Austerity & Household Prioritisations
On the unintended consequences of misguided public budgeting
[insert video]
As was outlined elsewhere reflecting on how sovereign indebtedness and public wealth are part of the same coin or puzzle, the focus shall now shift to public budgeting, concretely on the pursuit of austerity policies involving the apparent need of ‘prioritising’ within the public household budget. It will be shown that such public budgeting may be misguided and is likely to lead to unintended consequences.
The Doxa of Austerity:
Within governments, heads or secretaries of the treasury or ministers of finance occupy a powerful position compared to the rest of the executive branch. They determine the financial leeway and thus the overall scope of government policies over the legislative term and beyond. The same holds true for political discourse since the question of affordability is usually a constant companion in a democracy and the deliberative process.
Austerity is founded on the imagination that states have to balance out their budgets at all costs since it is assumed that state revenues from taxes shall be the sole determinant factor for state spending. Such a doxa (as ‘to denote a society's taken-for-granted, unquestioned truths’) can be either self-imposed or externally imposed.
Def.: Austerity
“Austerity is a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices, and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the state’s budget, debts, and deficits. Doing so, its advocates believe, will inspire ‘business confidence’ since the government will neither be ‘crowding-out’ the market for investment by sucking up all the available capital through the issuance of debt, nor adding to the nation’s already ‘too big’ debt.” [1]
According to this reading ‘budget deficits (the increase in new debt accrued)’ [2] are best to be avoided or hold down below a certain threshold in order to ring-fence the financial leeway of governments and parliaments from disposable public expenses of the past (and the accrued interest payments rising along with public indebtedness). Balanced public budgeting is in this understanding being charged with defending ‘fiscal democracy’. [3] This means that those advocating for austerity in the name of ‘fiscal prudency and balanced budgeting’ like to safeguard the sphere of influence for public investment and other constitutive state expenses. [4] As such, those objectives are in fact quite desirable. But it is critical to understand how to achieve more financial leeway and increase the sphere of influence for political projects.
Austerity, balanced state budgets, and — more extreme — fiscal surpluses have consequences. States are not like businesses that take risks to operate profitably. And states are not like private households that need to make ends meet with their earnings. Saving affects state budgets differently compared with those operating within the private sector and the wider economy as a whole. Saving extracts money from the economy. By contrast, deficit spending via the emission of government bonds is a valid means of state financing that even steers economic activity.
Unintended consequences:
There have been several periods in history in which austerity has been found to have led to unintended consequences. A striking example that is often overlooked is the self-imposed period of austerity (conducted with emergency decrees) after the Great Depression (post 1929) in the German Weimar Republic, especially in the cabinets of Heinrich Brüning (March 1930 through to June 1932). A study has shown
“that Brüning’s belt-tightening aggravated the Great Depression. Without austerity, GDP would have been higher by 4.5 percent and unemployment down by 3.3 million people in 1932, a year with two crucial elections that eventually paved the way for Hitler.” [5]
The austerity measures (cutting of salaries in the public service, stoppage of public construction projects, etc.) intensified the deflation and with it poisened public discourse. The aspired goal of a sustained consolidation of public budgets has not been achieved at all. This can be explained as follows:
“Austerity policies suffer from the same statistical and distributional delusion because the effects of austerity are felt differently across the income distribution. Those at the bottom of the income distribution lose more than those at the top for the simple reason that those at the top rely far less on government-produced services and can afford to lose more because they have more wealth to start with.” [6]
Similarly, it has been found, that political debate after financial crises tends to become highly polarised, involving increased partisan conflict and policy uncertainty that in turn attract voters to ‘the political rhetoric of the extreme right’. [7] This is not to say that attraction to the far right is generally caused by austerity policies alone. But it points to a direction in which the political climate may be much less accommodative of a constructive debating culture.
For instance, the premiership of David Cameron (2010-2016) in the United Kingdom has induced in response to the Great Recession (post-2008) a programme of austerity unseen in any advanced economy before. The fiscal contraction meant that:
“aggregate real government spending on welfare and social protection decreased by around 16 percent per capita. At the district level, the level at which most administration of welfare spending takes place, welfare spending per person fell by 23.4 percent in real terms between 2010 and 2015.” [8]
This is why understanding austerity policies are also key to understanding Brexit, i.e. the United Kingdom's vote to leave the European Union in 2016:
“While exposure to austerity-induced welfare reforms is a key activating factor contributing to the build-up of Leave sentiment, and to support for populist parties, the underlying economic causes of the growing reliance and exposure of (especially low-skilled) individuals on the welfare state are of key relevance to the broader public and political debate.” [9]
This tragic example exposed however the rationale behind austerity policies as a fallacy and as frankly misguided: ‘in the middle of a recession, where interest rates could not be cut any further, we should worry about government debt. "The government is like a household that has maxed out its credit card" [...] in reality the markets would have loved to buy more UK government debt, because interest rates were falling.’ [10]
The rhetoric of austerity frames also public debates in an ideological manner. The phrases such as ‘maxing out one's credit card’, ‘the thrift of a Swabian housewife’, ‘the practical constraint’ of ‘too big to fail’ or of having to cut social spending, of ‘prioritising’ one household item over another, seem all plausible at first, but once considering the interdependency between the public, private and foreign economic sectors, taking these framings without further scrutiny, leave the state and the public sector in a rather shady terrain. First associations to these seem common sense, but they are clearly not. They suffocate political discourse within a financial corset:
“Political parties and groupings must instead fulfil the requirement to make the values and goals from which their plans are derived recognisable to their fellow citizens, to present their plans as the consequence of what they see as the right ideology. Only in this way can everyone understand their actions and support the policies that correspond to their world view. [...] A politics that treats its fellow citizens like customers robs itself and the citizens of the chance of a lively democratic debate. [...] Because political communication thus erodes its own ideology in the long term, through its communicative and cognitive neglect.” [11]
Another unintended consequence from pursuing a politics of austerity is that it comes at great cost, socially as well as physically: not investing in the present and future due to keeping state finances supposedly ‘healthy’ and a country's economy ‘competitive’ at the international level means that in due course, a society and the land it inhabits lives off its substance (generated in the past) if its government pursues policies of austerity insinuiating that debt is inherently ‘bad’. The main question is whether state spending is consumptive, i.e. not generating any economic activity beyond merely being kept afloat (via subsidies, rent payments, etc.), or rather is investing in public infrastracture (such as nurseries, schools, libraries, universities, public health system, etc.) and the physical infrastructure (such as streets, railroads, public transport, power lines, housing construction, etc.). Austerity is a threat to both.
Sources:
[1] Blyth, M. (2013) Austerity: The History of a Dangerous Idea, New York, NY: Oxford University Press, p. 15.
[2] Ibid., p. 26.
[3] Streeck, W. & Mertens, D. (2010) ‘An Index of Fiscal Democracy’, in MPIfG Working Paper 10/3, Cologne: Max-Planck Institut für Gesellschaftsforschung, [online] available at: <https://www.econstor.eu/bitstream/10419/41704/1/mpifg-wp10-3.pdf> [Last accessed on 31st July 2024].
[4] Haffert, L. (2016) Die schwarze Null: Über die Schattenseiten ausgeglichener Haushalte, Berlin: Suhrkamp, p. 48.
[5] Ettmeier, S., Kriwoluzky, A., Schularick, M. & Stege, L. (2023) ‘Fatal Austerity: The Economic Consequences of Heinrich Brüning’, [online] available at: <https://www.stephanieettmeier.com/_files/ugd/709433_05a820aeb7094a43bda84d3433daa9b6.pdf> [Last accessed on 31st July 2024].
[6] Blyth, M. (2013) Austerity: The History of a Dangerous Idea, New York, NY: Oxford University Press, p. 21.
[7] Funke, M., Schularick M. & Trebesch, C. (2016) ‘Going to extremes: Politics after financial crises, 1870–2014’, in European Economic Review, [online] available at: <https://s28d3fe3418cce1f4.jimcontent.com/download/version/1713262563/module/12568838499/name/GTE.pdf> [Last accessed on 31st July 2024].
[8] Fetzer, T. (2019) ‘Did Austerity Cause Brexit?’, in American Economic Review, Vol. 109 (11), [online] available at: <https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.20181164> [Last accessed on 31st July 2024], p. 3850.
[9] Ibid., p. 3884.
[10] Wren-Lewis, S. (2018) ‘The Lies We Were Told: Politics, Economics, Austerity and Brexit’, PEF - Progressive Economy Forum Public Lecture Series, [online] available at: <https://progressiveeconomyforum.com/publications/the-lies-we-were-told/> [Last accessed on 31st July 2024], p. 8.
[11] Wehling, E. (2016) Politisches Framing: Wie eine Nation sich ihr Denken einredet - und daraus Politik macht, Cologne: edition medienpraxis, pp. 63-64.