Coronavirus: Economist warns post-crisis austerity would spark 'mighty backlash'

A woman carries an anti-austerity placard as demonstrators calling for fairer pay and rights for workers, as well as against public service cuts and workplace discrimination, gather on Victoria Embankment ahead of the 'New Deal for Working People' march organised by the Trades Union Congress (TUC) in London, England, on May 12, 2018. (Photo by David Cliff/NurPhoto via Getty Images)
A protest against public spending cuts in London in 2018. (David Cliff/NurPhoto via Getty Images)

A leading economist has warned the UK and US governments will fuel a “mighty backlash” if they slash spending to cut public debt once the coronavirus crisis has passed.

Danny Blanchflower, who served as a Bank of England policymaker during the global financial crisis, sounded the alarm after Britain’s former chancellor George Osborne said this week Britain faced renewed austerity.

In an exclusive interview with Yahoo Finance UK, Blanchflower warned anger was already turning against past spending cuts as welfare and healthcare safety nets come under increasing pressure and scrutiny.

“Osborne calling for austerity — people aren’t going to stand for that,” said Blanchflower, now a professor at Dartmouth College in the US. “We’ve exposed the fact the health and welfare systems have been cut to bone in the US and the UK. People will say you underfunded the NHS. We’re going to see a mighty backlash.”

Read more: Blanchflower warns many of UK’s furloughed workers ‘may not get their jobs back’

It comes after Osborne, who oversaw an unprecedented cost-cutting drive as finance minister after the global financial crisis, said on Monday (20 April) another “period of retrenchment” was likely as part of a drive to reduce public debt.

Osborne, now editor of the Evening Standard newspaper in London, warned Britain’s recovery was more likely to be ‘U-shaped’ than ‘V-shaped’ as some have forecast. “You aren’t going to get a sharp bounce,” he said in comments reported by Bloomberg at a Confederation of British Industry (CBI) webinar event.

Blanchflower is not the first to suggest spending cuts could be politically hard to sell. Paul Johnson, director of the widely respected Institute for Fiscal Studies (IFS) think tank, also said earlier this month more belt-tightening looked “unlikely” in the UK.

The current government could face a particular challenge if it heeded Osborne’s analysis, as it has vowed to “turn the page” on the austerity of previous Conservative administrations. Pressure is also growing for higher welfare spending and higher pay for NHS, care and other low-paid public sector staff still working during the crisis.

LONDON, ENGLAND - MARCH 20:  The London Evening Standards carries a front page story on the Chancellor George Osborne's budget, which was leaked on the paper's Twitter account, prior to the Chancellor's Commons statement on March 20, 2013 in London, England. The Chancellor is under pressure after the UK lost its AAA credit rating last month and the lack of growth in the economy, is predicted to reveal plans to continue with his austerity strategy to cut the UK's deficit. It is likely that Mr. Osborne will announce further spending cuts to Whitehall departments with the savings put in place to boost large scale infrastructure projects, with both tax breaks on childcare and a rise in fuel duty also high on the agenda.  (Photo by Matthew Lloyd/Getty Images)
An Evening Standard headline about austerity in 2013, before chancellor George Osborne, pictured, years later became editor of the paper. (Matthew Lloyd/Getty Images)

Growing unrest over cutbacks is widely seen to have cost the party their majority in the 2017 election, while low interest rates and central bank stimulus have made higher government borrowing more attractive to policymakers.

Read more: UK could face tax hikes amid fears of ‘biggest deficit in history’

But Blanchflower and Osborne agree recovery could be weak, putting a continued strain on public finances.

The UK government has been forced to borrow significantly more than expected to fund emergency stimulus and support measures. It has announced unprecedented income protection schemes, more generous benefits, extra NHS funding, business grants and sick pay rebates and bailouts in the transport and charity sectors.

March borrowing hit a four-year high, and it is likely to continue to rise while the measures are rolled out and tax revenues drop as the virus and lockdown cripple the economy. Office for Budget Responsibility (OBR) figures suggest it could reach its highest level this year since the Second World War.

But investors still appear happy to buy UK debt at record low yields, despite the government planning more bond sales in the next three months than previously anticipated for the whole financial year.

In the longer term, some who expect a strong recovery believe much of the budget deficit will shrink by itself, particularly as many spending measures are planned as temporary. New chancellor Rishi Sunak appeared to suggest as much this week, telling journalists: “The best way out... is to just grow the economy.”

Doubts are growing about the likely strength of recovery however, with Blanchflower agreeing with Osborne it could be weaker than widely expected. Blanchflower warned many of Britain’s millions of furloughed workers “may not get their jobs back,” with a lengthy lockdown and consumer caution likely to prove an enduring drag and hit tax revenues.

Read more: UK coronavirus spending surge fuels growing budget deficit

Public debt will also be much higher whatever happens to the deficit, with economists and policymakers divided about whether recovery will be strong enough to keep it sustainable. Any rise in inflation or central bank interest rates could also force up the cost of servicing the debt, though the Resolution Foundation believes interest payments are likely to remain “manageable.”

The think tank said earlier this month new fiscal rules may still be needed to reassure bond markets and the public, such as closing the current deficit within five years of recovery. But it backs plugging the gap through tax rises for “those least affected by the crisis,” rather than austerity likely to most hit “those who have borne the brunt of it.”