The return of David Cameron to active politics should spark a fresh debate about the consequences of Britain’s fiscal fetishism in the aftermath of the 2007-08 financial crisis—a worldview the newly ennobled foreign secretary embodies. In the previous decade, austerity was meant to “fix the roof when the sun was shining,” as Christine Lagarde, then the head of the International Monetary Fund, said in 2017.

As it happens, Lagarde was quoting John F. Kennedy, who expanded social welfare even as he cut marginal-tax rates to boost investment. Yet historical reality has never given pause to austerity proponents like Lagarde (and Cameron). Just as they have played fast and loose with the record, not just the economic history, so they also invented supposed “needs” of the market that meant refusing to invest in society when interest rates were low. Now, amid higher rates, they are poised to tear down what remains standing.

The UK experiment in austerity is instructive. Life expectancy in Britain has flatlined, while declining for the third year in a row in Scotland. Wages are lower in real terms than they were before the crash. National Health Service waiting lists are at record highs. Labor productivity has lagged behind Britain’s international peers, as public and business investment remains weak. In other words, the country is increasingly poor, unhealthy, and unproductive. These ills have their roots in austerity—a project unjustified by economic theory or circumstance.

In response to the financial crisis, then-Labour Chancellor Alastair Darling poured almost £140 billion ($177 billion) into the system to stave off an economic collapse driven by the iniquitous behaviour of financial institutions. At the peak of state support, more than £1 trillion of financial guarantees was on the table to prop up confidence. Private debts were nationalized. This Keynesian interventionism provided the perfect opening for those ideologically wedded to a rollback of the state. They argued that the only remedy for the damaged public finances was a hearty dose of fiscal retrenchment.

To be sure, Labour made significant fiscal policy errors in the years before the crisis. Labour governments relied on financial services and an out-of-control housing market for growth. Yet contrary to the austerity dogmatists, the markets weren’t about to stop lending to Britain. The state could borrow at very low interest rates with no impact on long-term gilt positions. A sovereign-debt crisis à la Greece wasn’t on the cards.

Yet the fact that Britain’s pre-crisis debts were low compared to both its own record and international peers was strangely absent from the austerity debate in the 2010s. It was the financial crisis, not structurally lax fiscal policy, that led to the rise in government spending, the loss of output, and a yawning deficit.

Austerity was instituted by Cameron’s coalition government that came to power in 2010, preaching a cocktail of fiscal consolidation and social liberalism. Cameron and his chancellor, George Osborne, rejected the social and economic benefits of a Keynesian approach to crisis management and took the line that deficit reduction was the key to solving the country’s economic ills.

“The British experiment was notable for its severity.”

It is true that other countries also embarked on similar programs of fiscal tightening during the fallout from the financial crisis and as the eurozone debt crisis raged. Even so, the British experiment was notable for its severity. Plans were laid out to cut cyclically adjusted borrowing by an amount second only to that of Greece.

The depth and pace of the coalition’s policy sucked demand and investment out of the economy when it was most needed. Austerity was, in that sense, a form of pointless economic self-flagellation. As Oxford University economist Simon Wren-Lewis put it, the approach was “the equivalent of putting a sick patient on a starvation diet accompanied by cold showers.”

The medicine was bitter indeed. The vast majority—around 85 percent—of Britain’s austerity program was delivered through spending cuts, with the balance made up by tax hikes. The ratio meant that the axe fell on those least able to afford the consequences: those at the bottom rungs of society, who were most dependent on the social-democratic arms of the state.

Government departments had their budgets slashed by 25 percent or more. Cuts to local government were particularly brutal, with local councils losing 60 percent of their central-government funding over the decade, the harbinger of deteriorating local services and a crisis in social care. Welfare benefits were trimmed by almost a quarter. While the NHS was relatively protected out of political necessity, Britain’s rapidly aging population meant that merely ring-fencing health spending was asking for more serious trouble later.

Capital spending took more than a decade to recover to its previous level, which makes it no surprise that Britain has a productivity crisis and crumbling infrastructure. Public-sector pay was frozen, and significant job cuts implemented, leading directly to the current recruitment crisis across essential services. The result of all of this was fewer police officers, teachers, and libraries—and more homelessness, families in need of food banks, and children living in poverty. It was fortunate for Cameron that he had once worked in public relations, as a very convincing pitch was needed to sell this awful agenda to Britons.

The rhetoric used to justify austerity was politically effective, but it was based on half-truths and fatuous comparisons. The absurd claim that Britain was about to end up like Greece—an economy constricted by its eurozone membership and hit by massive underestimates of its true financial state—was one. Another was that steering the British government finances was just like running the budget of a private household. It sounds like common sense, but Joe Public doesn’t have access to the money-printing facilities of the Bank of England.


Osborne attempted to give austerity an intellectual veneer by highlighting a 2010 paper titled “Growth in a Time of Debt,” by economists Carmen Reinhart and Kenneth Rogoff. The authors claimed that when a country’s debts rise above 90 percent of gross domestic product, it has a significant negative impact on economic growth. In such a situation, they argued, spending cuts would drive output higher. Yet the paper was later heavily criticized, forcing Reinhart and Rogoff to say that they had always warned against rapidly removing fiscal support. It turned out that British austerity rested on flimsy foundations.

“Austerity was also presented as a moral project.”

Austerity was also presented as a moral project. The story went that the country had been living it up for years on borrowed cash, and that it was now time for a responsible period of belt-tightening. Just like in the postwar years, Britons had to suck it up for the good of the nation. This narrative was accompanied by a demonization of welfare recipients, with the insinuation that such people, rather than international capital, were behind the financial crisis.

As government departments were subjected to the painful fiscal medicine, Cameron’s flagship social policy of creating a “Big Society” wilted. This was advertised as a great liberalizing project that would transfer power from government to communities in a panoply of localism and mutualism, and it drew on a Burkean conception of the world. The rough idea was to get more charities, private businesses, and civil-society organizations involved in the provision of public services. This wasn’t a bad goal in and of itself—it did help to introduce greater parental choice into the school system—but the Big Society was a convenient smokescreen for the removal of state support. A Civil Exchange report found the Big Society “delivered a ‘race to the bottom’ on contract price and the dominance of large private sector ‘quasi-monopoly providers’ who lack transparency and accountability.” This was all rather embarrassing for Cameron. The project was not so subtly dropped, and its initiatives quickly faded into obscurity.

On the other side of the economic equation, policymakers used monetary policy to increase activity by raising asset prices. The government wanted higher house prices and inflated share portfolios to boost consumer confidence and get money circling around the economy again. The Bank of England cut interest rates to near-zero and began buying up vast amounts of government bonds through so-called quantitative easing. It was this, rather than austerity, that drove Britain’s stuttering growth rates during the austerity decade.

This approach exacerbated economic inequalities and significantly worsened the intergenerational divide between the asset-rich and the asset-less. House-price inflation, a millstone around the neck of the British economy, was made worse by Osborne’s disastrous “Help to Buy” policy that stimulated demand amid a supply crisis and only helped monopolistic housebuilders. Britain now spends more on housing benefits than on some government departments.

Austerity was meant to boost growth prospects but instead strangled them and delivered the slowest British recovery on record. Instead of lasting for a single parliamentary term, it went on for a decade. It took two years longer than planned to deliver a current-budget surplus. Britain lost its AAA debt rating in the bargain. Slimmer, chastened state bodies aren’t providing a better service to ordinary people. They are creaking at the seams. Household debt remains worrying, and the public-debt-to-GDP ratio has barely budged.

Even the IMF got cold feet about fiscal tightening when the evidence came in. By 2016, its researchers had concluded that when it came to austerity, “the short-run costs in terms of lower output and welfare and higher unemployment have been underplayed, and the desirability for countries with ample fiscal space of simply living with high debt and allowing debt ratios to decline organically through growth is underappreciated.”

The British economy is now stuck in a low-wage, low-productivity mess. The aging population is piling more pressure on public services and tax policy. Interest rates are back at historically normal levels, meaning that government spending and borrowing are significantly more constrained than in the recent past. Long-term public and private underinvestment continues. Brits’ desire for Scandinavian-quality public services with US-style tax rates is a conundrum that can’t be solved without a fundamental political reorientation.

Austerity has continuing political implications. While Boris Johnson in his populist phase and the pandemic briefly revived Keynesianism, Prime Minister Rishi Sunak risks plunging Britain into Austerity 2.0. Chancellor Jeremy Hunt has brought a semblance of stability back to economic policy after the debacle of the Liz Truss period. However, the spiking of gilt yields seen last September in the aftermath of Truss’s mini-budget has falsely been taken to mean that more tightening is required.

The markets reacted with horror because they thought higher interest rates would result from the mad announcement of unfunded tax cuts and the refusal to release independent economic forecasts. Truss’s political disaster serves to highlight what a significant economic failure it was to not invest at low interest rates during the austerity decade now that the British government’s ability to borrow is more limited.

The economic and moral case for British austerity has been found badly wanting. The project should be dismissed for what it was in essence: an unjustified fiscal project that put a false idea of market demands ahead of the common good. Its legacy lives on, urging us not to repeat its failures.

Christopher Akers is a reporter with the Investors Chronicle team at the Financial Times.