The Welfare State and Austerity: What Each Position Is Protecting

On 5 September 2023, Birmingham City Council issued a Section 114 notice — the municipal equivalent of a bankruptcy declaration. Birmingham is England's second-largest city, with 1.1 million residents and responsibility for social care, waste collection, housing support, and the welfare of some of the poorest communities in the country. The immediate trigger was a £760 million equal pay liability. But the liability had been accumulating for years while the council's core government funding grant had been cut by over 40 percent in real terms since 2010 — part of the most sustained austerity program a British government had imposed in the postwar era. Birmingham was not an isolated case. Northamptonshire had issued Section 114 notices in 2018. Thurrock, Woking, Slough, and Croydon followed Birmingham in 2023 and 2024, together representing billions in liabilities that councils had tried to cover through commercial speculation, deferred maintenance, and the slow strangulation of discretionary services. Libraries. Youth centres. Domestic violence refuges. Road maintenance. The reserves that would have absorbed the shocks had been spent keeping statutory services running.

These insolvencies did not happen in a vacuum. They are the downstream consequence of a structural choice made in 2010 by George Osborne and the Cameron government: that the UK's fiscal deficit, which had expanded dramatically during the 2008 financial crisis and its aftermath, required urgent consolidation; that this consolidation should fall primarily on public expenditure rather than taxation; and that local government, which delivered the services most depended on by the poorest households, should absorb the largest proportional cuts. Between 2010 and 2019, local authority funding from central government fell by 49 percent in real terms. The welfare state contracted. The social infrastructure that had been built across seven decades of postwar settlement — the NHS, local social care, legal aid, housing benefit, Sure Start children's centres, disability living allowance — was restructured, capped, means-tested, or abolished.

This is not primarily a British story, though the UK makes it vivid. The same structural dynamic played out across the eurozone after 2010, with Greece, Ireland, Portugal, and Spain subjected to "troika" programs — conditions from the IMF, the European Commission, and the European Central Bank — that required deep spending cuts as the price of financial support. It echoes in the decades of structural adjustment programs that the IMF imposed on developing economies across Africa, Latin America, and Asia from the 1980s through the 2000s. And it is alive in every contemporary debate about public debt, fiscal rules, and the size and role of the state — in the United States, in France, in Brazil, in South Africa. The question is always the same: what does fiscal responsibility require, who bears its cost, and what exactly is being protected by the choice to consolidate or to spend?

What fiscal consolidation advocates are protecting

The conviction that sovereign debt is not unlimited, that bond market confidence is a real constraint rather than a manufactured one, and that governments which lose the ability to borrow face catastrophic consequences that dwarf the harms of pre-emptive consolidation. The core of the fiscal hawk position is not ideology but contingency: the claim that there exists some level of public debt, relative to GDP, at which lenders will either refuse to lend or demand interest rates that make debt service unsustainable, creating a self-reinforcing spiral toward default. Carmen Reinhart and Kenneth Rogoff's 2010 paper "Growth in a Time of Debt" — which became the most-cited document in the austerity literature, though also the most contested — argued that countries with debt-to-GDP ratios above 90 percent experienced median GDP growth of roughly minus 0.1 percent. The policy conclusion drawn from this finding was that austerity was not merely fiscally prudent but growth-enhancing: that the fiscal drag from consolidation would be offset by the confidence effects of demonstrated solvency. George Osborne cited Reinhart and Rogoff repeatedly in making the case for the Emergency Budget of 2010. The IMF's own 2010 World Economic Outlook endorsed the "expansionary fiscal contraction" thesis, arguing that fiscal consolidation in advanced economies would increase short-run output by calming markets and reducing uncertainty. What this position is protecting is the credibility of the sovereign as a borrower — credibility that, once lost, takes a generation to rebuild and destroys the state's capacity to respond to any future emergency, including the very welfare crises that spending advocates want to prevent.

The argument from intergenerational equity: that running persistent structural deficits transfers the cost of current consumption to future taxpayers who had no say in the spending decisions and who may inherit an economy with reduced fiscal capacity as a result. This argument has been made most clearly by economists in the tradition of public finance — Martin Feldstein at Harvard, Alan Auerbach and Laurence Kotlikoff in their "generational accounting" framework, and in the UK, the Office for Budget Responsibility's regular assessments of long-term fiscal sustainability. The argument is not that debt is inherently wrong but that structural deficits — spending that exceeds revenues not because of a cyclical downturn but as a permanent feature of fiscal policy — compound over time and shift the distribution of lifetime tax burdens in ways that are neither transparent nor democratically endorsed. When the interest rate on public debt exceeds the growth rate of the economy (r > g, in the notation that Olivier Blanchard made famous in his 2019 American Economic Association presidential address), debt accumulation is not self-correcting. The fiscal hawk position protects the principle that each generation should broadly pay for its own consumption of public services — that the welfare state should be funded on a sustainable basis, not mortgaged to the future.

The structural reform argument: that fiscal pressure, while painful, forces governments to confront inefficiencies that political incentives would otherwise protect indefinitely — and that the welfare state that emerges from consolidation can be more targeted, more effective, and more sustainable than the one that preceded it. This is the most contested version of the fiscal hawk position, but it is not merely rhetorical cover. Economists at the IMF in the early 2010s — Alberto Alesina and Francesco Giavazzi most prominently — argued that expenditure-based consolidations had historically outperformed revenue-based ones in terms of both fiscal success and economic recovery. The mechanism was partly confidence (lower spending signals fiscal commitment to markets) and partly structural (public sector wage restraint and benefit reform reduced the non-tradeable sector's claim on resources, freeing capital for investment). The canonical case was Canada in the mid-1990s, where the Chrétien government cut spending by 10 percent of GDP over two years and presided over a decade of strong growth. The Danish "flexicurity" system — high job turnover combined with generous unemployment insurance and active labour market policy — is frequently cited as evidence that a leaner welfare state can be both more equitable and more economically dynamic than a larger, less flexible one. What this position is protecting is the possibility of reform: the insistence that fiscal constraint need not mean welfare destruction, and that the political economy of unreformed welfare states — resistant to change, captured by producers, and increasingly expensive — is itself a threat to their long-run viability.

What Keynesian demand-management advocates are protecting

The empirical finding that fiscal multipliers — the ratio of output change to spending change — are large and positive in recessions, meaning that austerity during downturns reliably worsens the very fiscal ratios it is designed to improve, making it self-defeating as well as harmful. This is not an ideological claim. It is a measurement claim, and the measurement changed between 2010 and 2013 in ways that forced one of the more significant public admissions in the history of modern macroeconomics. In October 2012, IMF economists Olivier Blanchard and Daniel Leigh published a working paper — "Growth Forecast Errors and Fiscal Multipliers" — analysing 28 economies that had undergone consolidation programs between 2010 and 2011. They found that the IMF's own forecasts had systematically underestimated the output costs of austerity by a factor of roughly three. The institution had assumed fiscal multipliers of around 0.5; the data suggested they had been between 0.9 and 1.7. This meant that for every £1 cut in public spending, GDP had fallen by £1.50, not £0.50. Debt-to-GDP ratios had therefore worsened rather than improved in many cases, because the denominator had shrunk faster than the numerator. The IMF issued what amounted to a public apology in its 2013 World Economic Outlook. What Keynesian advocates are protecting is this empirical finding — the insistence that the timing and conditions of fiscal adjustment matter as much as the fact of adjustment, and that austerity in a recession is a category error that compounds rather than resolves the crisis it claims to address.

The social costs argument: that austerity produces health outcomes, mortality rates, and life expectancy losses that dwarf its fiscal savings and that these costs fall with brutal precision on those who were most vulnerable before the cuts began. David Stuckler and Sanjay Basu's The Body Economic (2013) provided the most systematic early synthesis of this evidence, comparing health outcomes across countries that had imposed austerity against those that had not. Their findings — that Greece's austerity-era cuts to public health budgets preceded a 200 percent increase in HIV infections and a 500 percent increase in suicide rates; that Iceland, which refused the troika's terms and let its banks fail instead, recovered faster and sustained better health outcomes than Ireland, which accepted them — were contested but persistent. In the UK, epidemiologist Danny Dorling documented a reversal of a decades-long trend of declining mortality, with life expectancy stalling and falling in the most deprived decile of communities from 2011 onwards. Michael Marmot's 2020 report "Health Equity in England: The Marmot Review 10 Years On" found that healthy life expectancy had fallen in the poorest communities between 2010 and 2020, and explicitly attributed this to austerity policies. The argument is not that public spending prevents all illness; it is that the specific institutional capacity being cut — social care, mental health services, housing support, Sure Start — is precisely what mediates between poverty and health outcome. Remove the mediation, and poverty becomes illness and death.

The structural demand argument: that a government surplus is a private sector deficit, and that in an economy where the private sector is attempting to save following a debt crisis, fiscal consolidation removes the demand that no other sector can provide — suppressing investment, employment, and the wage growth that would eventually reduce the welfare bill organically. This is the argument Paul Krugman pursued relentlessly in his New York Times column between 2010 and 2015, drawing on the liquidity trap analysis he had developed for Japan in the late 1990s. When interest rates approach zero and households are trying to repair balance sheets damaged by a financial crisis, monetary policy becomes ineffective — the central bank can create reserves but cannot compel lending or spending. In this condition, government is the spender of last resort, and fiscal withdrawal removes the only active source of demand in the economy. The paradox of thrift — Keynes's insight that individually rational saving decisions become collectively self-defeating — operates at the national level. Joe Stiglitz, Brad DeLong, and Larry Summers (who reversed his earlier fiscal conservatism in 2013 in favour of "secular stagnation" analysis) all converged on the same finding: that the opportunity cost of austerity was not merely cyclical lost output but permanent damage to the productive capacity of the economy, as firms cancelled investment, skills atrophied, and infrastructure deteriorated. The lost decade of UK productivity growth — from 2008 to at least 2023 — is the statistical record of this damage.

What welfare state preservationists are protecting

The conviction that austerity is not primarily a fiscal strategy but a political one — that the deficit framing provides cover for a permanent structural reduction in the state's role, and that each round of "temporary" or "necessary" cuts permanently erodes the institutional capacity that makes welfare delivery possible. This is the argument made most forcefully by Colin Crouch in The Strange Non-Death of Neoliberalism (2011) and by David Graeber in The Utopia of Rules (2015), and it has a specific empirical dimension. Institutions are not merely budgets — they are knowledge systems, networks of practice, professional cultures, and trust relationships that take decades to build and can be destroyed in months of funding withdrawal. The UK Sure Start programme — evidence-based early childhood intervention for families in deprived areas, credited by evaluation studies with reducing A&E admissions and improving school readiness — saw 1,000 children's centres close between 2010 and 2019. The programme was not formally abolished; it was allowed to wither through budget reductions to local authorities who were free to decide how to allocate them. What this means in practice is that the cumulative damage of austerity is largely invisible in any single year's budget document. It shows up in local authority insolvency notices, in waiting lists for social care assessment, in the absence of services that simply no longer exist for communities that no longer remember they once had them.

The distributional argument: that the incidence of austerity spending cuts is not neutral — that it falls with systematic precision on the households that are most dependent on public provision, and that this makes austerity a form of upward redistribution even when it is not described in those terms. The Institute for Fiscal Studies, the Women's Budget Group, and the Resolution Foundation all produced analyses between 2010 and 2015 showing that the distributional impact of the Coalition and Conservative governments' welfare and public spending changes was regressive. Households in the bottom income quintile lost a higher proportion of their net income than any other group — not because the cuts were designed to be regressive, but because those households depend most heavily on the services being cut. Social care. Housing benefit. Legal aid. Tax credit supplements. Disability living allowance. Benefits cap. Each individual change had a fiscal rationale. Their combined effect was a systematic reduction in the income of the poorest 20 percent of households. The Women's Budget Group's analysis showed that women bore approximately 86 percent of the fiscal impact between 2010 and 2015, because they were the primary recipients of the in-work benefits and public sector employment that austerity hit hardest. What welfare state preservationists are protecting is the recognition that fiscal neutrality does not exist — that every spending decision is also a distributional decision, and that describing austerity as "sharing the pain" obscures who in fact absorbs it.

The political economy argument: that universal public services — the NHS, state education, local parks and libraries — command their political resilience precisely because everyone uses them, and that the long-run threat to the welfare state is not fiscal but political: the erosion of the cross-class constituency that defends it. This is the Titmuss argument in its contemporary form, and it is particularly acute for services that have been means-tested or cut to the point where better-off households have exited to private provision. When the NHS waiting list in England reaches 7.5 million — as it did in 2024 — and private healthcare subscription rates rise to 12 percent of the population (from 8 percent in 2010), something politically significant has happened: the constituency for NHS improvement has bifurcated. Those who can afford to exit have less personal stake in a public system that mainly serves those who cannot exit. The same dynamic affects school funding, social housing, and public transport. The welfare state preservationist position is not that nothing can change; it is that the political preconditions for a welfare state — a cross-class solidarity coalition that has a stake in maintaining shared institutions — are fragile and difficult to reconstruct once broken. Austerity does not merely cut services. It cuts the social glue that makes services politically defensible.

What monetary sovereignty critics are protecting

The foundational claim that currency-issuing governments — those that borrow in a currency they themselves create and do not have a fixed exchange rate commitment to defend — face no solvency constraint of the kind that applies to households, firms, or eurozone member states, and that the "running out of money" framing of austerity is therefore a category error applied to the wrong kind of entity. Modern Monetary Theory, associated with economists Warren Mosler, Randall Wray, Stephanie Kelton, and the post-Keynesian tradition at the University of Missouri Kansas City, is not primarily a policy prescription but an institutional description. The claim is this: the United States, the United Kingdom, Japan, Canada, and Australia — all of which issue their own floating-rate currencies — can always service debts denominated in those currencies, because they are the monopoly issuers of the currency in which the debt is denominated. Japan's debt-to-GDP ratio exceeded 200 percent throughout the 2010s and 2020s with no sovereign default and no bond market crisis, despite consistent predictions from mainstream economists that one was imminent. Stephanie Kelton's The Deficit Myth (2020) synthesised this argument for a popular audience, arguing that the constraint on government spending is not the availability of money but the availability of real resources: labour, materials, productive capacity. When those resources are idle — as they were, demonstrably, throughout the austerity period in the UK and US — government spending does not crowd out private investment. It mobilises resources that would otherwise remain unemployed. What this position is protecting is not irresponsible spending; it is a more accurate description of the monetary system, and therefore a more honest account of what trade-offs austerity actually involves.

The inflation-not-debt argument: that the genuine constraint on government spending is the risk of demand-pull inflation — spending beyond the productive capacity of the economy — and that this constraint is real but categorically different from the solvency constraint that austerity discourse invokes. MMT economists have been at pains to emphasise that their position is not that governments can spend without limit. The constraint is real, but it is located differently: not in the bond market or the debt-to-GDP ratio, but in the supply side of the economy. When Randall Wray writes that "taxes don't fund spending" for a currency-issuing government, he means that the logical sequence is: government spends (creating money), government taxes (destroying money), with the sequencing being a functional reality of monetary operation rather than a fiscal metaphor about running out of funds. The pandemic provided a live test: the United States, UK, and eurozone all expanded their deficits dramatically in 2020-21 to sustain household incomes and business viability. The inflation that followed in 2021-23 was real and serious. MMT economists argued it was primarily supply-side in origin (energy price shocks, supply chain disruption, landlord rent-setting behaviour) rather than demand-pull; mainstream economists disagreed, citing the scale of fiscal expansion. This is a genuine empirical dispute. But what the monetary sovereignty position is protecting is the insistence that the pre-pandemic decade of austerity — undertaken when economies had enormous slack, when unemployment was high and interest rates were near zero — was not financially necessary. It was a political choice presented as fiscal reality.

The eurozone distinction: that the constraints on eurozone member states are genuinely different from those facing currency-issuing governments — that Greece, Ireland, and Portugal faced real solvency constraints precisely because they had surrendered monetary sovereignty — and that applying the lessons of eurozone crisis to the UK or US involves a fundamental misidentification of the institutional framework. This is perhaps the most practically important claim the MMT tradition makes, and it is one where even mainstream economists have moved substantially toward its position. Greece genuinely could not print euros. Its fiscal crisis was a genuine liquidity crisis in a currency it could not issue, subject to a central bank (the ECB) that had initially signalled it would not act as a lender of last resort. Mario Draghi's "whatever it takes" speech in July 2012 — which stabilised the eurozone crisis almost immediately — was precisely the ECB agreeing to function as the monetary backstop that currency-issuing governments take for granted. The lesson drawn from Greece and applied to the UK — that the UK too needed urgent deficit reduction to avoid a Greek-style crisis — confused a monetary architecture problem with a fiscal one. The UK was never at risk of a Greek-style crisis, because the UK issues sterling. What the monetary sovereignty position is protecting is the analytical clarity needed to distinguish genuine solvency constraints from manufactured ones, so that policy debates engage with real trade-offs rather than fictional ones.