The Greatest Trick

Public sector reform is a lot harder now than it would have been in the 2010s

The greatest trick the devil ever pulled was convincing the world he didn’t exist that fiscal consolidation was needed after 2008/09 public sector bailouts.

Reading through the announcements from the UK’s new PM Andy Burnham, the scale of the change that the UK needs is palpable. The agenda is huge, from infrastructure investment to boosting defence spend to social care to overhauling education.

This prompts two thoughts.

First, it is incredibly tough to enact these changes with a very tight fiscal backdrop. Net debt is just short of 100% of GDP, the fiscal deficit has been hovering in the 4-5% of GDP region, and gilt markets have been very sensitive to increased deficit spending over recent years.

Second, it is incredible just how much of a squandered opportunity there was in the 2010s to address structural issues.

To understand this, we first must run through a short history of the financial crisis and its aftermath.

1. Private sector banks overleveraged in the 2000s

2. Certain private sector banks blew up so bad that they risked bringing down the entire financial system

3. The government (correctly) stepped in to avert contagion, bailing out banks with massive direct equity investment

4. The increased equity buffer stabilised the banking sector

There are clear criticisms to be made of government and regulators ahead of the crisis, and many to be made during the crisis (e.g. bail outs over bail ins), but the biggest criticism to be made comes in the response after the crisis: austerity.

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