The UK must accept that austerity has failed

Let’s start at the beginning. George Osborne’s comparisons with Greece were always misleading in the extreme: Athens does not have its own currency, its own central bank, or indeed its own fiscal policy.

Another supporting factor, the rule that a country with a debt-to-GDP ratio of more than 90 per cent is unable to grow at a healthy rate, was subsequently revealed to have been partly based on an Excel spreadsheet error.

In the absence of economic arguments, the only continued motivation for austerity must be politicalDan Jones

Perhaps the most credible argument was the idea that the world's fixed income investors would shun the UK if it did not rapidly scale back its 10 per cent budget deficit, causing bond yields to spike and serious questions to be asked of the country’s ability to finance itself.

But looking back, this looks the least compelling line of reasoning. UK yields have fallen since 2010 not because of deficit reduction, but because of the global desire for safe assets. For evidence, consider the Brexit vote, which sent sterling tumbling on expectations of a worsening economic future, yet saw bond yields fall further. The flight to safety supported, rather than hurt, UK debt.

Taken as a whole, the UK economy has progressed well enough in the meantime. We were the fastest growing G7 country in the world in 2014, and almost repeated the feat in 2016, only to be pipped by Germany once revisions came through.

These efforts may or may not have been helped by the government’s decision to slow the pace of deficit reduction. Because said deficit has not been cleared - and this flexibility does not mean, as some claim, that the UK never experienced austerity. The crux is that the benefits of growth, and the focal points of fiscal consolidation, have not been shared around evenly. 

For much of the country, the past two national votes have been a chance to represent a protest vote against this state of affairs. Viewed through this prism, it's no surprise that the ‘change’ candidate has outperformed expectations on both occasions: first in the form of the Leave win last year, and now with the resurgence of Jeremy Corbyn. 

In the absence of economic arguments, the only continued motivation for austerity must be political. The government now appears to say it recognises this, too. Headlines last week predicted the Treasury would move away from austerity in a bid to win back some of the voters it lost on June 8. 

Similar noises were made last summer, but there is nothing that focuses politicians’ minds like a punch on the nose from the electorate. Higher fiscal spending – and yes, perhaps higher taxes – are firmly back on the agenda.

Dan Jones is editor of Investment Adviser