The UK is the only country that continues to believe austerity works

This week marks the tenth anniversary of the collapse of Northern Rock, a British building society that converted itself into a bank with disastrous consequences

We can see the effects of austerity when walking down the street (Getty)

It is tempting to believe that Theresa May’s decision to loosen the public sector pay cap marks the beginning of the end for austerity. Removing the 1 per cent limit would be a first step in dismantling it, if you like. I fear not.

Unravelling austerity would mean changing the Tory mindset, which isn’t going to happen. So typically, no extra funds are being made available for modest increases in the pay of police and prison officers. The relevant departments have been told that the extra funds must come from within their own budgets for the current year. So something else will have to give.

Meanwhile the austerity that is visible in the street as we walk past rough sleepers continues as “welfare reform” does its dreadful work. Indeed yesterday we learnt that “homelessness in all its forms has significantly increased in recent years”.

This is the assessment of Sir Amyas Morse, head of the National Audit Office, an independent parliamentary body. He further commented that despite this, the “Government has not evaluated the impact of its reforms…and there remain gaps in its approach”. And Sir Amyas went on to say that it is difficult to understand why the Department for Communities and Local Government persisted with its light touch approach in the face of such a visibly growing problem. I take “light touch” to mean neglect.

As originally conceived, austerity was a response to the financial crisis of 2008. Never forget that this alarming event was purely the result of reckless lending by major banks on both sides of the Atlantic. This week, for instance, marks the tenth anniversary of the collapse of Northern Rock, a British building society that converted itself into a bank with disastrous consequences. Matt Ridley (the 5th Viscount Ridley), who is described as a staunch supporter of Brexit, was at the helm.

The American banks believed they had found a magic money making system. You issued mortgages at high rates to borrowers with poor credit ratings (hence subprime), then bundled these mortgages together, which lowered the risk, and sold these packages in the financial markets for a good price. Hey presto! Except that when US house prices began to fall, the mortgage securities lost value and the banks began to fear insolvency so they stopped lending to each other and their customers. The financial crisis was upon us and matters got rapidly worse.

Governments’ bailed out their banks, which resulted in a big expansion of public debt. Then a new question arose: were even government loans safe? This is what forced governments to turn to austerity policies. If financial markets see that governments are taking painful decisions with regard to their own spending, then they will be impressed and be willing to continue buying government loans. So from 2010 to 2013, the Coalition government pursued an austerity policy. Since then nothing has been added to it, but neither has anything been removed. In particular the cruel programme of welfare reform goes on.

Even in its own terms, it has only partly worked. George Osborne, Chancellor of the Exchequer at the time, stated that the objective was that what is called the structural budget deficit would be in balance in 2015-16. It wasn’t; in fact the deficit is currently running at £50bn or so, a big drop from the £151bn recorded in 2009-2010 immediately following the financial crisis but not zero.

Paul Krugman, the Nobel Prize winning economist and columnist for The New York Times, wrote in 2015 that while the “austerian ideology that dominated elite discussion has collapsed to the point where hardly anyone still believes it, there is one big exception, the coalition that still rules Britain – and most of the British media”. The reason is political rather than one based on economic analysis.

As is pointed out in a handy guide to austerity, Austerity vs Stimulus, edited by Robert Skidelsky and Nicolò Fraccaroli, conservatives like to use the alleged dangers of debt and deficits as a club with which to beat the welfare state and justify cuts in benefits.

That’s what I mean by the Tory mindset – or more pertinently, the attitudes held by May. However there are two parliamentary select committees that could quite properly examine the merits of austerity. There is the Business, Energy and Industrial Strategy Committee chaired by the Labour MP, Rachel Reeves and there is the Treasury Committee chaired by the Conservative MP Nicky Morgan. Both chairs are well qualified for the task. They would be doing a very great public service if they took on this task.