Austerity may be a dirty word but it is too soon to write the obituary

Critics of austerity got one thing correct: the bond vigilantes were never going to arrive. The UK is not Greece or Argentina. We haven’t properly defaulted on our debt for hundreds of years, despite it rising to well over 200pc of GDP at times. Our prosperity is partly down to our government’s predilection to keep its financial promises, and unlike individual Eurozone economies, we have our own central bank.

On the other two counts, however, the austerity proponents were right.

Restraint then has granted more financial freedom now. And while Theresa May and then Boris Johnson increased spending on the NHS, police, and infrastructure, pre-Covid, there is no plan to completely “reverse austerity” in the medium or long run. The debt path will be much lower than it would have been without cuts, which helps now given the Covid-19 tidal wave and spending pressures from an ageing population.

Macroeconomic effects – on aggregate demand, inflation, and unemployment – are where the austerity advocates won in practice, but not in debate. Austerity’s critics claimed fiscal tightening would lead to sustained elevated unemployment, with “scarring effects” on workers’ skills that would then worsen future growth prospects.

In fact, macroeconomic support through low interest rates and QE led to inflation not far undershooting its target for the decade, while unemployment fell rapidly, driven (as predicted) by the private sector. An all-time record employment rate was achieved by 2015.

True, real GDP growth was abysmal, leaving a lost decade in living standards. But this was driven by sluggish productivity growth, averaging just 0.3pc per year, a striking reversal from the 2pc growth seen between 1997 and 2007. To claim austerity caused this, however, is a speculative theory for which there is little to no economic evidence.

Yes, some extra well-targeted investments in, say, transport might have improved productivity a bit. But this impact of government spending would not occur instantaneously. In fact, government net investment was actually higher in the 2010s than the 2000s, despite higher productivity growth in the latter.