Austerity and Brexit

The UK’s defining domestic economic policy under the Conservative governments since 2010 can be subsumed under the term ‘austerity’.

In this article, I explore some of the notable patterns and observations in UK politics and economics that I argue play a pivotal role in the run up to the EU referendum. This highlights that the UK's specifi c national context, domestic economic policy choices and economics matter a fair bit. Yet, the social and economic context of the UK is shared across many countries, highlighting the need for progressive economic policymaking to tackle the underlying structural economic failures.

Domestic politics prior to 2016
The only party in the UK's political system that stood on a political platform of leaving the EU was the United Kingdom Independence Party (UKIP). The party was established in the wake of the Maastricht Treaty and, from the late 1990s, started to increasingly contest UK elections. In the 2005 Westminster elections, UKIP fi elded 496 candidates across the 650 constituencies. In 2010 it fi elded 558 candidates, while in the consequential 2015 general election, UKIP fi elded candidates in 624 out of 650 potential constituencies. Across European elections, which use an electoral system that gets much closer to proportional representation, UKIP did quite well electorally already in 2004, securing around 15.6% of the vote (albeit on low turnout).
Yet, it remains that prior to 2010, UKIP performed quite poorly in most national polls. And even in May 2010, as unemployment reached record levels in the wake of the 2008/2009 crisis and despite fi elding candidates in most constituencies, UKIP won only 3.1% of the popular vote. The 2010 election produced a three-way split and a hung parliament with the Conservatives winning 36.1% of the popular vote (but gaining 47.1% of the seats); Labour coming in second with 29% of the popular vote and the Liberal Democrats in third with 23% of the popular vote. The hung parliament resulted in a Conservative-led coalition government, in which the Liberal Democrats were by far the minority partner with one-sixth of the number of seats that the Conservatives held. While UKIP was only a minor player in national politics prior to and including 2010, from then onwards, the party started to signifi cantly pick up votes in local elections, most notably from 2013 and particularly in the 2014 European election and the 2015 general election (see Figure 1).
The relevance of UKIP's electoral support for the 2016 Leave vote has been documented broadly. At the individual level, a vote for UKIP in the 2014 European election or the 2015 general election almost certainly implied support for DOI: 10.1007/s10272-020-0865-5 Forum Leave in 2016. 4 This pattern at the individual level also holds in aggregates. Figure 2 highlights the tight relationship between support for UKIP in the 2014 European elections and support for Leave in the 2016 referendum quite clearly.
UKIP's voter base, to a signifi cant extent, included protest voters. In the 2014 European election, in which UKIP came out fi rst securing 26.6% of the popular vote, only 43% of UKIP voters cited that they support UKIP because they wanted the UK to leave the EU or were unhappy with Europe. The second most frequent response, with 26%, indicated that UKIP voters wanted to send a message to the other three parties or to voice their protest. Despite the topic dominating the 2016 EU referendum, only 18% of UKIP voters cited immigration as their reason for supporting UKIP. This highlights that individual electoral support for UKIP includes a mix of motivations -from classical EU-scepticism to pure protest, which was consequential in 2016. 5 What can explain UKIP's post-2010 surge? Before making the case that the answer to this is found in the UK's domestic economic policy decisions in the wake of the 2008/2009 crisis, it is imperative to understand that even the paltry 13% performance of UKIP in the 2015 general election was consequential in bringing about the 2016 EU referendum. The answer is found in the UK's fi rst-past-the-post electoral system in which UKIP's 13% popular vote in 2015 resulted only in a single seat in the Westminster parliament. amounts of anti-austerity protest votes from a broad set of backgrounds that may conventionally be associated either with non-voting or with support for Labour or the Liberal Democrats -which, until then, was seen as the classical protest party. 6 In England, the Conservatives won 59.9% of the seats with only 40.9% of the vote. The fragmentation of votes across four other opposition parties -Labour, UKIP, Liberal Democrats and the Greens -allowed the Conservatives to claim victory in England. The outright majority across the UK was secured due to Scotland being effectively lost to the Scottish National Party by both Labour and the Conservatives.

Austerity as defi ning economic policy since 2010
The UK's defi ning domestic economic policy under the Conservative governments since 2010 can be subsumed under the term 'austerity'. Fetzer shows that the sharp increase in support for UKIP between 2010 and 2015 was to a significant extent caused by austerity. 7 I estimate that around 6% to 11% of the support for Leave in 2016 can be attributed to individual-or regional-level exposure to cuts. Austerity entailed deep cuts to public spending, which were implemented along three main pillars.
1. Budget cuts for day-to-day spending across most Westminster departments which took almost immediate effect with the announcement of the autumn budget in 2010.
2. Nominal freezes on most public salaries and benefi ts.
3. Substantive and ongoing deep reform of the UK's social security system -most of which was set in motion  To illustrate the magnitudes and implied compositional changes in public spending, Figure 3 suggests that, starting in 2011, spending for welfare and social protection dropped signifi cantly, declining by 16% in real terms, falling to levels that had last been seen in the early 2000s. 9 Public spending on education contracted by 19% in real terms, while expenses for pensions steadily increased, suggesting a significant shift in the composition of government spending. 10 The 8 T. F e t z e r, op. cit. 9 Ibid. 10 The deep cuts to public spending on education were further exacerbated by increases in tuition fees. Formally the tuition fee caps for undergraduate studies was raised from 3,225 to 9,000 British pounds, implying that the privately born cost of further education steeply rose across most of England and Wales (Scotland does not charge tuition fees to Scottish or EU students -but does levy them on English and Welsh students).
impact of austerity across these three main items of public spending is self-evident: public spending cuts were disproportionately borne by the current working age adult population (who are mostly benefi ting from social security payments) and the future generation (who benefi t from publicly funded education), highlighting that government spending became increasingly age-biased.
A second signifi cant component contributing to the cuts in government spending was nominal freezes on most public salaries and benefi ts. Public sector employees earning more than 21,000 British pounds saw, from 2011 to 2013, a freeze of their salaries, while wage growth has been capped at 1% since 2014. Similar freezes were introduced for most welfare benefi ts, resulting in real term wage and benefi t cuts as infl ation rates were consistently above 1% throughout this period. As such, public sector employment became increasingly unattractive, contributing to staffi ng and staff retention problems across most government entities -particularly in the National Health Service (NHS). There, staffi ng shortages  Austerity was mostly implemented by means of cutting spending -not by raising revenues. Rather, tax-free allowances, whose full benefi ts are only reaped by people with incomes above the tax-free allowance were signifi cantly expanded. Corporation tax rates were drastically reduced from 26% to now 19%. Similarly, very generous pension tax credits were only marginally cut. The most salient dimension of the austerity programme, however, were the cuts to the UK's social welfare system and cuts to local government funding -which provide many of the day-to-day services that citizens use.

Local government spending cuts
Most government ministries saw direct cuts to their budgets. The only departments sheltered from cuts were the Department for International Development and the Department for Health, which funds the NHS. Yet, even the NHS experienced real cuts de facto as it was not spared by the wage squeeze making primary care jobs less attractive, while at the same time it experienced signifi cant increases in demand due to the UK's ageing population. Most salient to many citizens were the dramatic cuts to local government fi nances.
Funding for the Ministry of Housing, Communities and Local Government, which equips local councils with a significant part of their funding, was cut in real terms by between 30 and 40%, putting pressure on local councils to provide services -in an overall environment of increasing demand due to population growth and limited independent revenueraising abilities. 11 Figure 5 highlights the depth of cuts across local governments in England indexed to 2007. This fi gure is neither accounting for infl ation nor population growth; yet, the patterns are quite obvious. Social care spending rapidly increased. In 2017-18, English councils' core budgets totalled about 44 billion pounds. Spending on adult social care absorbed the largest and growing share at 35%. The ageing population along with the cuts to central government support grants implied that councils had to cut spending on items deemed non-essential -the parts of spending that most elastically responded were planning and development (a nominal contraction of 43%), housing (nominal contraction of 35%) and culture (nominal contraction of 25%).
The cuts were highly salient. Police forces had to cut their staff by 17.    Forum implied the closure of community centres, public parks and libraries, which in many cases produced signifi cant local uproar and may have undermined community cohesion. The dramatic cuts to planning and development spending, naturally the most elastic component of spending, indirectly provided a further economic shock to regional economies and undermined council plans to invest in more public housing -in the wake of an already mature housing crisis, an inelastic housing supply and substantial cuts to locally provided housing services, which most often benefi t poor and vulnerable groups in society. Fetzer et al. highlight that housing benefi t cuts implemented in 2011 are sharply and causally associated with an increase in evictions, statutory homelessness and actual rough-sleeping adding to the perception of local economic decline. 13 The fact that around onethird of UK rough sleepers come from other EU countries may have vastly exacerbated the perception of the extent to which immigration may create pressure on the welfare system (despite immigration from the EU being fi scally very positive for the UK). 14 Wealthier communities and districts, on average, were better able to cope with the funding cuts as they could mobilise other sources of funding. As such, the impact of local council budget cuts is likely to have further exacerbated the already vast regional economic inequalities within the UK. 15 Austerity and, in particular, the cuts to local government budgets, were hugely unpopular.
In 2014, 60% of the British Election Study respondents indicated that they thought that cuts to local services in their area had gone either too far or much too far. Only 6% of respondents indicated that they thought cuts had not gone far enough or not gone nearly far enough -the remainder thought that cuts were about right. Contrary to some beliefs, austerity was not popular among UKIP voters.
Welfare reforms and hollowing out of social protection The central pillars of austerity were substantive cuts and ongoing reforms to the welfare system. Beatty and Fothergill highlight that, in particular, disabled workingage adults and single parents were disproportionately affected by spending cuts. 16 Most welfare reform measures were implemented through the 2012 Welfare Reform Act, which took effect in April 2013. These biggest elements combined were expected to reduce welfare spending by around 18 billion pounds by 2015. The extent of cuts is quite visible. Figure 6 presents real welfare spending per capita over time, distinguishing benefi ts targeted at pensioners and benefi ts that are not specifi cally targeted to- Forum wards pensioners. The notable drop in welfare spending per capita from 2012 to 2013 by around 10% in real terms highlights the signifi cant cuts that this entailed -despite unemployment levels in 2013 remaining near the 2012 record high, highlighting that these reductions do not mask broad reductions in the demand for welfare due to an improving economy.
Compositional spending changes. The steady rise in spending for the state pension highlights that the Coalition government's design of austerity implied winners and losers, with many pensioners actually seeing the value of their state pensions increase. This is due to the so-called triple lock, which was introduced by the Coalition government and ensures that the state pension would grow by the minimum of either 2.5%, the rate of infl ation or average earnings growth. The Institute for Fiscal Studies estimates that between April 2010 and April 2016 the value of the state pension increased by 22.2%, compared to 7.6% average earnings growth and 12.3% growth in prices. 17 Hence, the real value of state pensions increased, while the working-age adult population in employment saw a decline in real incomes by 4.7%. For many, real incomes in 2019 have still not recouped their pre-crisis levels.
Ecological fallacy. The observation that state pensions grew faster than real employment incomes may come as a puzzle to some commentators who have studied the EU referendum. The common assertion is that it was the older cohorts that voted predominantly in support of Brexit. 18 An analysis of the data would suggest that older people, on average, were signifi cantly more likely to support Leave in 2016. Naturally, many pensioners would have been indirectly exposed to the consequences of austerity in their communities, for example, due to an increase in rough sleeping or more visible high street shop closures. Further, simply looking at the 2016 EU referendum data is very misleading as it fails to highlight an important compositional effect. A signifi cant share of the older electorate that voted Leave in 2016 would have voted Leave if there had been a referendum, say, ten years ago, simply because EU-scepticism has always been much more pronounced among the older demographic. Yet, what proved consequential after 2010 was the sharp increase in support for UKIP, much of which was due to working-age adult's switching their support to UKIP -often out of pure protest and, in the context of the 2016 Referendum campaign on the basis of misleading, deceitful and unrealistic promises, most of which have since been debunked.
Indirect effects of cuts. The real cuts to transfer incomes further exacerbated regional economic divergence -as the cuts themselves contributed to the sluggish economic recovery in the early 2010s. The primary rule of thumb on the geographic incidence of most benefi t cuts suggests that the impact of the welfare reforms was felt the hardest in the parts of the UK that already were most deprived prior to 2010. 19 Fetzer estimates that for every pound lost in transfer income, local economies contracted by around 2-2.5 pounds. 20 The projected annual savings of around 18 billion pounds from the welfare cuts alone indirectly contributed to the UK's economy being up to 45 billion pounds smaller. The VAT or broad tax receipts on that foregone economic activity could have easily paid for the UK's annual net contribution to the EU's budget.
The indirect economic effects were concentrated in the retail sector, accelerating its already underway structural transformation and may have further contributed to the perception of local economic decline. This has often been subsumed under the notion that political populism provides a harbour for the economically "left behind" or the "places that do not matter". 21 In the case of the UK, the sharp increase in support for UKIP after 2010, which helped bring about the 2016 EU referendum, has mostly domestic origins. 22

Austerity exacerbated existing socio-economic cleavages
To summarise, it is quite evident that austerity exacerbated existing social and economic cleavages across the UK and across the constituent nations of the UK (Scotland was spared some of the impact of the cuts). Naturally, it is not the only factor that played a role in shaping the 2016 EU referendum outcome, but given the evidence, it is hard to deny that it played an important role.

Forum
versus Remain seem to be aligned. 23 In particular, support for Leave versus Remain appears to be distinctly different between • rural and urban agglomerations • high-and low-skilled groups • manual versus non-manual workers • able-bodied versus disabled • young versus old • natives versus migrants.
Consistent with patterns documented elsewhere, and recently summarised in a review by Fetzer and Gold, the welfare state and the UK's internal redistribution system -through transfers to local governments -helped moderate some of the structurally broadening cleavages. 24 Many of these developments featuring the hollowing out of the middle class, growing job polarisation, increasing economic insecurity and growing inequality have common roots. The economic roots are found in import competition from low income countries, 25 offshoring, 26 structural transformation, 27 along with the rise of automation, 28 and skill-biased technological change more broadly. 29 Further, even though most evidence highlights that migration has no adverse effect on natives' economic prospects on av-erage, it is still possible to have very localised adverse effects. 30 Taken together, many of these ongoing and accelerating economic developments produce distributional effects that create winners and losers, and may increase (perceived) economic insecurity. The natural answer is that the welfare state needs to play a particular role in ensuring that losers are adequately compensated. 31 Yet, it is not immediately clear whether transfer payments provide a suitable and sustainable solution to tackle these challenges. Rather, it is important to think about how social and economic policy could more broadly de-risk and reduce (perceived) economic uncertainty by reformulating social contracts.
Structurally, the erosion of unionisation and collective bargaining along with weaker employment protections, together with the rise of large corporations that may exercise monopsony power in labour markets are a challenge that economic policy needs to tackle. Similarly, the increase of precarious or insecure employment, coupled with increasing barriers to accessing housing and affordable and reliant healthcare are a shadow that threatens to break the implicit intergenerational contract. For the fi rst time, future generations do not expect to live a better life than the previous generation. The sceptre of the ongoing climate crisis and geopolitical realignment provides further context.
Brexit itself is a product of the UK's specifi c economic and political history, facilitated by its inadequate institutional setup and signifi cantly driven by austerity politics. The underlying broader economic context is shared by many countries both inside and outside the European Union. Progressive and pragmatic policy changes, ideally backed by solid evidence, are key to tackle the many crises and bring in a brighter future -after all, every crisis is also an opportunity.