The great reversal: austerity is dead as former hawks celebrate falling pound

We are seeing an astonishing reversal: austerity is dead, and politicians who not so long ago warned of the calamitous consequences of a falling pound, now claim that this is precisely what the UK needs.

Article updated: 1 August 2019 1:00pm Author: Michael Baxter

Back in 2010, the UK was in crisis. Government debt had exploded. Government borrowing had shot up, GDP was massively below the 2008 peak. The UK had been hit especially hard by the 2008 crash as it was more reliant on the banking sector.

Although Germany suffered a sharp fall in GDP in 2008, it recovered quickly. France did not suffer such a severe jolt. The then French finance minister, a woman called Christine Lagarde, seemed almost patronising when she discussed the UK’s plight.

At around that time, the bond investor, formerly known as the Bond King, Bill Gross, said that the UK gilts sit on a bed of nitroglycerin.

Tory MPs such as John Redwood warned of the calamitous consequences of the falling pound.

In that environment, David Cameron and the Tory Party won more votes than any other party in the general election, but not enough to form a government and so the coalition government was born. Many people argue that Nick Clegg caused massive damage to the Lib Dems by forming that coalition, but looking back with hindsight, it is hard to see what he could have done differently. Political instability may have caused that bed of nitroglycerin to blow up, creating an even more severe economic shock.

And the new government created austerity. We were told this was essential, that without it, the Bank of England couldn’t keep interest rates down.

But something else happened in 2010, and this something else should have changed the austerity narrative — the euro crisis began.

The currency markets are zero sum — the pound can’t fall against the euro if the euro is falling against the pound.

Austerity was not just introduced in the UK, but across the Eurozone and to a lesser extent in the US too.

At the time, I warned in this column, over and over again, how dangerous this was. Austerity, when it is applied by one country facing a specific set of problems can be appropriate, but when it becomes a global thing, enormous dangers are created.

Now look at what has happened since. UK real wages are up by just 1.7 per cent since 2005. Up until 2015, real wages were below the 2005 level.

Most countries in the world have their own crisis to contend with, from Brazil to Britain, Turkey to the US.

A recent survey carried out by the FT looking at attitudes in the UK’s more rundown areas, which mainly voted Brexit, uncovered huge levels of dissatisfaction. There was resentment aimed at London and a sense that elite politicians had no understanding of the challenges they faced. It seemed many voted Brexit out of a sense that the UK needed a massive shake-up. The Brexit vote in such areas was not so much an anti EU-vote, as an anti ‘how things are’ vote.

“Some people expressed dismay at what they saw as far-reaching and negative changes in their areas: decent jobs being replaced by low-paid and insecure ones, rising levels of violent crime, and high streets blighted by empty shops,” stated the FT.

Post Brexit vote, post Trump

It is hard to envision a more different set of attitudes among the right wing of the Tory Party, today.

Boris Johnson has earmarked £6 billion as an emergency fund to deal with hard Brexit, to go on areas such as stockpiling medicine. So that’s £6 billion, or £115 million a week, a big enough sum to make a nice adornment to the side of a bus.

But that is chicken feed. Boris Johnson, one time critic of HS2, has not only become a strong advocate of the project, despite the projected cost exploding to around £100 billion, but he wants more HS2 type projects, such as a line connecting east and west England along the Pennines.

And while analysts talk about the pound falling to parity with the dollar and euro, the arch supporters of Brexit, often the same men and women who supported austerity because it was essential to protect the pound, celebrate — it’s what the country needs, they say.

Who cares if other countries slap tariffs on the UK if the pound is 10, 20, or 30 per cent cheaper.

Let’s spend and spend on infrastructure— after all, the government can borrow at just 1.318 per cent (7.44 am 1st August 2019) over 30 years.

The US had adopted much the same plan, spend on tax cuts, spend on infrastructure, scream at the central bank to cut rates, talk the dollar down.

That’s what its like in 2019. Sure, governments have pandered to social disquiet by trying to roll back globalisation, a move that will make the global economy smaller and should be disastrous for equities, but at least they have dropped austerity, the real underlying cause of social resentment.

What next? It depends on how much inflation we get as a result. If inflation remains subdued, expect calls for central banks to create money to fund policies such as universal basic income and infrastructure spending.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

See what else we have to say