A decade on from the global financial crash that was precipitated by the sub-prime lending crisis, the credit crunch and the collapse of several major financial institutions in developed economies, is the end of austerity in sight?

Governments including the UK have been touting an end to austerity for several years, while retaining a tight grip on the national purse strings.

There are still major disparities between the parties’ election manifestoes for December 2019, with Labour outlining spending of more than 20 times that promised by the Conservatives.

But across the board, the main political parties are pledging to increase spending, crucially including promises to return to real terms growth in spending on things like infrastructure, public transport and the healthcare system.

After a decade of austerity, standards have slipped, and sentiment among the voting public now seems to be veering very much towards ‘enough is enough’.

Is it time for austerity to end?

The past decade has been typified by low interest rates, low government spending and low growth in GDP.

Debt has been cheap and saving has been relatively unprofitable, especially compared with the boom time that immediately preceded the recession under the Labour government.

So with the risk of a renewed recession still on the horizon, is it the right time for austerity to end?

It’s perhaps not so much a case of having the money to spend, but more that countries like the UK cannot afford to go much longer without spending it.

NHS waiting times, potholes in roads and rising crime statistics are all indicators that the ‘swingeing’ cuts made since 2008 have started to cut too deep.

Eventually something has to give – and while nobody wants to see the government’s budget deficit rise again, there’s an ever-dwindling number of people left who don’t want spending to increase too.

When is spending no bad thing?

Government spending is essentially investment on a national scale, and like any investment, it’s not a question of how much you spend, but more of how much you gain.

If gross expenditure on infrastructure, transport and healthcare result in increased productivity and reduced costs elsewhere, the net impact on the UK economy could prove positive even if it means taking on some government debt.

With interest rates at historic lows, it’s an extremely cheap time for the government to take on that debt.

And many people see government debt as a red herring, an inevitability that should not cause too much concern even if it increases.

Strong and stable monetary policy?

The UK has benefited from the stewardship of the Monetary Policy Committee for the past couple of decades, and this band of economists has helped to prevent wild swings in the base rate.

Their conservative approach to monetary policy has meant rates rarely change more than 0.5% in any one month and even when the economy was strong, we did not see interest rates spike into double digits.

MPC decisions are guided by a general long-term goal to keep inflation at or close to 2.0% and although the Bank of England base rate has been close to zero for several years now, with little wriggle room for the MPC, the economy overall has fared relatively well as a result.

The future of government debt

Of course the risk in terms of government debt – just like household debt – is that eventually the base rate will start to climb again.

There has been increasing expectation of this in 2019, although the US Federal Reserve’s decision to cancel its own widely anticipated rate rises has reduced that likelihood somewhat.

But as we move into a new decade, it is likely that barring further economic shocks, the 2020s will be a period of increasing interest rates.

That’s good news for savers but bad news for debtors, including households with variable rate mortgages and credit cards, but also crucially for government debt on a variable interest rate too.

Spending via borrowing does not burden the current generation of taxpayers; it defers that burden until some future time, at which point whoever is paying tax becomes responsible for paying down the debt.

The government over the past decade has focused on eliminating the budget deficit, but this does not eliminate the accumulated debt.

By borrowing to fund infrastructure investment now, the total amount owed will increase once again, adding even more weight to the burden future taxpayers must bear.

Make hay while the clouds rain

Increasing investment in an uncertain economy is the opposite of making hay while the sun shines, and investors will recognise the greater level of risk involved.

Essentially, infrastructure investment and public spending now represents a gamble on a more optimistic future.

If an economic shock – for example, Brexit – has an adverse effect on the UK economy within the coming decade, we could easily see the return of austerity with a vengeance.

The parties’ recent manifestoes have largely resisted increasing income tax, except for the highest earners, but the money has to come from somewhere eventually.

At the same time, major markets like the financial sector have been transformed by regulatory changes over the past decade, making it more difficult to predict how they will perform as we truly emerge from recession.

This added uncertainty makes it a difficult time to pour public funds into government-led projects – and could leave the nation’s communal wallet wide open to any future fiscal shocks.


Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.