Post-austerity? Not just yet

27 May 14
David Walker

Despite some signs of recovery, we are far from reaching the end of austerity across Europe. Nor has the delivery of public services been transformed by the fiscal crisis in the way anticipated

Spying the green shoots of recovery is a mug’s game. Ask the former UK chancellor Norman Lamont, whose reputation took a long time to recover from his premature articulation.

Wariness has to be the watchword looking at GDP growth figures, let alone declarations about the ‘end of austerity’ or even – the subject of a recent seminar at the Institute for Government – ‘post austerity’.

In Helsinki, they would laugh: Finland has gone eight consecutive quarters without growth. Or in the Netherlands, where GDP contracted by 1.4 per cent last year. And yet, Lisbon has successfully returned to the bond market, Portuguese credit is restored and from Dublin and Madrid the road back is clear.

One lesson is beware generalisation. Each country has its own trajectory and skeletons – Nokia rattles away in Finland, where IT has fallen from 10 to 4 per cent of GDP; in the Netherlands (unlike the UK) house prices took a mighty tumble after the crash, pushing households into negative equity. But if we are somewhere near the prospective end of austerity in at least a few European countries (the Irish government says its next budget will be the last to make cuts its centrepiece) it’s not too soon to extract three observations.

The first is that for all the talk from governments, management consultants and thinktanks, fiscal crisis has not been ‘transformational’ – in the sense of leading to some profound reorganisation or restructuring of public services or public expectations of what the state should provide. Cuts have been banal and predictable. In most countries, governments have taken the relatively easy options of hitting capital investment, or targeting social groups with the least political clout (younger people rather than pensioners, say).

In those countries – Latvia notably – which savagely attacked their public sector headcounts, the state has merely shrunk; it hasn’t been ‘transformed’. It’s not just in the UK that we’ve seen a sort of mindless reaching for private contractors in order to cut short run costs. This isn’t transformation and, besides, stores up all problems around quality control, monopoly provision and political lobbying.

The second emerging theme is that the crisis has not seen the triumph of localism that many hoped for. Under financial stress, treasuries and finance ministries have strengthened, pushing disproportionate cuts to local and regional administrations, and cutting their autonomy. The Republic of Ireland mirrors the situation in Spain where central grants have been cut and local and regional government discretion on tax has come under pressure. The Irish Republic bit the bullet and introduced a property tax but it is collected and administered by Dublin, the proceeds of which flow into the central treasury, and some paid back to councils in grants. Of course fiscal centralisation is controversial. In Spain, the government of Catalonia is fighting Madrid over tax and spending and separatism remains a background threat.

The third theme looks forward in time, and sees trouble ahead. In most EU countries, demography will stoke demand for collective services. In such countries as the Irish Republic (as in the UK) there is no simultaneous pressure on services from increased numbers of school age children and a rapidly rising population of older citizens who are likely to become more intense users of welfare and social services in addition to exercising their pension entitlements.

Crisis and recovery have seen no fundamental change in countries’ response, beyond some adjustment of pension age. We approach ‘post austerity’ ill-equipped to respond to social change – worse equipped, since baseline levels of spending are now set lower.

David Walker is a writer and commentator on public policy and management

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