George Osborne’s belief is that if the state sector is scaled back the private sector will rush to fill the vacuum. That's why he’s willing to impose massive and destructive cuts on the wellbeing of ordinary people in this country.
He’s wrong to think this. There are three reasons for saying so. First, as the FT reports:
The dangers facing companies that supply the UK public sector were highlighted on Friday when Connaught issued a profit warning that wiped out almost a third of the social housing maintenance group’s market capitalisation.
The FTSE 250 company became the first big state contractor to warn that the looming spending cuts in the wake of George Osborne’s emergency Budget would materially hit earnings this year and next.
Have no doubt, these companies will not be alone.
Second, there is no reason why the private sector could not take up the slack now. Again, as the FT has reported, admittedly with regard to US companies but with the scenario being replicated here in the UK:
US companies are signalling a desire to buy back their own shares at the highest rate in months as record levels of cash pile up on balance sheets.
So far in 2010 there have been 343 new authorisations for $178bn in buy-backs, according to Bank of America Merrill Lynch. If carried out, and projected over a full year, it would be the highest volume since 2007, or $898bn. Last year, there were only $128bn-worth of buy-backs. Other US companies announcing $1bn-plus buy-backs in June were CVS Caremark, Viacom and Monsanto.
This situation of companies being very heavily cash rich right now is common: it’s happening here in the UK too. Again as the FT reports (same link) there is an excuse:
Companies so far in 2010 have been cautiously exercising their right to buy shares. They are keen to maintain a large cushion, as rating agencies are closely watching cash balances as credit markets tighten.
So the rating agencies which stop government borrowings are now also the people stopping companies spending to make up the gap! The madness of the impact of these wholly inadequate organisations continues.
But there is a third reason why the private sector will not be filling the gap. It’s not just that the government is not spending, and they’re the biggest single customer for the private sector. Nor is it just that household well being is collapsing — although it is. The real reason is much more important and never stated: the simple, fact is that there’s nothing the private sector can sell to people that can make up for the loss of the state services they really want right now.
People want schools.
people want law and order.
People want well maintained roads.
People want social services.
People want the safety net the state provides.
People want fair pensions — not ones that decline in value.
People want to know they won’t be financially devastated by sickness.
And they’re being denied these things. In the face of that reality they’re not going to go out and buy new goods or indeed new services. There are only so many televisions they need. So many phones. So many clothes. And so on. But they don’t want them, as much as the security the state supplies.
So they won’t substitute reduced state spending with more private spending. They’ll hoard cash — just as companies are — because it is vital for them that they build up their own reserves to cover the risks that the state has until now insured them against. The consequence of that is obvious. We will have a profound and deep recession , if not depression.
All of that for reason of dogma: a wholly false belief that the private sector is crowding out the private sector when people actually want what the state is providing more, I suspect, than any private sector alternative. And one other illusion — the one that creating “sound money” of constant value is worth this pain. It isn’t. Planned inflation has to be part of the solution too. It is the only historically proven way to wash bad debt out of an economy. Which is why we need it at 4 to 5% now.
These dogmatic illusions — by the Conservatives and as much by Orange Book Lib Dems will cost us dear. We will pay an enormous price for them. One day they will too.
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It’s been written/broadcast a fair few times in the Guernsey media, that we are wanting more than we can pay for, now the finance industery has been shown as a %$£&
we are a small island. lets get small. what’s the problem?
We are not the City of london that can steal taxpayers money and reap the rewards…..ah hang on….
fat bankers need gastric bands. full stop.
and they are fat, but they love ‘the trickle down to the gym’ theory.
try the beach. ********************s
Sorry to bang on;
but as tangential point about mut the service i am employed in:
Do some of you finance industry workers know how many of your ’employees/sweatshoppers’ are on multi-year waiting lists for social/affordable housing????
I’m still waiting for adequate answers on all the blogs I write on.
It’s like the UK wasn’t interested in home hownership or ‘big society’.
It beggars belief. It beggars belief that this blog owner, and folk like me get the deeply insulting replies that I/we do.
Back it up. Make an argument. Don’t sit there all rich and clueless.
pah.
‘mut’ is obviously unintentional….
Dear richard Murphy
Maybe somehow you could merge above posts
“People want schools. people want law and order.
People want well maintained roads.
People want social services.
People want the safety net the state provides.
People want fair pensions — not ones that decline in value.
People want to know they won’t be financially devastated by sickness.”
But they don’t want to pay for them. They want someone else to pay for it and the last government was happy to go along with that in order to stay in power. When the government is spending 30% more than it is taking in taxes and the deficit is roughly equal to income tax an corporation tax receipts, then we clearly have a problem. One solution would be to double the rate of income tax so that some people are paying 100% tax on top of NI, but my guess is the country would grind to a halt, so there isn’t much choice except to cut spending, which means fewer public sector workers, paying less to those who remain and cutting back on investment, plus some higher taxes.
@Alex
They did pay tax for it – as I have shown time and time again
Tax revenues failed when banks collapsed
That was a private sector failure you conveniently forget
Please stick to facts or you will be deleted
This is what i love about this blog:
Everyone has a go at Richard Murphy for being ‘this’ and ‘that’, but no one can say anything that would translate itself into realist suggestions for the ideolgy of ‘more for all’!
@Alex, you along with your misanthropes, are truly cluelesss.
RM may not be right 100%, and I say this from a position more ‘left’ than his, personally, but come on; have a better degree of debating skills!
Most of you are rubbish, it’s no wonder they get edited.
I could do better cutting and pasting through the t e l e g r a p h
did i need to spell it out
“Tax revenues failed when banks collapsed”
The deficit is over £150 bn per year. £150bn/28% is more profit than the UK banks earn worldwide in 10 years, so the deficit has nothing to do with a shortfall in tax receipts from banks.
The simple fact is that the last government was set to spend £700 billion against barely £500 billion of tax receipts. The rest was supposed to be paid for by our grandchildren, which frankly is immoral.
Just as Margaret Thatcher’s destruction of the economy was seen by the Tories to be worth it to destroy the unions, this seems to be worth it to the multimillionaires of this government to destroy the public services… the LibDems are trapped… they can only hang on in there in an attempt to get change in the electoral system. Ian Aitken in Tribune says that the Cameroons want to return the country to the pre-war period, and that this is a last chance given their progressively smaller share of the national vote since the 1950’s.
Can’t imagine what Richard is going to say about the outcome of the G20… what has Cameron got over Obama helicopter trips and a volte face about the UK’s budget? or is this more of the media reporting Osbourne spin as fact?
@Alex
Sorry – but this is nonsense
See the first graph in here http://www.taxresearch.org.uk/Documents/PCSTaxGap.pdf
We had an entirely manageable deficit until 2007/08
Then revenues collapsed
Everything you are saying is straightforwardly wrong. Worse than that: you know it’s wrong. Yes that’s immoral – but what’s immoral is the private sector role in this
And further comment on you such as this – which any informed observer knos to be so untrue – will be blocked
This is not a site for the promulgation of lies about he economy
Sorry, Richard, but your graphs only show one side of the story. If you had shown on the same graph (i) GDP and (ii) GDP less government spending, it would be obvious that the 3% or so average GDP growth was driven almost entirely by 6-7% annual growth in government spending over the period on your graph, with private sector activity largely flat over that time. The increase in government spending was covered by a combination of the infamous “stealth taxes” and borrowing but eventually something had to give and when gover5nment spending reached 50% of GDP it all fell apart.
@Alex
Let me get you right
You’d rather a) people sat around doing nothing than work
b) You’d rather the government did nothing so that the private sector had space to do nothing
c) You’d rather the government did not meet real need using resources that are available to give the private sector room to do nothing more than it already is?
Amazingly perverted logic you have
This comment has been deleted. It failed the moderation policy noted here. http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision on this matter is final.
@Richard Murphy
The deficit was only manageable if you believe the fundamentals that underpinned banks’ profits were themselves sustainable. They weren’t.
You continue to believe Richard that we can return to the halcyon days of 2006 and collect tax revenues based on the fantasy that these benign conditions of cheap credit and light regulation will not only return but continue. Wrong. You even don’t want them to return as you’ve said numerous times.
@Richard Murphy
Not at all Richard.
I would love to see everybody gainfully employed and enjoying a comfortable standard of living, but collectively we have unrealistic expectations, which have been fuelled in part by governments. There isn’t a magic solution whereby 50% or more of the population can live off the state, either through welfare payments or through employment. Life just doesn’t work like that, mostly because any standard of living above that of the eighteenth depends on industry or technology as a source of value, but equally it depends on international competitiveness. Over spending or excessive control by governments invariably leads to decvlining living standards for all. Governments that spend far more than they take in taxes, like the last UK government, invariably fail. Governments that control their finances well, even if they take up a substantial proportion of the economy, invariably prosper in the long run.
@Alex and
@Peter
You both persist in thinking the private sector generates wealth and gthe public sector sends it
You’re wrong
The public sector can and does generate wealth – the NHS for example and education and roads and law and order and on and on and on
The private sector can destroy wealth .e.g the banking crisis
If this is accepted then you conclusions do not follow
And your claims are untenable and mine obviously right
So, respectfully, you’re wrong
Sorry Richard, but much as I might accept that education and roads, both of which are surprisingly small parts of government activity, the NHS is predominantly a form of social insurance (not that I decry it), but not a net creator of wealth, and whatever the pluses or minuses in the vbanking scetor (they are net tax payers over the years so let us assume that they are profitable on average) they facilitate productive investment by businesses including ghandling all of their cash flows.
The predominant effect of the private sector is to create wealth and the predominant effect of the state is to consume it, often unproductively.
“People want fair pensions — not ones that decline in value.”
and
“Planned inflation has to be part of the solution too. It is the only historically proven way to wash bad debt out of an economy. Which is why we need it at 4 to 5% now.”
Inflation will destroy the value of fixed rate bonds in a pension fund: the gross redemption yield will have to rise to exceed the expected rate of inflation. This leads to pensions that decline in value, with the side-effect of much higher costs of new debt.
Your statements are contradictory. If you want to use inflation to transfer wealth from the lender to the borrower then you must accept that pension funds will decline in value. You must also accept that future lenders will demand much higher interest rates to cover them against the risk of further confiscation by engineered inflation.
This comment has been deleted as it did not meet the moderation criteria for this blog specified here: http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision is final.