George Osborne believes in the absurd theory of expansionary fiscal contraction. It's worth giving the notion a few minutes of thought since his belief is currently wrecking the lives of millions in this country and the prospects of millions more.
Expansionary fiscal contraction is what is called a general equilibrium model based on the ideas of neoliberal economics. For the wonks there's an explanation here.
What this means in fairly lay terms is that the model assumes that we know the future. This is of course something we can all recognise as being very obviously right: it's glaringly obvious that we all know what is going to happen to us from now on, isn't it? If you disagree, just note that means George Osborne disagrees with you, and vice versa.
And the model also assumes that we all believe that if only the government spent less we'd all be better off. That's clearly also universally true: isn't everyone agreed we want less health care, education, pensions, protection when we're sick, law and order, child protection, health and safety (so we can have many more industrial accidents), road safety, environmental protection and so on? We're all agreed, aren't we? Those are, after all, 'bad things', aren't they?
Now, assuming we are agreed with George, what George also agrees on with the economists is that if we now know that he has promised that he will spending less of our cash in future - not becasue of the recession mind you - but just because that's what he always intended to do - then we all are absolutely confident he can deliver that objective without any disruption to our current well being (as you've all noticed) and that we will all proceed to this land over-flowing with the riches of milk and honey without a hitch and with absolute certainty that the benefits we all dream of from the resulting lower taxes that we will pay will flow into our pockets, wallets and offshore bank accounts (all full declared, of course) from whence we will be able to spend them.
And because George is sure that we have that confidence because we know the futute with certainty the result is that he's also sure that we will all go out now and spend more today to celebrate the fact that in a few years time we will have more income as a result of George's largesse in cutting our taxes - as he will do for reasons that have nothing to do with his own self interest in 2014, precisely.
So, although we have not got the tax cut yet - and big companies apart there has as yet been no hint of an announcement that they will happen, we should all be celebrating the fact that we know they're going to happen by going out now and borrowing more to spend now in anticipation of the fact we'll have much more income in the future to repay the debt.
That, I promise you is how the theory of expansionary fiscal contraction works when all the crap and the formulas are cut away. And that is the basis on which George Osborne thinks that his cuts will make the UK economy grow. He really does think we should all be dancing in the streets and borrowing money to spend now to celebrate the fact that he's going to give us tax cuts with absolute certainty in the future even though he's being coy enough to not say when.
It is this theory that suggests why he thinks that cutting public sector jobs will result in the creation of private sector jobs straight away because we will all be spending the anticipated savings now. And it is this theory that explains why his budget forecasts a considerable increase in private borrowing over the next few years - borrowing that he thinks we will all undertake in anticipation of his tax cuts that will follow which will allow us to repay the borrowing.
And let's be blunt about this: it's utterly crackpot. We don't know the future. We don't know cutting spending will result in reduced taxes in the future when right now we're still in deficit. We aren't confident that if tax cuts happen they will let us consume more - they might just cover the increased health insurance we take out because of NHS cuts, the increased pension contributions we have to make, the increased savings we need for old age and more of the same besides. Because that's the rational response to the cuts being made by the state. So in fact we may rationally not consume more ta all.
But on the basis of George's crackpot belief in this crackpot idea the UK is being plunged into economic turmoil.
And the fact that the idea will not work is becoming increasingly apparent: 10,000 jobs have been lost on the High Street in the last week. And still George sticks to his guns because, to be candid, he believes in a world of make believe.
We all have the right to be very, very worried.
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Osborne’s beliefs wouldn’t matter a damn if we didn’t have a system in this country where the sons of millionaires get to run the country almost by default. The hapless, hopeless and unqualified Osborne is of no consequence set against that backdrop. We shouldn’t be concerning ourselves with him but with how it is he comes to be Chancellor in the first place.
BB
As a former accountancy practice owner surely you would know that in order to raise your fee income over the year the natural thing to do would be sack a few staff, loosen your credit control and stop prospecting for new business…how could that possibly go wrong?
It is as you say crackpot.
Despite my considerable distaste for all the Coalition are doing I can’t help but maintain a naive, distant feeling of hope that somewhere amongst this madness there is a plan to rebalance the economy towards more sustainable activities, but I fear I will be very disappointed.
I do wonder however if we shouldn’t temper the furore over the ‘death of the high street’ with an acknowledgement that it’s perfectly possible these businesses were outmoded and in danger anyway and the recession simply tipped them over the edge. Take Thorntons, for example, which has relied on selling fairly mediocre quality chocolate on what must have been enormous margins required by their massive high street presence. Might I venture the idea that other smaller businesses are beating them to the consumer with higher-quality products, better service and better prices?
Whilst I have complete sympathy for those who lose their jobs, should we not also be considering the people who have established or have grown ‘better’ chocolate businesses? There are three superb quality independent chocolatiers within walking distance of my house who appear despite the doom and gloom to be surviving, if not prospering, for example, and if this trend is any in way mirrored across the rest of the country it might go some way to explaining the failure of Thorntons.
If nothing else it will make a useful scapegoat in 2014, when the coalition has finished annihilating the NHS and death rates from obesity- and diabetes-related illnesses soar to US levels.
Thanks for the link, but I lost patience with trying to work through the theory: It makes too many assumptions that do not fit in with the real world, like constant mortality rates at all ages, as well as everybody having the same rather reckless psychology. The usual term wouldn’t meet your comments policy, so let us call it codswallop or buncombe instead.
It is codswallop – and lives are being blighted on the basis of it
I’ve said it before – Osbourne, bless him, is not very bright
I suppose the problem is he is too stupid to know how stupid he is, and to arrogant to consider he may indeed be wrong (“I don’t need a backup plan!”)
If his hidden policy is to destroy medical services free at source and enrich even more his already rich supporters, then his plan will work.
Then he would not be thick, but malicious and single minded.
Time will tell.
And do not forget, by 2015 the electoral boundaries will have been re-drawn. Doubt less many labour “strongholds” will find themselves in the corner of conservative strongholds (or split into various other constituencies.
And you’re mentioned again in the Daily Finance, Richard:
“Richard Murphy of Tax Research UK says that in 2007/08 alone, private pension funds received subsidy of £37.6bn and paid out just £35bn”
“The fact is that public sector pensions are more efficient than private sector pensions. A group of leading economists said in a letter to The Guardian on 10 March that: “The net cost of paying public sector pensions in 2009/10 was a little under £4 billion. The cost of providing tax relief to the one per cent of those earning more than £150,000 is more than twice as much”
http://www.dailyfinance.co.uk/2011/06/29/pension-scare-tactics-don-t-add-up/#continued
“I do wonder however if we shouldn’t temper the furore over the ‘death of the high street’ with an acknowledgement that it’s perfectly possible these businesses were outmoded and in danger anyway and the recession simply tipped them over the edge.”
Oh, come on! Let’s not make excuses for incompetent mismanagement of the economy, eh? Were CarpetRight and TJ Hughes outmoded?
These companies went under because of lack of consumer confidence, due to this government’s policies of mass sackings in the public sector, (which invariably lead to job losses in the private sector) the rise in VAT, wage freezes and inflation. I should add, though, that inflation is causing havoc only because of low wages. 5% inflation is actually quite low compared to say, the 70s and 80s.
That’s three companies down in just over a week and while the government needlessly restrict spending, a lot more will be joining them before long.
I think the management of the economy has been appalling frankly and the massive reduction in consumer confidence is proof of that if any is required. It’s a dreadful situation that will see many more failures of good businesses but all I’m really saying is that (if we follow the wise words of one JK Galbraith) in the midst of a recession some businesses that are outmoded will go and others that do a better job of servicing their customers will thrive. Yes there is a needless and wreckless depression of the economy going on but some rubbish businesses are lucky to have held on so long.
But while there may be some argunent for Thornton’s (who seem to have been floundering for a while) who says these companies are rubbish businesses? By the law of averages, there are always going to be some rubbish businesses, ones like Railtrack propped up by public money spring to mind.
If you are fighting rent rises, VAT rises, rises in inflation and a squeeze on borrowing, then you are effectively competing in a prize fight with manacles around your wrists and ankles, are you not? Many of these businesses seemed perfectly viable before the recession and this governments lunatic economic policies came in.
I’m sorry, but as with companies like Habitat and Jane Norman, many businesses are suffering directly as a consequence of economic policy, NOT because they are not viable.
These are not what the conservatives of the past used to label “old, traditional industries”, you know, the ones that used to make things and employ lots of people, like manufacturing or textiles – these are service industries that provide 75% of our income. If service industries are starting to totter, there is a great deal to worry about.
I’m sorry, but it is quite ridiculous tp blame the plight of so many businesses failing on the businesses themselves. It appears you are trying to make excuses for government policy.
Stevo!! – You really have got me all wrong here and are grasping completely the wrong end of the stick.
The last thing I am doing is blaming the plight of “so many businesses failing” because on their own incompetence. And I am certainly not making excuses for government policy and in fact am mildly offended by the suggestion.
I run a business myself and know first hand that the consumer confidence ‘squeeze’ is manifesting in reduced spend by our clients and that in turn leads to reduced prospects for us. That pattern is being repeated up and down the country and it is the direct consequence of over a year of cut propaganda from Messers Osborne and Co, the unsurprising outcome of which is dreadful economic prospects. I am horrified at the language used, that we in the private sector are being coaxed into an antagonistic ‘them vs us’ position with the public sector….it’s all horrendous and were it not so damaging for the country, it would be laughably incompetent. The policies are lunatic as you say.
However, I am arguing for a slight dose of tempering here – in a recession businesses go bust for all sorts of reasons and sometimes, perhaps just a fraction of the time, the writing has been on the wall and the latest rent rise or whatever else simply pushes them over the edge.
You quoted Habitat which (for a few days in Edinburgh at least) a great shop and one I use regularly. However, as a businesses it has been ‘failing’ for quite some time, which you could put down largely to (as analysts have) poorly targeted products, poor customer service, excessively high overheads and fierce competition. Once a dip in consumer confidence hit, the slender breathing room they had was lost.