False economies at the heart of austerity


Homeless in Bangkok. Original by BrokenSphere

Many governments around the world shifted to a policy of austerity after the financial crisis led to large rises in public deficits. There is often much talk about its necessity in restoring ‘confidence’ and ‘living within our means’, as well as its potentially damaging effects on growth. But there has been less comment on the problems of cutting spending in particular areas, only to see it rise in others, thus making significant reductions in the deficit harder.

If social policy is seen as a productive factor in economic activity, then squeezing spending in areas such as health and welfare may be much harder than it appears. Cuts to social care for the elderly can lead to a shortage of hospital beds as hospital stays lengthen. Cuts to ‘care in the community’ mental health services could similarly make these equally vital kinds of hospital more crowded and unable to care for new patients. A lack of such necessary care could then lead to rising problems of homelessness, with the attendant costs falling on charities and kind-hearted volunteers. In the latter case, the cost does not disappear but is reallocated more or less to private or ‘third’ sectors as new problems are created.

More generally, cuts to the levels and duration of particular kinds of social welfare benefits in regions with limited job opportunities can lead to rising physical and mental health problems among the (non) recipients if they fail to find a sufficiently well-paid job. It could even raise crime levels, which impose costs on the police and the wider community. Some of these costs may not be easy to value economically, so they may be hidden. However the social costs remain. These can have disparate economic effects if particular regions begin to decline, with falling house prices, reduced demand and employment, rising bankruptcies and increased emigration, with worsening prospects for those who remain.

These sorts of problems are unlikely to operate in a linear fashion. Cuts to public services and welfare will not automatically cause them. But they are a possibility and should therefore be taken into account when plans for public spending cuts are undertaken. Reforms to public services and social welfare could make them more effective at a lower cost. But the relationship between causes and effects may be complex and lead to unexpected outcomes.

One of the goals of social policy under capitalism should therefore be to produce a healthy, educated and productive workforce, which in the long run should benefit both society and the economy. This is surely something that those of all political persuasions can support.


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