The startling thing about the death spiral currently engulfing the UK economy is that the medicine prescribed to deal with it – austerity and tax rises on ordinary people – will only make the economic pain worse. And yet they are seen as the only conceivable option.
Jeremy Hunt soberly tells us we must “pay our way in the world” as he ordains £30 billion in spending cuts and £24 billion in tax rises. Meanwhile the ‘Labour’ opposition rules out taking “risks with public finances” and or “getting its big government cheque book out”. Given that Hunt’s public spending cuts will take place in 2025 – after the next general election – and that the Labour party will almost definitely, following Blair’s example in 1997, not dare deviate from Tory spending plans in a bid to appear economically ‘credible’, it is an odds on certainty that austerity mark 2 will happen regardless of which party is in power.
That that party is the Conservatives, is dependent, we are told, on the unlikely event of them recovering their reputation for “sound money and sound public finances” lost in the Liz Truss debacle. But the incredible thing is that following the Cameron/Osborne years they had it in the first place.
The twin disasters of Austerity Mark One
It is established, if not universally known, that the original version of austerity was a disaster in social terms. The 40 per cent cut in funding for public services, most apparent in huge reductions in local authority social care budgets (for home visits, help with dressing, washing etc.), translated to 335,000 excess deaths and falling life expectancy .
But austerity was also a disaster economically. GDP per head only reached an average of 1.2% between 2010 and 2018, lower than the previous decade (which was already low). Despite a mania for selling off public assets, which raises revenue in the short-term, public debt rose from 65% of GDP in 2010 to 79.1% in February 2020, and then mushroomed further because of the Covid lockdown.
Under ‘Osbornomics’ all this pain for masses of people was accompanied by an unconditional bounty for the super-rich in the form of quantitative easing, a state subsidy which raised the value of financial assets like shares. In the Eurozone, a mirror-image – ‘Draghinomics’ (after Mario Draghi former head of the European Central Bank) – likewise dispensed the suffering and largesse to, respectively, the undeserving poor and the undeserving rich, resulting in similarly comatose economic growth.
That there is a connection between falling real wages, lacklustre GDP growth, rising government debt, and austerity (which cuts the public sector workforce and reduces spending power and thus has ripple effects in the economy, and therefore on government revenue) can only be denied by an ideologically-induced blindness, which handily our government and its handmaidens in the media have in abundance.
Nonetheless, the barely contested response to projections that government revenue will be reduced in future, in the context of even larger falls in personal income, is to reintroduce austerity, the effect of which will be to further reduce government revenue.
It must have been this kind of iron-clad logic that earned the Conservatives their reputation for economic competence.
Don’t cut your cloth according to your measure
It shouldn’t take a PhD in economics to see through it. Despite the tenacity of home-spun wisdom that the government is like a household and must budget for hard times accordingly, cutting its outlays to take account of lower income, it isn’t and shouldn’t*. The government’s spending – on for example enhanced salaries for nurses and other public servants – will multiply through the economy by being spent by individuals, and eventually turn into income for the government paid through tax. As economist Anne Pettifor points out:
Once earned, individuals, households and firms spend and invest their new, higher income. They spend on goods, on rent, on food, and on services provided by for example, football clubs, lawyers, accountants, musicians, artists etc. That spending generates additional tax revenues for government, this time paid by football clubs, firms, shops, landlords, farmers, lawyers, musicians etc.
This anti-austerity insight that the government is not like a household and shouldn’t behave like one essentially comes from John Maynard Keynes, who famously said in 1931, “You cannot balance the nation’s books by cutting its income”. That this perception, which comes from a man who explicitly wasn’t a socialist, is now indelibly associated with the Left and non-mainstream economists is an indication of how far to the Right politics and economics have shifted in the West in the last four decades.
The economic limits of shopping
Because in the context of 2023, not 90 or so years before, there’s something wrong with it. It, and its contemporary proponents, are making half an argument.
Resuscitating what economists call “effective demand” – a virtuous circle that ensures people have more disposal income so they go out and buy consumer goods, thus stimulating production to keep up and, through increased tax, shrinking government debt – is not the panacea for the economy because it doesn’t get to the root of what’s fundamentally wrong with it.
For decades the economy has become more dependent on profits from finance and speculation for the prosaic reason that more money can be made that way than from expanding production. This is despite unrelenting efforts to sustain demand in the form of escalating personal debt. And as a profits are made, more capital is inevitably produced, conditioned to seek profitable outlets of one sort or another. Curiously, governments in the West in the last decade responded to this surplus of capital but creating even more of it through Quantitative Easing.
There is no realistic way of expanding demand quickly enough to absorb this ever growing mass of capital. Even if the UK government miraculously saw the light and stopped suppressing demand through austerity and holding down public sector pay.
In this financialised economy, government progressively becomes more indebted as it has to support a weak private sector through bail-outs, tax cuts and subsidies to low pay. Meanwhile private sector debt escalates because being “highly leveraged”, in technical parlance, is seen as the way to increase exposure to financial products and thus bring in future profits.
Theoretically, the route out of this conundrum is strong economic growth which enables the gradual amelioration of debt, private and public. In its own rather pathetic way this is what the short-lived Truss administration was trying to do through its “investment zones” and scattergun tax cuts, which would supposedly have ‘paid off’ after a few years. That the ‘markets’ quickly pulled the rug from under Truss’s feet is an indication that no-one really believes revived economic growth is possible. With Sunak and Hunt, we’re back to stabilised misery.
Socially it is imperative that the RMT and others win their pay disputes. It is vital that the NHS is properly funded and re-nationalised. It is essential that Sunak’s attempts to force workers to continue working even if they want to go on strike – reminiscent of the Fascist regimes of the 1930s and one continuity with Liz Truss – are defeated. But we shouldn’t pretend that these victories – should they happen – will bring about an economically sustainable system.
*The idea that the government should ‘trim its sails’ in hard times, much like a sensible household, has proved to have a tenacious hold on public opinion, since it was first outlined by the conservatives and their allies in the media in the wake of the 2008 financial crisis. But not only is the analogy wrong, it is belied by the fact that most people don’t take any notice of it in their own lives, in that personal debt goes on rising year by year.
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