Martin Wolf has one of his regular, and insightful, comment columns in the Financial Times this morning. It is entitled “Britain's experiment in austerity". If I might summarise his arguments, firstly he says that it is extraordinary that Britain is trying to reduce its government spending and deficit so rapidly when it has no fiscal crisis.
Secondly, he says it is entirely a political choice that the level of public spending in this country is to fall from its long-term average of about 43% to around 41%.
And thirdly, as he points out, given that there has been a massive one-off loss of GDP growth in this country, which is now assumed will never be recovered, this cut in spending as a proportion of GDP is a very real reduction because that GDP is much lower than anyone could have reasonably anticipated. He illustrates the point with graphs, the most important of which is that at bottom left here: it shows how stark the loss in GDP is and how it will not recover the lost ground.
This, I admit got me thinking whilst doing the school run this morning, and it occurred to me that inherent in these stark conclusions is the whole fallacy that underpins the ConDem policy.
As I have already noted today, business is wash with cash. We know that the rich are getting richer. We know that bankers are, to be not too subtle, winning hands down. And we know that the gain that they are making is occurring despite a relative decline in our economy - after all, that upward line GDP may be wholly optimistic. it is the government's forecast and there is no certainty that it will be delivered. What we can be sure of though is that the stake of some inside this reduced pot is increasing, but that those who are seeing an increase in their command of resources are those who have least need for additional resource, because they are already the wealthiest in our community.
On the other hand boost with least resources in our communities are suffering a double blow. Firstly, with GDP stagnant, with unemployment rising, and with the prospect of any form of social advance through economic growth removed from them, all their hope has been removed. Worse than that, with GDP stagnant, and their share of that total GDP falling, which must be the case if others have their share increasing, they are seeing a relative decline in well-being. And, at the same time given that so many of these people are desperately in need of the re-allocation of resources that can only take place through the state if it is willing to command a significant proportion of GDP, which this government is denying is its role, then they're already reduced stake in a stagnant GDP is reduced even further by pinning the scale of government service to a fixed and declining percentage of that already stagnant GDP. it is not just charts as a consequence that public services are being reduced, or that it is the poorest who will suffer most. This is the inevitable consequence of this policy of reducing spending as a proportion of GDP when GDP itself is behaving in a way that we really are not familiar with.
Let's put this another way. there are some absolute needs that must be met the person is to have a decent standard of living. They must be able to eat nutritiously. They must be clothed. They must be housed. They must have access to power, transport, education, social facilities, social intercourse, work, training, and, by necessity, the income to participate in these activities. These are not relative issues, these are absolute needs in a modern society. Relative needs relates to all the fripperies of life advertised in Sunday newspapers, holidays away from home, access to cars if one lives in a city ( but not the country), and so much more that we all enjoy, but can candidly live without. The choice the government has made is that the absolute needs of some will not be met whilst the relative needs of some will be maintained, and even enhanced for a limited number of people.
I stress, that is a choice. It is deliberate. Given the decisions that have been made it is an inevitable consequence that those with fixed need, and little consumption over which they have discretion must suffer most in this current economic environment.
There are many things to campaign about at the moment - and I'm delighted that people are campaigning on many issues from tax, to forestry, to the NHS and more. But this issue of the deliberate creation of poverty within our country is, surely, at least as important. And it says that the issue cannot be dealt with by single issue campaigning alone. This is about politics. There is a need for a serious challenge to neoliberalism within our political system. Labour has to provide that now.
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Actually, the issue is not the percentage of GDP accounted for by government spending.It is,1.the ability of the government to continue to run a massive deficit(risk of a gilts strike)and 2.the desirability of bequeathing to future tax payers the enormous interest cost of ever mounting government debt.After the excesses of Brown,this government appears to be adopting the word he talked of , but never delivered,’prudence’.There will be pain,but what else do you expect when you follow an administration whose policies resulted in two major banks going bust,not to mention Northern Rock.
@william
a) There is no fiscal crisis – and no chance of one
b) If we spent now we’d reduce the deficit – it’s called investment
c) The only way to increase the debt is do as Cameron & Osborne are
d) Banks failed through their own folly
Now please stick to the facts – not your fantasies
@william
Yes, but Brown and Blair were following Tory policies – that is the tragedy. Brown was bewitched by the City and the massive sums of money it traded in. He forgot Labour’s mission: to look after the poor and vulnerable, not the rich and the middle classes. Hence we saw campaigns like the “No Ifs and Buts” campaign that targeted the poorest people in the land, namely benefit claimaints.
William, if the Cameron-Clegg policy is “prudent”, then why will the government be be running a deficit throughout this Parliament? Why not just equalize spending and tax revenues from the get-go? Fact is that the government ACCEPTS that the government has to run a deficit for the next few years, for the health of the economy. Where they differ with us is what size that deficit needs to be and for how long.
See, to paraphrase Winston Churchill (allegedly), we’ve already established what kind of government this will be. Now we’re just haggling over the price.
@william
The number one issue is surely the creation of jobs especially for our young people and in the present circumstances this will only be achieved by investment. The state will have to undertake this as many large private sector companies are sitting on piles of cash which apparently they have no idea how to use. You have obviously fallen for the propaganda from Osborne that we could have faced a Greek style debt crisis when the facts reveal that our debt is much longer dated than Greek sovereign debt and for the most part our citizens ( except some of the wealthy elites) are prepared to pay their taxes. The real ‘pain’ stems from the fact that under neoliberalism the share of national income going to wages and salaries for middle earners has been declining for years, so in order to maintain living standards people have borrowed. At the same time the super rich have grown even more rich. Note that this has also happened in the USA. Perhaps you are quite happy to live in a very unequal society with all the social problems that creates. However some of us are concerned about the future for our fellow citizens and do not want to see the type of social unrest which has occurred in Egypt.
@Stephen
“Brown was bewitched by the City and the massive sums of money it traded in”
It never ceases to amaze me that people fail to link that to the enormous tax revenues it produced that allowed Labour to swell the public sector enormously. It was a pact with the Devil – we’ll allow the City to let rip so long as it produces the cash to spend on our pet projects.
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@Richard Murphy
On your answers to William
A) If you think there is no fiscal crisis, is that because tax revenues are going to come back? If that is your belief, surely that means GDP growth is coming back, yet you have argued that it isn’t?
B) Investment is different from spending, and that is what low interest rates are expected to encourage, however government borrowing is hoovering up investment funds.
C) How can cutting spending be increasing the deficit, are you refering to lower growth in the future? Unfortunately, there is balancing act between cutting the deficit enough to satisfy the bond market and not damaging future growth. The problem is that it is one possible to be wrong on the one side: If you don’t cut enough and your cost of borrowing starts going up, you get stuck is a vicious circle of high borrowing costs leads to higher deficit to higher borrowing costs. If you cut too much, borrowing costs come down, reducing the deficit, allowing cuts to be reduced.
D) Some banks failed through their own folly, others didn’t. But lax regulation, consumer greed and bad governemnt decisions were also to blame.
@ Richard Murphy
Sorry, am I right in reading you believe holidays and a car are a basic human right in this country?
The government deficits as long as sustainable is an investment and thus an injection into the circular flow of income, thus boosting economic welfare and GDP growth in real terms. If the deficit is to large and the injection is too big then this could lead to inflation, inflation is in essence what the government has created by VAT etc, which in turn does mean that government debt falls, which to an extent is obviously good as the smaller the debt the less we pay in interest which is a leakage.
The reasons that the banks collapsed is in essence capitalism the idea of shifting the problems round the board rather than fixing them.
We should scrap the bank levy this hurts the sector, what should happen is we should tax the risk (Robin hood tax in the form of the banks), stopping or at least it will less likely to happen again and other risk taxes to make them less appealing.
Capitalism left to it’sown devices is scary, communism doesn’t work ever so lets start regulating and make capitalism safe, lets fix capitalism.
Tax to share income and wealth, tax to minimise risk, subsidise low risk enterprise, pay benefits to keep the balance right and keep the economy moving.
@Zed
You are wrong. I did not say that holidays are a human right. I said that they are relative consumption. But I do think you’ll find it is almost impossible for people to access employment if they live in the country without having a car. In that sense, a car is essential to have access to the workplace, and therefore is a fundamental need which has to be fulfilled in those places. This is not true in a city.
@Zed
It is very obvious that you have not this lightest understanding of the very basic elements of Keynesian economics and yet wish to argue on this website. Please acquaint yourself with some basic understanding before bothering to argue. It is not my job to educate you in something you should know if you wish to engage in informed debate