) increased from 38.5 per cent in 1979 to 40.75 per cent in 1990, along with increased income inequality (Evans 2013, pp. 32â33). At the beginning and end of the Thatcher era, inflation, unemployment and interest rates were almost exactly the same (Needham 2014, p. 167).
âReaganomicsâ was encapsulated in campaign material, principally the Economic Policy Memorandum Number 1, and in his early congressional statement, the âProgram for Economic Recoveryâ (Morgan 2008). There was a commitment to balance the budget by the end of his first presidential term. Reagan lowered taxes, but the benefits were skewed towards higher-income earners, with the overall package of tax cuts the largest in history. The belief was that lower tax rates would increase tax revenue as the foregone tax would be invested and the economy would grow. âSupply side economicsâ provided the Republicans with an antidote to Keynesian stagflation and a more politically palatable alternative to austerity and balanced budgets (Rossinow 2015). Critics described it as âtrickle-downâ economics with a nicer name.
Domestic spending was restrained, while inflation targeting was prioritised over reducing unemployment in the short-term. The Federal Reserve controlled the money supply, which precipitated a recession, and also increased deficits. Meanwhile, spending on defence increased.
The Democrats focused on deficit reduction and used legislative tactics to highlight Reaganâs profligacy, while Republican Senators Phil Gramm and Warren Rudman gained support for sequestration measures if the deficits continued unabated (Rossinow 2015). Other congressional manoeuvres resulted in increases in taxes other than income.
Sandbrook writes that:
Further evidence of this can be seen in Australia and New Zealand, where the major centre-left parties moved away from their ideological comfort zone after electoral failure in the 1970s.although the electoral successes of Reagan and Thatcher are often discussed in the context of the supposedly inevitable rise of the New Right, the decisive political phenomenon of the period was not so much the rise of the right but the collapse of the center-left, which had staked all its chips on Keynesian management and abandoned itself to fratricidal bloodletting when the gamble failed to pay off (2008, p. 182).
By the end of the 1980s, major international institutions such as the International Monetary Fund (IMF) and the World Bank were promoting the same policy prescriptions throughout the world as the USA Treasury Department. Economist John Williamson of the Institute for International Economics identified a set of ten policies comprising this âWashington Consensusâ: limiting budget deficits; shifting spending to areas with high economic returns; broadening the tax base but cutting marginal tax rates; using the market to determine interest rates; maintaining exchange rates to encourage growth in non-traditional exports; liberalising trade; encouraging foreign direct investment; privatising state enterprises; deregulating to foster more market competition; and ensuring the integrity of intellectual property rights.
Conservatives continued to govern in both the UK and the US into the 1990s, but the leadership successors to Thatcher and Reagan were faced with recession along with the usual challenges for parties ruling for long periods. British Prime Minister John Major also had to deal with currency pressures, and eventually withdrew the pound sterling from the European Exchange Rate Mechanism (ERM) on âBlack Wednesdayâ in 1992, while President George H.W. Bush had to try and work with a Democratic-controlled congress. There were attempts at addressing the budget deficit, with Bush breaking a campaign promise and raising taxes for higher-income earners to secure Democratic support at the expense of a Republican split (Morgan 2008). Yet neither Major nor Bush presided over budget surpluses, and debt grew, particularly in the US due to the costs of the Gulf War.
Many saw Democratic President Bill Clinton as the successor to Reaganâs economic policiesâReagonomics Mark II or Clintonomicsâalthough settings were reversed with monetary easing and fiscal tightness (Morgan 2008). Clintonâs campaign strategist James Carville famously emphasised the importance of addressing the recession, encapsulated in the more memorable phrase âItâs the economy, stupidâ. Clinton pursued balanced, and then surplus budgets, with cuts to government spending in all areas, deregulated financial markets and the championing of free trade, most notably the North American Free Trade Agreement (Pollin 2001). Unemployment and inflation came down and the stock market boomed. Pollin characterises many of Clintonâs policies as centre-right, while Clinton himself fashioned a Third Way between âthose who said government was the enemy and those who said government was the solutionâ, although government âmust be smaller, must be less bureaucratic, must be fiscally disciplined, and focused on being a catalyst for new ideasâ (cited in Pollin 2001, p. 60).
Aside from finally achieving budget surplusesânot an inconsiderable feat in itselfâClintonâs economic record was superior to that of Reagan and Bush. Average economic growth, productivity growth, consumption, investment and stock price growth were higher, while average unemployment, inflation and government expenditure were lower. Critics contend that economic conditions were changing anyway, and that the Republican-controlled congress shared many of the same ideas. Yet (coincidentally) Clintonâs successor Republican President George W. Bush faced a recession in his first year and enacted tax cuts favouring higher-income earners, and increased national security and military spending after 9/11 to pay for several wars, creating a series of budget deficits and increased debt. Morgan (2008) notes that the fiscal deterioration under Bush was almost comparable to the Depression era, and that Bush was an even more ardent supply-sider than Reagan, even though growth never paid for the tax cuts.
The end of conservative leadership came later in the UK, but the election of âNewâ Labour Prime Minister Tony Blair in 1997 in many respects announced the arrival of the Third Way. Blair claimed that New Labour was âneither old left nor new right ⊠[rather] a new way ahead, that leads from the centre but is profoundly radical in the change it promisesâ (cited in Arestis and Sawyer 2001a, p. 1). In practice, this meant a continuation of inflation targeting monetary policy, but with an independent central bank, lower taxes on company profits to encourage investment, less focus on industry policy (other than competition policy) and more investment in human capital. As Labour reminded voters after their election, the Conservatives had frequently promised balanced budgets but never made adequate progress, and despite five years of growth, deficits remained and debt as a proportion of GDP had almost doubled since 1990 (HC Deb 11 June 1997, c. 1143). In 1994, the Conservatives projected a balanced budget in 1998â99; by the following year, it was pushed forward to 1999â2000, and again in 1996 to 2000â01.
Arestis and Sawyer (2001a, p. 2) cite various terms to describe this policy mix, such as ânew monetarismâ or âinterventionist neo-classical economics of a new Keynesian varietyâ. Blair and then-German Chancellor Gerhard Schröder, leader of the Social Democrats, articulated their vision in a joint manifesto, Europe: The Third Way/Die Neue Mitte. They proclaimed that:
Public expenditure as a proportion of national income has more or less reached the limits of acceptability. Constraints on âtax and spendâ force radical modernisation of the public sector and reform of public services to achieve better value for money. The public sector must actually serve the citizen: we do not hesitate to promote the concepts of efficiency, competition and high performance.Our aim is to modernise the welfare state, not dismantle it: to embark on new ways of expressing solidarity and responsibility to others without basing the motivation for economic activity on pure undiluted self-interest.We do not rule out government deficitsâduring a cyclical downturn it makes sense to let the automatic stabilisers work. And borrowing to finance higher government investment, in strict accordance with the Golden Rule, can play a key role in strengthening the supply side of the economy.Social democrats also must not tolerate excessive levels of public sector debt. Increased indebtedness represents an unfair burden on future generations. It could have unwelco...