Section 2: Understanding the Trap · Chapter 5
The first duty of government
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We must redefine what public safety means in the twenty-first century.
For generations, the political establishment has defined national security through a narrow, defensive lens: the number of nuclear submarines in our oceans, the deployment of police on our streets. But true sovereignty and genuine safety cannot exist in a nation where the population is systematically ground down by economic instability.
Austerity is not a financial correction. It is a structural assault on national safety. When you cut the budgets of local planning departments, neglect the maintenance of the electricity grid, and allow millions of homes to sit uninsulated, you are actively dismantling the defences of the nation. You are making Britain structurally fragile.
How can we claim to be a proud, independent nation if a handful of short-sellers in New York or Singapore can effectively veto our ability to eliminate homelessness or cure juvenile crime?
“We were told that austerity would balance the books. It never did.”
The OBR did the sums. Austerity cut growth by a full percentage point in 2010-11, and another in 2011-12. By the second year the economy was 2% smaller than it would otherwise have been. What recovery did arrive came from interest rates on the floor, not from the cuts.1
The House of Lords Economic Affairs Committee examined the Bank of England’s quantitative easing (QE) programme. They found limited impact on growth and aggregate demand, limited evidence of increased bank lending or investment, and a main effect that ran through asset prices. Those who already owned financial assets saw their wealth increase. The Bank’s own staff, using confidential data on which banks received the reserves, found no evidence that QE directly boosted lending to the real economy.2
True public safety means economic, social, and environmental security. It means building a society where the baseline components of human survival – warm shelter, abundant clean energy, efficient transport, and community infrastructure – are structurally insulated from international market volatility.
Real de-risking doesn’t mean allowing private corporations to extract wealth from our utilities while the taxpayer absorbs their losses. Real de-risking means using the sovereign power of the state to build permanent, tangible domestic capacity.
But given that the evidence shows that the current set up isn’t working, why do governments persist with it? Until we understand that, we won’t escape Groundhog Day. That’s the theme of the next section.
- OBR estimates, reported in Austerity: Growth Costs and Post-Election Plans, Centre for Economic Performance, LSE, and in Wren-Lewis, “The macroeconomic record of the coalition government”, National Institute Economic Review, 2015. The OBR estimated that austerity reduced GDP growth by one percentage point in each of 2010-11 and 2011-12, leaving the level of GDP two points lower by the second year. Because Bank Rate had already fallen as far as the MPC considered possible, monetary policy could not offset the fiscal contraction and quantitative easing was used instead. The OBR’s estimate is likely conservative: it applies average historical fiscal multipliers, whereas subsequent research finds fiscal contraction bites harder when an economy is depressed and interest rates are near zero. On the wider theory that spending cuts can themselves generate growth, the IMF tested “expansionary austerity” across the advanced economies and found that a consolidation worth 1% of GDP reduces output by around 0.5% within two years, with earlier findings to the contrary proving to be an artefact of how consolidation was measured. Guajardo, Leigh and Pescatori, IMF Working Paper 11/158. ↩︎
- House of Lords Economic Affairs Committee, Quantitative easing: a dangerous addiction?, HL Paper 42, 16 July 2021. The Committee is cross-party and these are its own conclusions, not those of a witness. Two concessions it makes should be recorded. It found that the first round of quantitative easing in 2009, alongside expansionary fiscal policy, prevented a recurrence of the Great Depression, and in doing so limited the growth of the inequalities a depression would itself have caused. It also found the distributional effects hard to separate from other events, noted the Bank’s own analysis that the effect on inequality was relatively small, and reached no conclusion on income inequality. Its finding was that quantitative easing is likely to have exacerbated wealth inequality, because raising asset prices primarily benefits households that already own assets. On bank lending: Giansante, S., Fatouh, M. and Ongena, S., ‘Does quantitative easing boost bank lending to the real economy or cause other bank asset reallocation? The case of the UK’, Bank of England Staff Working Paper No. 883, August 2020. The authors note that the Monetary Policy Committee did not expect strong transmission through the bank lending channel, so the finding confirms the Bank’s expectation rather than contradicting it. They also find that retail lending fell further at the banks that received reserve injections than at those that did not, and that those banks moved towards lower risk-weighted assets such as government securities. The further argument that quantitative easing inflated house prices specifically, by pushing investors out of gilts and into property, is made in evidence submitted to Parliament rather than found by a committee. ↩︎