By Mike Turley | 20 January 2014
Just as in the UK, the experience of austerity is reshaping the political landscape in Greece, Portugal and Spain. But there are some key differences.
Depending on who you ask, this year’s UK general election will be either the most important vote in a generation or a good election to lose. Whichever party wins, new ministers will need to make decisions about spending cuts, tax and public sector reform that will constitute a turning point in the history of the UK state.
Whatever the outcome on May 7, the tension of coalition politics and a fixed-term parliament has already made 2015 a highly anticipated election year. That anticipation peaked after the Autumn Statement when forecasts confirmed that more than half the cuts needed to eliminate the deficit in the next parliament are yet to be made. Political debates since then suggest that differing visions of austerity look set to dominate election campaigns as we head towards polling day.
Prime Minister David Cameron has made deficit reduction the first of six Conservative manifesto themes and committed to a budget surplus by 2019/20 through spending cuts rather than tax rises. Labour has committed to a similar deficit reduction timetable but plans to deliver a surplus through tax increases, as well as spending cuts. The Liberal Democrats want one-fifth of the deficit reduction to come from taxing the well-off. And Ukip says the party would make savings by leaving the European Union, cutting foreign aid, scrapping HS2, devolving tax powers to compensate for Barnett reductions and abolishing both the Department of Energy and Climate Change and the Department for Culture, Media and Sport.
Amid all the domestic politicking, it’s easy to forget that a global crisis made our national spending cuts necessary. After 2008, governments around the world spent £7 trillion to prop up financial institutions. The ensuing economic downturn reduced tax revenues, widening the gaps that already existed between government spending and government income in many states. At the same time, the sovereign debt crisis threw a new spotlight on how governments manage their citizens’ money and how expansive governments had become. Many countries faced sizeable fiscal consolidation challenges that they approached through a blend of tax rises and spending reductions.
So spending cuts of the scale we have witnessed in this parliament – and that we expect in the next – are not an exclusively UK phenomenon, and the UK is not the only austerity-hit nation in Europe with an election this year. Portugal, Greece and Spain are all heading to the polls and the Irish republic will follow closely behind in 2016 at the latest. So how are their election battles shaping up?
Spain is witnessing seismic political shifts in advance of its general election, expected late in 2015. While the People’s Party and Socialist Worker’s Party – the dominant Right and Left-leaning parties respectively – struggle to capture the public’s imagination, the populist Podemos party has done just that, winning 1.2 million votes and five seats in last year’s European elections.
While the rise of a populist party might sound familiar to UK ears, Podemos is a far cry from Ukip – it is pro-euro but anti-austerity. Formed in 2014 by politics lecturer Pablo Iglesias, its rise has been extraordinary. In just 20 days, 100,000 people joined the party and that number has since trebled to make it Spain’s second largest political party by membership.
Recent polling puts Podemos in the lead to form Spain’s next government with 18% of support compared to 14% for the Socialist Worker’s Party and 12% for the People’s Party. Spain’s next general election could well see a complete renovation of its political landscape. Regional and municipal elections in May will be the first test of whether Podemos’ popularity will be converted into votes at the ballot box.
In Portugal, centre-right Prime Minister Pedro Passos Coelho faces a serious challenge from the Socialist party in a vote to take place in late 2015. Led by António Costa, Lisbon’s mayor and a former justice and home affairs minister, the Socialists are running on an anti-austerity ticket. But, as in the UK, financial realities mean that whoever wins the 2015 election will need to decide where cuts will fall or where taxes will rise.
Portugal’s austerity years have been difficult for Coelho. Last summer, a court overturned the government’s austerity measures for apparently breaching the constitution. Judges decreed that public sector pay cuts of up to 12% were excessive. The court also rescinded cuts to sickness and unemployment benefits.
The country’s financial woes have also taken a demographic toll. As austerity measures bit in 2012, emigration spiked at a 50-year high and the birth rate plummeted to a historic low. The global financial crisis has certainly changed the course of Portuguese history.
Before voters go to the polls in the UK, Spain and Portugal, Greece’s electorate will have had their say in a snap election on January 25, triggered by Greece’s parliament when it rejected the government’s candidate for president at the end of 2014.
The stakes for Greece’s election were high with Prime Minister Antonis Samaras, who leads the centre-Right New Democracy party, warning that a victory for the opposition would cause Greece to default and leave the eurozone.
The widespread impact of austerity in Greece certainly makes it a powerful political issue. Since the crisis, measures have included cuts to the minimum wage, to pensions and to public sector pay. Average household incomes have dropped by nearly a third and a quarter of the working age population are now unemployed.
The opposition Syriza party, led by Alexis Tsipras, has committed itself to ceasing austerity measures and restructuring Greece’s debts, although it has also confirmed a commitment to the euro. Syriza was formed as a coalition of Left-leaning parties and, in common with Podemos, is characterised as anti-establishment and anti-austerity. Further Greek political drama unfolded as the new year began when George Papandreou – prime minister from 2009 to 2011 – launched a new Democratic Socialist party, which looked likely to play a decisive role in Greece’s coalition politics.
A similar Greek-style drama also took place early in the new year, on the other side of Europe, when a former Irish government minister announced the creation of a new centre-right political party. Lucinda Creighton, a former Fine Gael minister, told the press that the as-yet unnamed party would be launched within weeks. Flanked by the presenter of TV’s Rip-off Republic and an independent councillor, the three set out founding principles for their new party that suggest a populist, anti-establishment approach with political reform as a central mission. Ultimately, they aspire to ‘reboot Ireland’. While it is not clear if they will adopt the same explicit anti-austerity politics as the newcomer parties in Spain and Greece, their launch comes after seven hard years of Irish austerity that has seen public spending fall by 13% in total.
Fortunately those years look set to come to an end amid economic growth, falling unemployment and tax revenue that is currently ahead of expectations. Last October, Ireland’s finance minister delivered the country’s first budget in seven years that did not feature public spending cuts or tax increases.
These elections will be seen around the world as judgments on austerity. Syriza and Podemos have no doubt been buoyed by noted economists like Joseph Stiglitz and Paul Krugman who have long denounced austerity and argued that it stymies growth. In fact, Podemos is apparently being advised ahead of Spain’s elections by French economist Thomas Piketty, author of Capital in the Twenty-First Century.
While the UK fiscal debates seem relatively balanced – with all parties acknowledging the need to eliminate the deficit and restrain public spending – the international view of the UK is that the coalition government has been a flag-bearer for fiscal consolidation. An article in the New Yorker last month even described George Osborne as the ‘international poster boy for austerity policies’. Whatever the outcome of each of these elections, together they show that the political impact of the global financial crisis and the austerity that came in its wake will be felt with particular force in 2015 and beyond.
Mike Turley is vice chair and public sector leader at Deloitte LLP
This feature was first published in the January/February issue of Public Finance magazine
