Why Austerity is a Dangerous Political Choice

How many times have we been told

  • there is no money tree
  • government borrowing is madness
  • governments must balance the books
  • there is limited money
  • government spending is inflationary

ALL these statements are not realistic and merely represent a political programme commonly known as NEO-LIBERALISM/the FREE MARKET approach.

A BRIEF ECONOMIC MODEL

To appreciate why cuts in government spending are damaging to any economy we need to understand where demand and spending originate.
There are four types of spending in any economy

  1. Consumption spending (private households)
  2. Business spending (investment and revenue spending e.g.wages)
  3. Government spending (investment and revenue spending)
  4. Export sales

If one of these spending components is reduced, one or more of the others must increase to avoid a recession and unemployment. Since 2010 the Conservatives and Lib-Dems have cut into Government spending (AUSTERITY) resulting in reduced total spending in the UK – they planned NO compensating increase in any other type of spending! The reason why there has not been continued recession since austerity was enforced in 2010 is due to the BANK of ENGLAND coming to the rescue with QUANTITATIVE EASING whereby it electronically created £435 billion which it pumped into the banks. Additionally there has been a increase in consumer spending financed by money created by high street BANKS though HOUSEHOLD DEBT (THE HIGH STREET BANKS are a MONEY TREE BEING ABLE AT WILL TO CREATE NEW MONEY electronically to borrowers). Personal debt substituted for WAGE CUTS suffered by many families as a way of making ends meet.

BUT THERE IS A CATCH – There is obviously a LIMIT to this PERSONAL DEBT MODEL of running the economy – and the BANK of ENGLAND has this month threatened to raise interest rates to force cuts in bank loans and mandated the high street banks to find £11 billion to protect themselves against the possibility of another banking crash as in 2008.

THE CONSERVATIVES STARTED THE STORY HALF WAY THROUGH THE BOOK

The Government DEFICIT was not the fault of the last Labour Government. The BANKING CRASH in 2008 preceded the deficit of 2009- 2010. The BANKING CRASH in 2008 was caused like all banking crashes in any economy – by banks overextending themselves by providing too many loans to too many borrowers who could not repay.
Banks in the UK reacted as expected and tried to call in loans or/stopped lending. A major part of both business demand and household demand for products is financed by bank money (95% of money in the UK ECONOMY has been electronically created by high street banks and only 5% by the government). As night follows day, a fall in bank lending results in a fall in spending, resulting in RECESSION, and increasing UNEMPLOYMENT.
The key issue here is what impact does a recession have on Government – RECESSION automatically results in a FALL IN TAX REVENUE and an INCREASE IN SOCIAL SECURITY BENEFITS spending – LEADING to an INCREASE in the Governments DEFICIT!!
A GOVERNMENT DEFICIT is the RESULT, not the cause, of financial and economic failure.

But the key issue for understanding what has gone horribly wrong over the last 40 years is to ask the question why banks behaved in this destabilising way.

THE NEO-LIBERAL/ FREE MARKET DOCTRINE

Since the 1980’S all governments and political parties have accepted this doctrine
The features of the doctrine are-

  1. DEREGULATION – since 1971 THE government and the BANK of England have REMOVED REGULATIONS which managed the private high street banks. This DEREGULATION allow BANKS to lend as much and for whatever purpose, and to whoever they choose. The result is no institution is exercising COMPREHENSIVE guidance in the national interest – banks lend according to what MAXIMISES their profits in the short term.
  2. Limitations on Trade Union freedoms – the consequence being a redistribution of income and weaLth from the many to the few – and an increase in INEQUALITY as a result of declining wages and deteriorating contracts at work.
  3. Privatisaton – to provide new profit opportunities to the private sector – e.g. outsourcing of local government services

This model is

  1. unsustainable as it is being build on debt
  2. unstable as it results in periodic crisis as banking crises occur
  3. austerity is always the solution its political supporters apply.

LABOUR’S 2017 MANIFESTO IS A GROWTH ALTERNATIVE

It addresses all the above issues by going for a GROWTH STRATEGY as opposed to a CONTRACTIONARY STRATEGY of AUSTERITY.
This GROWTH STRATEGY has two parts and is a break with free-market doctrine.

PART ONE

to increase current government spending. This will redistribute income from the 5% to the 95%. This will begin to reverse the growth in income inequality since the 1980’s.

  1. This consists of increasing wages in the public sector (“removing the cap”)
  2. Enabling private sector employees to increase wages by renewing Trade Union rights
  3. A national wage of at least £10 per hour
    These wage and salary increases will INCREASE DEMAND and and boost business sales and profits, and government tax revenue.
  4. Make a start on abolishing the DEBT MODEL by abolishing tuition fees

These changes in government revenue spending will be financed by –

  1. Increasing income tax on the 5% earning more than £80,000
  2. Restoring corporation tax to 26% from the conservative aim of cutting it to 17% (many E.U. countries have higher rates as does the U.S.) There will be a lower rate for small business.
  3. A transactions tax on banks dealings in the City
  4. Taking serious action on tax avoidance by large companies.

PART TWO

A Labour government will increase investment/ infrastructure spending e.g. council housing. This will be financed by government borrowing.
NEO-LIBERAL DOCTRINE opposes public borrowing based on a 19th century misunderstanding of how an economy works.

WHY IS GOVERNMENT BORROWING GOOD?

  1. It provides a savings opportunity for companies.
    The Bank of England (owned by the government) borrows from pension companies and insurance companies. It issues a receipt (known as a gilt) for each sum borrowed. The length of loan can vary between 5 to 100 years. The lender can recover their money any time. Like shares, these gilts can be resold many time during the term of the loan, in the City. There is always a strong demand for government debt because it offers a secure and steady rate of interest for pension and insurance companies into which they can invest your insurance premiums and pension contributions.
    Reductions in government borrowing cause serious investment problems for financial businesses.
  2. The UK government can always pay back its debt.
    The UK government has its own central bank. It can electronically print money. Since 2010 it has ‘printed’ £435bn to buy back 25% of all government debt issued since 1694. This QUANTATIVE EASING is forgotten by the mainstream media and most politicians, or not understood. It raises a serious issue of whether the National Debt and Annual Deficit have been misused since 2010 as the justification for AUSTERITY.
    The UK is different to all European Union members in the Euro currency zone e.g. Greece, as they do not have their own central banks and cannot electronically print additional money to repay debt. Note that the money a central bank creates is NOT taxpayers’ money! The Central Bank is a MONEY TREE.
  3. Inflation can help reduce government debt
    Inflation reduces the real value of debt. Debt in money terms stays fixed for the loan’s duration. The Bank of England has an inflation target of 2% per year and if prices and wages increase by 2%, then debt is automatically reduced by 2% per year. If the debt receipt has a duration of 50 years it is easy to understand why up until 2010 governments of all political parties had not made the annual deficit or national debt a political issue.
  4. Interest rates on government borrowing are extremely low at present, due to QUANTITATIVE EASING.
    It makes excellent business sense for governments to borrow now.
  5. Why government spending leads to growth
    A government spend of £50bn per year results in £75bn additional spending in the economy, as the money has a multiplying impact. For example, a council spends money on new council houses to be built by private business, they pay workers who spend their wages in shops which order new stock from factories which purchase additional materials and increase their workforce and so on. (This effect has been understood from at least the 1930s and it is currently accepted that a multiple of 1.5 is realistic.) There is an INCREASE in EMPLOYMENT from this multiplier impact.
    The MULTIPIER leads to an increase in tax revenue to the government – the estimate in this case would be about 50% of the multiplied spend i.e. £37.5bn – clearly this new tax revenue repays a lot more than just the interest on the new borrowed sum.

    CONCLUSION

    There is no substance to the NEO- LIBERAL/ FREE MARKET SLOGANS about burdens on future generations etc. (They don’t ever show much concern for personal student debt.)
    Nor is the fear of inflation of any substance. There is nothing inherent about government spending that makes it any more inflationary than any other type of spending.
    In addition, the UK economy has spare capacity, for instance there is widespread underemployment, and in these circumstances increased spending is very unlikely to result in higher inflation.
    We can clearly see that Labour’s 2017 manifesto is based on a realistic understanding of how real-life economies operate and the positive impact of the policies of a progressive government on employment and living standards on the MANY.

    Whitby branch will hold a meeting in the near future on funding our manifesto and how it impacts on our canvassing. Please come along and join the discussion.

    PHIL TIDY (Whitby and District Branch)

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