UK: Whatever Happened To Austerity?

Last Updated: 3 July 2017
Article by Ian Stewart

Last week a Times headline proclaimed that "Austerity is Over" in the UK. It may have been an exaggeration, but the headline captured the spirit of the time.

Labour's anti-austerity rhetoric played well with voters during the election campaign. The Conservatives, who ran their 2010 and 2015 election campaigns on the need to reduce public debt, have gone quiet on austerity. As Torsten Bell at the Resolution Foundation notes, the deficit got a mere three mentions in the 2017 Conservative manifesto, down from 17 in 2015.

The hard grind of austerity started in 2010 and most of the progress in cutting public borrowing has come from squeezing public spending. It is a sign of how tough this process has been that after seven years of austerity the UK is borrowing more each year, as a share of GDP, than any EU nation, including Greece, Italy or Portugal. So far austerity in the UK has been about slowing the rate of growth of government debt, not reducing debt levels.

The task of deficit reduction has been made harder by sub-par growth and stagnating incomes. Average pay is still below where it was in 2008. Those on low pay have suffered the twin effects of weak earnings growth and a reduction in the real value of most state benefits. A one percent cap on pay rises in the public sector has left earnings for over five million public sector workers lagging behind inflation.

Labour's solution is to raise public spending funded through Ł50 billion of tax rises and a slower pace of deficit reduction.

Borrowing has clear attractions. It avoids the political pain of tax rises. Borrowing costs are low, with markets willing to lend to the UK government for ten years at an annual interest rate of 1.0%. Nor is there any clear or fixed constraint on public borrowing. Relative to GDP, Japanese government debt is 50% higher than UK debt levels but Japan's borrowing costs are less than a tenth UK levels.

For all this public borrowing is not risk-free.

The ultimate constraint on debt-financed spending is the willingness of the markets to lend; a limit that was reached in the case of Greece in 2010 when it was forced to turn to the International Monetary Fund for loans. Before this constraint is reached a government faces growing pressure from higher borrowing costs. Today interest rates on Greek or Portuguese government debt are many times higher those for German or Dutch government debt.

The euro crisis demonstrates that markets swiftly change their minds about the creditworthiness of governments.

In an ideal world governments would build up buffers in the good times to provide the scope to borrow in the event of recession or national crisis.

Levels of government debt fluctuate, with wars and recessions being the big upward drivers. The ratio of UK government debt to GDP spiked during the Napoleonic war and the First and Second World Wars. After each major spike it took decades of peace and growth to reduce debt. Today we are seeing a fourth, lower spike. At 88% the UK's debt ratio is at the highest level in half a century. The financial crisis has led to a near tripling in the UK's public indebtedness.

Periods when GDP growth is running at, or above, trend levels, and the economy is close to full employment, are the obvious time to reduce levels of government debt. Today, with the UK into its eighth year of recovery, and unemployment at a 40 year low, prudence would suggest that the UK should be moving towards a budget surplus and repaying debt.

The fact that the UK is borrowing the equivalent of over 2.0% of GDP each year at this stage in the economic cycle illustrates a wider point. The perception that the government is unyielding in its pursuit of austerity is wide of the mark. The target for deficit reduction under the previous Chancellor, George Osborne, slipped significantly between 2010 and 2016. In the short time Mrs May has been Prime Minister the UK has seen a further easing of the pace of deficit reduction and austerity.

Almost unnoticed, the Chancellor, Phillip Hammond, has watered down his predecessor's targets for the deficit and has created headroom for increased public spending. The Chancellor could meet his new target for deficit reduction and announce high profile increases in public spending, matching Labour pledges on social security, health, schools and public sector pay.

So there is scope for the government to spending materially more consistent with its commitment to reduce the deficit – albeit on a slower timetable than planned by Mr Osborne. And while, during the election campaign, Labour talked of ending cuts and austerity, in practice its policies would still allow for a gradual reduction in the budget deficit.

Separate from the debate about spending on government services, pay and welfare benefits, it is not hard to make the case for debt-financed public investment. Between the late 1940s and the early 1980s UK government spending on infrastructure averaged about 5.0% of GDP a year. Since then it has averaged around 1.5%, a change which has left the UK languishing in international league tables of infrastructure provision. Borrowing at current, low interest rates to fund infrastructure which contributes to future growth has obvious attractions.

It seems highly unlikely that any government will give up on the idea of reducing the level of the deficit from current levels. In this respect austerity has further to run. It would be unwise to ignore potential constraints on public borrowing, even though those constraints are not binding today.

Of course the UK could finance a large increase in the size of the state from taxation. Much of Continental Europe follows this higher tax, higher public spending model. Labour's pledge to raise taxes on corporates and higher earners in the election seemed to resonate with the public.

Yet is hard to see how the UK could finance a large increase in public spending solely through taxing business and "the rich". If we want a materially bigger state we will all need to contribute. The public may be suffering austerity-fatigue. The real question is whether they are prepared to pay higher taxes to end austerity.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.