Years of Austerity Have Created a Welfare State for the Middle Class

Welfare now means a safety net for the comfortable and social cleansing for the poor.

by Grace Blakeley
05 November 2018, 12:17pm

Photo: Dario Earl / Alamy Stock Photo

Drawing on rhetoric usually reserved for the end of a lengthy war, Theresa May's budget statement last week was supposed to represent the triumphant end of austerity. The Prime Minister reminded the public that their sacrifices had not been in vain – that the deficit has almost been defeated and "the end is in sight".

Eight years of brutal cuts to everything from welfare and local government to the police force have started to frighten even core Tory supporters, so it’s unsurprising that May felt the need to put the axe away.

But as it stands, Philip Hammond's budget came nowhere close to delivering on May's promise. Estimates on the amount needed to finally end the cuts range from £20 billion to £31 billion, spread across different departments and welfare spending – and that would just be to stabilise spending at current levels. At the start of this year, there were still £7 billion worth of cuts to welfare yet to make their way through the system. The grant to local councils will continue to be reduced until, by 2020, 50 percent of councils won't receive any central government funding. And many of those departments not facing further cuts are still close to breaking point under the current funding settlement.

So no, austerity isn't over. But if we are edging closer to the Conservatives' preferred fiscal settlement, then we're looking at a very different welfare state to the one they started tearing lumps out of in 2010.

While the middle classes are now starting to feel the pinch, the impacts of austerity have been felt starkly unevenly across different groups. Cuts to local government spending have had a particularly severe impact on at-risk and looked-after-children, the elderly and the disabled. Alongside those in work on low incomes and single parents, the disabled have also been severely impacted by welfare cuts, with the UN accusing the British government of "grave and systemic" violations of disabled people's human rights.

This budget is no exception. Hammond has cut income tax on the top earners, increased the personal allowance and allocated millions to dealing with potholes – interventions that disproportionately benefit middle and upper earners. Analysis from the Resolution Foundation shows that half of the benefits of this budget will go to the top 10 percent of households. Meanwhile, the small increase in funding to Universal Credit and local government will only marginally improve the position of the poorest. The £20 billion to the NHS is welcome, but without more money going into social care the health service is likely to continue to feel the pinch.

The shape of the so-called "end of austerity" budget proves beyond reasonable doubt that the cuts have been part of a long-term political project not only to shrink, but also reshape, the state. The social security system that has emerged from eight years of cuts looks like social insurance for the middle classes, and social cleansing for the poor.

While this is clever short-term politics from the Tories, they'll soon find they've caused the kind of lasting economic damage that hurts everyone. Since the crisis, economic growth has relied almost solely on consumption spending by households. In the context of the longest period of wage stagnation since the Napoleonic wars, this has been fuelled by unsustainable increases in household debt, which reached almost 140 percent households' disposable incomes in 2018 – mortgages, student loans and all those credit card purchases that you could totally afford and will definitely pay off… at some point. But debt can't increase forever, and when households stop borrowing, consumption-driven economic growth will grind to a halt. Businesses know this and, anticipating a contraction, they've stopped investing.

A turn in the business cycle, and potentially another recession, is clearly around the corner. If the Conservatives respond to it with another round of cuts, they will inflict deep and permanent damage on the British economy that even the richest in society won't be able to ignore. Labour needs to expose the Tories' politicking for what it is: reckless economic mismanagement that will impoverish the economy and cause deep suffering for the most vulnerable.

Doing so requires addressing some under-developed aspects of the party's economic agenda. Labour must commit to properly funding the country's welfare system, based on both a rational appeal to Keynesian economics, and a moral one to our common humanity.

All of the Tories' cuts to welfare should be reversed, and the sanctions regime removed entirely. This should be combined with a commitment to write-off a certain amount of "unsecured" consumer debt – debt not backed up by an asset, like credit card debt rather than mortgages. The government could buy up some of this high-interest debt – forcing the banks to take a hit – and make it disappear, or allow people to repay it over a longer period of time at much lower interest rates. This would be a politically popular move, so it would negate any resentment towards a more generous welfare settlement.

Labour could also do better on taxation. While the commitment to increase income tax only on the top 5 percent is welcome, the real source of inequality in the British economy is the unequal distribution of wealth, exacerbated by the total failure to tax it properly. Reforms to inheritance tax are political kryptonite and would need to become a political hot topic before Labour touches them – but bringing capital gains and dividend income into the income tax schedule would be a relatively easy win.

This must be accompanied by a serious attack on tax avoidance, by expanding HMRC's mandate and beefing up its enforcement capacity, as well as imposing greater transparency on the UK's overseas territories and crown dependencies so that companies can't keep pretending they make all their profits in Bermuda.

This budget has made one thing particularly clear: the end of austerity will not arrive until the election of a Labour government – which could be coming sooner than we think.


Philip Hammond
Budget 2018