How do the achievements of the Coalition look ten years on?

Ten years ago, in May 2010, a new government was formed from a coalition of the Conservatives and the Liberal Democrats. It lasted the full five year term, but it is usually regarded as a political failure, especially for its junior partner, who have been marginalised ever since. If coalitions don’t work for all parties than they are unlikely to be repeated. I don’t want to go over that well-trodden ground, though, but to ask whether the coalition served the country well. Its leaders thought that however unpopular they were at the time, they would be vindicated by history. How is that working out?

I had envisaged doing that in a single post, but on reflection I could not do the topic justice. I will attempt it in three. In this post I will look at the Coalition’s handling of the economy, and in particular the controversy around austerity. In the second I will look at the attempt to reform public services. And finally I will look at its record on the country’s governance, where the most important event was the referendum on Scottish independence in 2014.

The Coalition’s record on the economy usually gets a bad press, except from confirmed Conservative supporters. The government inherited the aftermath of the Great Financial Crisis, and in particular a budget deficit of an eye-watering 11% (though we may soon learn to regard this as being a bit tame). All parties in the 2010 election promised to eliminate this deficit to bring the national finances back to order. The trajectory offered by the Conservatives was the steepest, and this was the target adopted by the coalition. It involved some tax rises (especially raising VAT), but most of the strain was taken through expenditure cuts. The scale of such cuts was spectacular. Only the NHS and education were spared, and, with demand on the NHS rising through an ageing population, even the NHS budget amounted to a real-terms cut. The cuts were less spectacular in execution than planned, and the government’s targets for the deficit were missed repeatedly. The actual outturn was strikingly similar to that promised by both Labour and the Lib Dems in the election.

These cuts provoked a massive depth of anger from the left. “Austerity” has been turned into a totem of hate, alongside the nebulous idea of “neoliberalism”. For all this anger, or perhaps because of it, it is hard to take this seriously. Rational debate has become impossible. All cuts are always evil, in this way of looking at life. There is no such thing as wasted public spending (though some might debate spending on weaponry, trade union allies quickly close that thought down). In the country at large this is a minority view though. One of the critical truths grasped by Gordon Brown and Tony Blair before their victory of 1997 was that until Labour showed that it could embrace austerity if necessary, not enough people would ever believe that the party was fit for government. That is probably still true.

But the criticism of the Coalition’s austerity policies goes much wider than the angry left. Most neutral economists join in. In fact I don’t think I know of a respectable academic economist who has been prepared to defend it. The argument here is that as the country was in recession, there was massive spare capacity, and the country needed fiscal stimulus to put this capacity back into use, and reduce long-term damage. Instead government cuts prolonged the recession and stunted the subsequent recovery. Few defenders of austerity bother to respond to this criticism. Instead they suggest that national debt was out of control and it was vital to bring it down to calm financial markets so that the government could finance itself. This thought was clearly on the minds of coalition ministers in 2010. It was the time of the Greek debt crisis, and nerves were jangled. The Treasury undoubtedly played the risks up – fiscal conservatism is in their DNA. The academics respond that as the UK had its own currency, the government could always pay its debts; anyway interest rates on government debt did not suggest market panic.

This is an interesting line of debate. The complication in the case of the UK is that it has a large and persistent current account deficit, and so is dependent on foreign finance, unlike Japan, another major economy with a floating currency and big debts. There is strength on both sides of the argument here. Ten years on the academics look closer to the mark than the Treasury types. But there is some strong hindsight there.

I am much more interested in taking on the academics’ core case against austerity though, which is that there was a lot of spare capacity in the economy in 2010. This view arises from an idea that economies have a natural rate of growth, arising from steady productivity growth, in turn arising from improved technology and more sophisticated management methods. In the 2000s they thought this rate for developed economies was about 2% a year. If GDP fell below the level suggested by this “trend rate” than that suggested spare capacity. This meant not only that the gap was bigger than it first appeared in 2010, but that with the slow rate of growth once the economy started to recover, that gap was never closed.

That line of reasoning suggests that all was well with the British economy in 2008 when it was hit by the financial crash. But that was far from true. A closer inspection of the country’s productivity growth in the years before the crisis shows that it was entirely based on two sectors: finance and business services. The crash proved that in the case of finance this growth was a work of fiction – a product of stoking up risk and optimistic accounting. It was scarcely better in business services, which was riding the bubble. There are plenty of good reasons for thinking that the idea of a natural rate of growth is out of date – this is a favourite topic in this blog. The truth is that growth in the UK since 2000 was driven by the expansion of a financial bubble, the import of cheap products and services from Asia, and massive immigration from Central and Eastern Europe, all fuelled by fiscal and monetary policy that was surely too loose. By 2010 the financial bubble had burst, cheap Asian imports had run their course, and although immigration was continuing, it had slowed and the general view was that it was causing excessive social strains. It was not a question of quickly trying to recreate the pre-crash economy, but the much slower job of building a more sustainable replacement. Fiscal stimulus would simply have led to a flood of imports, not new and better jobs.

In fact “rebalancing” was widely spoken of as a necessary thing at the time, though most people fondly thought of this as a return of old-fashioned manufacturing. Looked at it a bit more closely, and much of the academic criticism of the coalition actually reflects this. They bemoan not the cuts to services and benefits that so angered the left, but the lack of public investment. There is some justice to this, but investing public money wisely is much harder than it looks. Usually the money ends up wasted in vanity projects. Some of the suggested ideas, such as the expansion of Heathrow airport don’t look so good in hindsight. Others: better interconnecting rail links between northern cities, look a better idea, and the coalition could have done much better there. A failure to support green energy projects was a constant complaint by some Lib Dem ministers.

As it happened, the economy did rebalance, and quite quickly. Unemployment was never as serious as the GDP figures suggested it should be, and the employment statistics became very healthy. The problem was that this rebalancing was towards a new and rather ugly economic model, with insecure gig workers at its base. Inequality did not get worse in the Coalition years, but it didn’t improve by much either. The generation gap, with younger people in insecure jobs and rented homes, their elders with nice pensions and property wealth, has got worse. The coalition did little for regional inequalities either. And yet none of these problems was easy to solve, and the government’s main priority was to dig its way out of the financial crisis.

Overall my verdict on the Coalition economic record is good, but not that good. Damning with faint praise, perhaps. But the country was in the grip of wider economic forces: catch up by China reducing the flow of cheap goods; the spread of the gig economy; the saturation of the “stuff” economy. The glib criticism of macroeconomists does not do justice to these forces.

Lib Dems will always argue that the worst aspects of austerity on public services came in the following Conservative majority government, which doubled down on the cuts. There is some justice to this, but we can’t let the party off that easily. The Coalition’s record on public services is about more than austerity, as I will discuss next time.

3 thoughts on “How do the achievements of the Coalition look ten years on?”

  1. I’m sure Lib Dems will try to refocus on other aspects of coalition economic policy as the history is written but the question of austerity is always going to come back to haunt everyone and keep on doing so for a good while yet.

    Ostensibly, the reason for austerity, a combination of tax rises and spending cuts, was given, by the political right, as a desire to ‘heal the public finances’. The Govt was borrowing too much. The deficit had to be reduced. We had to live within our means and not the income of future generations etc etc. The left saw it as an attempt to reduce the size of the State. Both had it wrong. It did neither and nor should anyone have expected it to. Spending cuts and tax rises, aka austerity, is a valid macroeconomic tool to reduce inflation. In principle, it is neither neoliberal nor of the political right. So why impose a counter inflationary measure and expect anything else other than a fall in inflation?

    “The complication in the case of the UK is that it has a large and persistent current account deficit, and so is dependent on foreign finance….”

    This of course is the conventional view. But, let’s look at it another way. The current account deficit is the mirror image of the capital account surplus. The two simply sum to zero. Therefore, by focusing our efforts on attracting foreign finance and keeping up the flow of inward capital, all we are doing is making the current account deficit even larger and more persistent. Now many MMTers would say that’s not a problem. I agree, in principle, but my reservation is that it becomes a problem if enough people think it to be a problem.

    So why doesn’t austerity work as people think it should? As Yanis Varoufakis often says you can’t, in any macroeconomic consideration, take any one thing in isolation, change that and expect everything else to remain the same. If the Govt cuts its spending and raises taxation it cuts its income too. The gap may not close at all.

    Another way of looking at it is that “our persistent and large current account deficit” has to be financed by someone in the UK doing some borrowing. That will always be by a combination of the government and the private sector. So, to reduce the government’s share, the private sector needs to be encouraged to borrow more. That was done by lowering interest rates. This part of the policy does make much more sense. But it was dishonest to claim that the austerity measures were successfully reducing the deficit when all that was happening was that the economy was being pumped up by ever greater levels of private debt.

  2. I don’t have a perception that the fiscal balance was uncomfortably tight in the coalition years – as you say Matthew, such a thesis seems to be belied by the employment data. But I would add two problems to your analysis. One is that of increasing inequality at the extremes, of the maginalised at one end of the spectrum , and the escalating salaries of the wealthy, eg on company Boards, at the other; this despite average inequality (as measured by the gene coefficient) not increasing due I think to increasing convergence between the various strata of society in the middle. The second is public under-investment in the sort of routine requirements – of decent classrooms, the training of an adequate number of doctors and nurses, the ironing out of bottlenecks in rail and road infrastructure – which the public will notice in their everyday lives. If only the Lib Dems could have secured a better balance between tax increases and public expenditure cuts – but then, that was not on offer from the dominant Conservative side.

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