What comes after austerity is the subject of a major conference being hosted by the TUC next week. But just how austere is the austerity age?
David Cameron and George Osborne have developed since 2010 a political narrative emphasising the necessity of public spending cuts accompanied by personal asceticism. Apparently we have been living beyond our means.
The problem, however, is that the government has not yet put its economic strategy where its mouth is: an administration that really wanted to get personal debt down would have to take a very different approach to deficit reduction and public spending cuts.
The austerity agenda relies ultimately upon private consumption boosting growth and therefore (on current trends) increased private indebtedness. The issue first caught the prime minister out in 2011, when he told the Conservative Party annual conference that households were paying off their credit card debts, in an apparent show of national commitment to austerity.
He was wrong; indeed the government’s own forecasters, the Office for Budget Responsibility, had predicted earlier that year that household indebtedness would rise.
The media’s reaction, however, focused on what Cameron had originally intended to tell the conference, that is, that households should pay off their credit card debts. Again, he was on the wrong side of the OBR, who were expecting consumption to rise faster than income, accounting for half of GDP growth by 2015.
This inevitably means increased indebtedness, despite George Osborne’s missive against private sector debt in his 2010 emergency budget speech. And given that real wages continue to fall, private debt will now have to increase even further than the OBR suggested if its consumption forecasts are to be reached.
This is more than merely a rhetorical sleight of hand. Several critical areas of policy appear to have followed the same approach. The failure to curb the relentless rise of ‘payday lending’ is one example, and arguably a direct result of the government’s failure to ensure that a second major credit crunch is averted while at the same time increasing the economy’s reliance on private debt.
It is of course not clear whether the government is entirely happy for payday lending to form a major part of a consumer-led economic recovery, but given that it has opposed measures to cap the cost of credit offered by such providers, it seems to have determined there is little alternative but to allow them to join the mainstream financial services sector.
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So despite maintaining the pretence that public austerity is compatible with private saving, the government need us to spend. And with real incomes still falling this means more debt. The news last month that Wonga will now offer credit to businesses as well as individuals was therefore unsurprising, but chilling nonetheless.
As the Guardian’s Deborah Orr remarked:
“This is yet another sick symptom of the continuing bind that the economy is in.”
But unwilling to admit to the contradiction in its economic approach, the government has continued to proselytise the importance of saving.
Speaking at the launch of the simple financial products steering group in February, Treasury minister Mark Hoban said:
“Everyone here has a critical role to play in rebalancing our economy towards secure and sustainable recovery. That means supporting individuals on a path to financial security. Ensuring that families build savings that ensure that they have the resilience to withstand unexpected shocks.”
As well as an economic strategy premised upon a likely rise in private indebtedness, measures that would promote saving have also been rolled back. The Labour government’s very simple Saving Gateway scheme, which would have incentivised regular saving among low-income households, was abandoned as soon as the coalition government took office.
A single justification was offered by the chancellor in his emergency budget: the scheme was apparently a ‘benefit’ that the country ‘can no longer afford’.
Arguably much more is being done on pension saving with the introduction of automatic enrolment into a workplace pension scheme from 2012 onwards. Pension saving, however, is not about building financial resilience, but rather deferring consumption from working age to retirement. Given that consumer demand will increasing come from older consumers in the future, automatic enrolment can be seen as a pro-spending (albeit in the future) rather than a typical pro-saving policy.
This is notwithstanding the fact that, in any case, the government’s ambitions on pension saving do have limitations. The phasing-in period has now been extended to 2017.
The minimum threshold for contributions - 3 per cent from employers and 1 per cent from tax relief, if employees commit to 4 per cent (on a restricted band of earnings) - has been set at a low level, and there are few signs that the government is prepared to take action to significantly increase contribution rates in the immediate term.
In fairness to the government, this issue represents a hugely complex dilemma which needs to be addressed by significant long-term changes in the way our economy works - ultimately it is faster rising household incomes, a fairer wealth distribution and a better balanced economy that will create the conditions for strong growth accompanied by increased private saving.
The brutal reality, however, is that for the government’s current strategy to work it requires increased private consumption and indebtedness at the household level. But their own public austerity agenda is prohibiting them from being open about their approach.