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Lessons from a decade of failed austerity

Getting it right this time
Report type
Research and reports
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Chapter 8: A New Deal on a longer view + Annex

Muscles aching to work, minds aching to create - this is [hu]man.

― John Steinbeck, The Grapes of Wrath

Behind output gaps, natural rates and relentless cuts, is a wider futility that nothing can be done. Society must simply learn to live with degraded conditions. On this thinking the promise to end austerity is empty. For the moment at least households are relieved of the threat of interest rate rises. But instead the Financial Policy Committee of the Bank of England are “concerned by the rapid growth of leveraged lending, including to UK businesses” and warn “Risks to the UK from global vulnerabilities remain material”.[1] The global financial crisis may have been contained; it has not been resolved.

John Steinbeck’s career was fostered by the Federal Writers’ Project, a New Deal initiative. Roosevelt threw everything he possibly could at the Great Depression. In parallel his ‘Wagner Acts’ greatly strengthened the role of trade unions. Even UK government spending grew rapidly from 1934, as austerity policies were relatively quickly dismissed. War too makes it obvious that an economy – or rather the workforce – can support whatever is asked of it.

Under Clement Attlee, the first majority Labour government in British history inherited post-war debt of 250% of GDP, yet created the NHS, provided education for all, built “homes for heroes”, strengthened the welfare state and nationalised several industries. The economy began to grow with unprecedented vigour, the deficit moved into surplus and the public debt fell. Similar preconceived notions of capacity were proven meaningless, and private debt was benign for decades (as on the IMF chart above).

The Trades Union movement had been instrumental in the reconstruction of the Labour Party over the 1930s. The repeal in 1946 of the much-hated Trade Disputes and Trade Union Act of 1927 marked a new place for unions in society and the economy. To varying degrees, there were similar developments across the globe, supported by the Bretton Woods Institutions established after the war, under Keynes’s original initiative. “The result, in the third quarter of the 20th century, was economic growth in the industrialized countries at a pace never seen before”.[2] Upturning this approach has upended outcomes and led to the most insecure and frightening economic and political conditions since the great depression.

The experience tells us that outcomes are better when unions are strong and countries cooperate towards shared goals of full employment and decent social provision. A renewed New Deal for Workers is long overdue.

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[1] Financial Policy Committee Statement from its policy meeting, 3 October 2018.