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The UK Experience of Austerity Policy
In the current debate resulting from the recent open letters to the Financial Times expressing opposing views
on the advisability of implementing far-reaching public spending cuts in the near to medium term, we feel that
neither side has provided compelling evidence from UK economic history. Our contribution thus seeks to
move the debate onto a more empirical footing.
Cutting public sector expenditure to reduce the national debt can be effective – but only if there is significant
growth in the economy. If this is not the case, UK history consistently shows that the debt burden as a
percent of GDP will either remain high, or rise even further.
This can be explained by the multiplier effects associated with government spending and austerity when the
national debt is high. During a period of economic expansion, employment and income growth together
contribute to higher tax receipts relative to public expenditure (including debt servicing), allowing for a
reduction in national debt as a proportion of GDP. In other words, if GDP growth exceeds growth in net
public spending, the national debt to GDP ratio falls. On the other hand, reducing public expenditures during
a recession can be expected to add to the downturn, as increasing unemployment and falling incomes mean
lower tax revenues and a greater burden on public services.
The figure below (from HM Treasury) shows the trend in UK national debt as a proportion of GDP from 1900
to the present (2010 estimate).
During the First World War, the UK national debt increased from 25% of GDP in 1914 to 135% in 1919. In an
attempt to pay this off, the Treasury adopted a restrictive policy. The result was a stagnant economy
throughout the 1920s and the national debt to GDP ratio increased.
In 1931, in an attempt to reduce the interest charge on the national debt, the government cut the rate of
interest to 2%. This unwittingly triggered a house building boom and growth of new consumer goods
industries in the South and East of Britain. One effect of the resulting increase in GDP was a reduction in the
national debt from 177% of GDP in 1933 to 110% in 1940.
The Second World War increased the national debt to 216% of GDP in 1945 and 238% by 1947. From 1948
to 1973, however, strong economic growth contributed to a reduction in the national debt to 50% of GDP, as
growth in GDP exceeded the increase in government expenditure resulting from the extended role for the
State (with the creation of the NHS and the welfare state).
During the 1970s and 80s, there was a retreat from the welfare state, extensive privatization and the
replacement of Keynesianism with Monetarism. Stagflation in the 1970s and major recessions in the early
1980s and early 1990s caused the rate of debt reduction to slow. From 1992, economic recovery and a
determined effort to reduce public expenditure contributed to a reduction in the national debt to 26% of GDP
in 1993. But by 2006, it had once again risen to 38% of GDP; and by 2009, to 55% of GDP, well above the
level it had been during the mid 1970s.
In short, the historical record suggests that only in a context of strong economic growth can we expect
attempts to reduce the national debt to be effective. In a recession, restrictive policies are likely to be counterproductive and may consolidate the debt at an even higher level. Consequently, we would argue in favour of
delaying public sector spending cuts until the economy demonstrates credible signs of growth.
Dr Sue Konzelmann,
Reader in Management and Director of the London Centre for Corporate Governance and Ethics (LCCGE),
Birkbeck, University of London
Dr Frank Wilkinson
Emeritus Reader in Economics, University of Cambridge, and LCCGE Research Associate
Mr Marc Fovargue-Davies
Strategy Consultant and LCCGE Research Associate
National debt as % of GDP
20
20
20
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
08
02
05
96
99
90
93
84
87
78
81
72
75
66
69
60
63
54
57
48
51
42
45
36
39
30
33
24
27
18
21
12
15
06
09
00
03
National debt as % of GDP: 1900 to 2010
250
200
150
100
50
0