Federal Politics

Copying UK's austerity cuts sets us on a road to ruin

When the Great Depression hit the United States, US treasury secretary Andrew Mellon famously advocated austerity. His formula was simple: ''Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate ... It will purge the rottenness out of the system.''

The theory behind austerity is elegant: proponents argue that government crowds out businesses, and that taxpayers will equate spending cuts today with tax cuts tomorrow. There will be some short-term pain as prices and wages fall, but from cuts will come growth. Austerity sounds great in simplistic theory. The only catch is: it doesn't work.

Yet today, a conservative government in Britain (in partnership with the Liberal Democrats) is trying austerity. The British government has cut spending on pension benefits and housing. Teachers, police, doctors, nurses and community workers have had their pay frozen. Public libraries are closing, and more cuts have been foreshadowed. Oxford's David Stuckler and Stanford's Sanjay Basu estimate that 10,000 families in Britain have become homeless as a result of the cuts.

British Labour's financial affairs spokeswoman, Angela Eagle, has argued austerity has ''hit the poorest hardest''. The chief executive of the UK Patients' Association, Katherine Murphy, reports that patients on oxygen due to breathing problems have seen visits from district nurses reduced, while other patients have been denied operations and painkillers due to the cost, with a nurses' union warning that Britain ''is sleepwalking into a crisis''. Unemployment was 5 per cent before the crisis, and is now almost 8 per cent.

The double tragedy of austerity in Britain, as with every occasion it is put in place, is that it has hurt the neediest and failed to jump-start the economy. Britain's recovery from the global financial crisis has been the slowest recovery from any recession in that country since records began: slower than the recovery from the Great Depression and slower than any other G7 country apart from Italy.

That's because slow growth has effectively negated reductions in debt. As the International Monetary Fund's Luc Eyraud and Anke Weber have argued, ''fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output''. The situation is akin to a plumber who sells his tools to help pay off the mortgage.


This point has been picked up by thoughtful observers. Britain's Office for Budget Responsibility has warned that cutting will slow economic growth. IMF chief economist Olivier Blanchard warns that Britain would be ''playing with fire'' if it did not do more to stimulate its economy. Princeton's Paul Krugman likens austerity to a mediaeval doctor draining a patient's blood, who, noticing the patient deteriorating, takes more blood.

The contrast with Australia is stark. We avoided recession and saved hundreds of thousands of jobs because the Australian government actively created jobs and benefited the community through nation-building projects such as a once-in-a-lifetime school building program. Australian wages are rising and inflation remains lower than in Britain. Australia's debt to GDP ratio is well below Britain's. As Columbia University's Joseph Stiglitz likes to quip, Australia's only contribution to the global slump was the acronym ''GFC''. As former prime minister John Howard remarked: ''When the current Prime Minister and the Treasurer and others tell you that the Australian economy is doing better than most - they are right.''

Why does the difference between Australia and Britain matter? Because, if the federal opposition win government later this year, Britain's past may be Australia's future.

In recent months, Tony Abbott has acknowledged that ''the Coalition obviously is looking for significant expenditure reductions'' and admits these will be ''painful decisions''. Queenslanders know what he's talking about. The savage program of cuts by the LNP government amid an overblown fear campaign about public debt also led to increased unemployment there.

Britain's experience warns us that you cannot cut a nation to prosperity at the expense of the young, the elderly, the disabled and the infirm. If you care about reducing the debt to GDP ratio - as I do - then you need to worry not only about paying down debt, but also about increasing GDP. On economic policy, this election sees Australia at a fork in the road. Coalition austerity would be a rocky path indeed.

Dr Andrew Leigh is the federal member for Fraser.

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