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Forget Brexit – austerity is far worse for the UK economy
The weight of opinion holds that leaving the European Union would be costly for Britain. The latest forecast, from the respected Institute for Fiscal Studies, predicts that austerity measures such as cuts in public services and in the welfare budget would be prolonged in the event of Brexit.
Yet, beneath the blur of claim and counterclaim over Brexit, there is a broader critique to be made of the present government’s approach to economic policy and of austerity more generally. The focus on reducing the deficit by cutting public spending is adding to downward pressure on aggregate demand, thwarting economic recovery.
This critique remains valid, regardless of Brexit. It also feeds into considerations around the need for reform in the EU that go beyond the present debate over staying in or out of it.
The sad reality is that neither side in the Brexit debate is offering any real alternative when it comes to economic policy – depressingly, both sides seem to be taking the current (pro-austerity) policy for granted. This needs to change.
The IFS, for example, suggests that lower GDP growth and extra borrowing costs caused by Brexit would worsen the public finances. The effect would be that the government would only be able to achieve its self-imposed target of a budget surplus by 2022, rather than by 2020. If Britain votes to leave the EU, then it faces two more years of higher taxes and/or spending cuts – a dire prospect.
The forecasts of the IFS assume continuity in government policy. In effect, they accept the continued commitment to a budget surplus target and with it ongoing austerity.
The criticism here is that the budget surplus target is arbitrary and self-defeating. There is no justification (other than naked ideology) for such a target at the present time. Rather, under present circumstances, with a large trade deficit and weak private sector investment, there is a strong case for maintaining a budget deficit.
Indeed, given these circumstances, the government risks jeopardising recovery by sticking to its surplus target. It creates this risk by taking demand out of the economy at a time when growth is being propped up by households that are spending and borrowing beyond their means.
Cutting through the rhetoric
The point is that, Brexit or otherwise, the government’s current economic policy position needs to be reversed. The danger is that the government is buying support for its own flawed economic policies by citing the costs of Brexit. In effect, it is seeking to cultivate a commonsense around the legitimacy of its macroeconomic stance, stifling critical debate. We should be wary of this diversion tactic and keep our sights on the errors inherent in present economic policy.
This is not a coded appeal to the Leave side. The latter is seemingly just as committed to the folly of a surplus target and austerity as many on the Remain side. Rather it is an attempt to cut through the rhetoric of Brexit and to promote the case for alternative economic policies – from a renewal of publicly funded infrastructure investment to a revived industrial policy. These alternatives, it should be said, are ones that the electorate can potentially vote for at the next general election.
The Brexit debate is polarised. It has been framed in much of the media as though you either believe in the EU or you reject it. Any wider awareness of the need for a reformed EU, let alone campaign for it, appears to be missing.
The idea of an EU that supports greater cooperation between nations – say, via an expanded EU-wide fiscal and regional policy and stronger labour rights and protections – has yet to be fully heard. Yes, the barriers, both economic and ideological, to reform remain formidable. But this positive and progressive vision of a reformed EU is in danger of being crowded out by the promotion of a commonsense that takes deflationary economic policies for granted.
The choice for the electorate in the EU referendum is between austerity and more austerity – no other alternative is on offer. This sorry state of affairs reflects badly on the state of economic and political debate in Britain. It highlights, in short, the way in which this debate is hemmed in by a narrow agenda that ultimately supports the status quo.
The referendum should be an opportunity to challenge conventional wisdom, including the government’s approach to managing the economy. In reality, it provides the opposite – a vote for continuity, and with it, an austere future. The people of Britain, and of the EU, deserve better.
David Spencer has received funding from the EU FP7, EPSRC, and ESRC, but this article reflects the author's personal views.
David Spencer, Professor of Economics and Political Economy, University of Leeds