This brief piece by Ann Pettifor appeared in the New Statesman on 4 May, 2020. Top economists warn the UK not to repeat austerity after the Covid-19 crisis. Mariana Mazzucato, Robert Skidelsky, Ann Pettifor, David Blanchflower and others on why the UK must not impose spending cuts in response to higher debt.
It is clear that some commentators and think-tanks have not woken up to the severity of the debt-deflationary depression we are heading into. Delusional Tory austerity enthusiasts have not given this threat much thought. Nor it seems, has the Resolution Foundation which called on the Treasury to maintain fiscal rules and “to keep inflation expectations firmly anchored around the 2 per cent target.”
Both groups fail to grasp the devastating scale and depth of the forthcoming depression, which will be prolonged and deep. Austerity would simply aggravate and lengthen the slump.
At the behest of Montagu Norman, then governor of the BoE, austerity was imposed on the British economy after the last great pandemic – the Spanish Flu of 1918 – with disastrous consequences. Taxes were raised, government spending was cut, interest rates rose and the strengthened pound boosted debt servicing costs. Soon the British economy was in free fall. The consequences were dire. 1919 culminated in 1939.
In 1919 the British economy was recovering from a world war, as well as a pandemic. Today, the global economy is weakened both by the ongoing great financial crisis, and austerity, from which western economies have never fully recovered. Over the last ten years corporates have failed to invest and instead, thanks to QE, gorged on low rates and cheap debt. The deflation of these debts will be achieved through default, write-offs or bankruptcy. The debt overhang has already depressed both investment and consumption. Coupled with gluts in oil, cars, beef and dairy products the effect will be to depress prices of both assets and commodities, resulting in more bankruptcies. These will lead to rises in unemployment while the coronavirus continues to demobilise consumers and immobilise travellers.
Given this likely scenario, to once again impose austerity would be an egregious act of deliberate, government-inflicted harm, culminating in the kind of political tensions that exploded in war in 1939.