Beware, Ottawa: Look what austerity and deficit fetishism did to Britain

Open this photo in gallery:

Johnna Montgomerie is a professor at the University of British Columbia.

During national budget deliberations we often encounter a familiar narrative decrying the size of the deficit, lamenting the national debt and warning against passing the burden of debt to future generations. Deficit hawks propagate this political storyline, insisting that the government must eliminate operating deficits and curb the accumulation of debt, claiming this is necessary to improve domestic economic conditions.

The federal government’s budget released on Tuesday must keep in mind that this oversimplified narrative of complex economic realities by deficit hawks promotes misguided policies that have disastrous outcomes.

Take Britain as an example. After the 2008 global financial crisis prompted large-scale bailouts, the Conservative Party campaigned on the platform that the country had “maxed out” its credit card. Spinning a tale about the economic virtues of cutting the deficit, according to former Conservative finance minister George Osborne, was key to promoting the austerity agenda in a way that was “devastatingly politically effective.”

Deficit fetishism is a politically powerful narrative. After all, Canada’s current Liberal government has come under fire for running a deficit every year from fiscal 2015-16, its first year in power. During that time, the national debt has nearly doubled, reaching $1.2-trillion last year.

But it would be complete economic folly to fixate on the numbers and single-mindedly slash spending. Focusing only on the deficit is a political story of a “tax-and-spend” government, where the state does no more than collect taxes and spend money. In reality, the government’s balance sheet is completely unique.

Unlike households or companies, nation-states possess the power to create currency by issuing government bonds. Tax revenues act as a guarantee that interest will be paid to bondholders. As the late economist Hyman Minsky argued, “Everyone can create money; the problem is to get it accepted.” This is why sovereign debt is the proverbial gold standard of financial assets.

Insisting that the finances of state need to be treated like those of a household is an assertion with no basis in fact; instead, it is political cover for imposing austerity – massive cuts in public spending. Nobel-winning economist Joseph Stiglitz cautions that deficit fetishism is a dangerous response to economic stagnation, “because the appropriate size of a deficit depends in part on the state of the economy.” In practice, cutting the deficit neither generated economic recovery nor reduced the national debt in Britain’s case. Maverick economist Thomas Piketty argues that austerity cannot achieve the goal of reducing the debt-to-GDP ratio without hampering economic growth and business investment.

Ultimately, focusing on eliminating deficits in the short term further exacerbates inequality and weakens social cohesion. Brown University professor Mark Blyth decries austerity as a decision to inflict suffering on the most vulnerable, emphasizing its role in hollowing out the state’s social protections. This conclusion is echoed by economist Ann Pettifor, who describes austerity as a form of violence against ordinary people. That point is backed up by a UN special envoy’s report on U.K. austerity measures, which it said reached far beyond the economy; it is considered a contributing factor to the referendum vote to leave the European Union, a key factor in the rapid escalation of child poverty and the first-ever reduction of life expectancy in Britain since such records began.

Much of the moral rhetoric about the national deficit and public debt relies on claims of a perilous future to come. The narrative of an unsustainable national debt unjustly “passed down” to the younger generation contends that, at some unknown time in the future, the government might default and cause a financial crisis, making it hard to find employment and be financially secure. But this future already exists in the present day. The younger generation is saddled with unsustainable household debts, yet there is no moral outrage to be found among the deficit hawks.

Indeed, there is zero political will to address the historically high household debt levels overall. That means everyone who has tried to buy a home, start a small business, drive a car, go to university or take a family vacation over the past three decades is still paying interest on this accumulated stock of debt. Collective indebtedness engenders a collective sense of despair and powerlessness; “financial melancholia” is a mood that permeates society, eroding trust in institutions and exacerbating social divisions.

If you believe the prevailing moral narrative of fiscal restraint and probity as a panacea for economic stagnation and supply chain woes, then heed the warnings of the perilous future that awaits.