Campaign news

Austerity and the two Eds

11th June 2013

Mick Brooks on Labour’s swerve to the right:

There has been consternation among Labour’s supporters at two speeches from the leadership over the past week.

First Ed Balls declared that the next Labour government would abolish winter fuel payments for top rate tax payers. This seems a small matter – but it breaches the principle of universal provision of welfare benefits. How will we defend the senior travel pass when the Tories come after it, as they inevitably will?

More importantly Ed declared that the Labour government would stick by spending limits imposed by the coalition when in office. That inevitably means that ferocious cuts will continue under Labour. Why vote for them, then?

To top it, Ed Miliband stated a few days later that the next Labour government would impose a cap on benefits, seeming to accept the Tory argument that there are too many lazy scroungers out there.

The Labour front bench appears to have moved from a position that they would impose cuts slower and more gently than the government to outright acceptance of the whole Tory logic of austerity. George Osborne has argued ever since the election that the government’s number one priority is to stop the government spending more than it gets in and so reduce public debt. Only then can we return to prosperity.

We see that austerity hasn’t worked to achieve the required reduction in government borrowing. Osborne proposed in 2010 to eliminate the deficit by 2015. Now he’s deferred the date to 2018. In the same week the two Eds made the two speeches the Institute for Government reported, “We are still as far away from the target as we were in 2010.” They predict we could still be living in austerity times in 2020.

In fact, despite the cuts, government spending stands at 44% of National Income, the highest level since the mid-1980s. Why? Because cuts in public spending also cut our incomes and make us all poorer. That is why the economy is just crawling ahead. The more the government slashes public services the more the economy shrinks. So government spending is lower in absolute terms but, since the economy is in decline, it’s actually higher as a proportion of National Income.

Here’s how it works. The International Monetary Fund (IMF) tried to work out what is called the multiplier in an economic survey last autumn. Really the multiplier just expresses the fact that in the economy we’re all interdependent. So if I am plucked off the dole and get a job, I have more money to spend and my spending helps someone else to get a job. This is called the multiplier effect. The spool runs the other way too. If the government cuts public services and sacks public sector workers, that depresses economic activity generally.

The IMF reckoned in the past that the multiplier was 0.5. So if the government spends an extra £1 the economy will get an extra 50p for free. But if the government cuts £1, the economy gets 50p smaller. To that extent – 50p – the cuts haven’t worked. The IMF thinks the multiplier has changed because of the recession. It’s now between 0.9 and 1.7 (IMF-World economic outlook). So if the coalition cuts £1 it loses 90p of the effect in lost output. And, with a multiplier of 1.7, every £1 in cuts causes the economy to decline by £1.70. Cuts are therefore utterly self-defeating.

Ed Balls made his Bloomberg speech in the USA in 2010, with sweeping criticisms of the whole austerity project. In it he said that Osborne “repeated his claim that fiscal retrenchment through immediate and deep public spending cuts to reduce the fiscal deficit would build financial market confidence in the UK economy, keep interest rates low and secure economic recovery by boosting private investment.”

How does that pan out against the facts? The rating agency Moody’s has scrapped its AAA rating for Britain’s economy. That’s a vote of no confidence. Interest rates are low. But that’s because the Bank of England has been printing money like there’s no tomorrow. It’s not a result of ‘financial market confidence’. As for private investment, it’s tanked. Investment has fallen because the rate of profit is still lower in the UK than it was in 2007. It is investment that powers the economy forward. As a result we are still poorer on average than we were in 2008, and will continue to be so for years to come. No real recovery so far.

“The country is like someone trying to lose weight by cutting off arms and legs.”

Austerity has not just failed to restore prosperity in Britain. It hasn’t succeeded anywhere else. The Eurozone is still in recession under a continued programme of cuts. Spain, Italy, Portugal and above all Greece all show a shrinking economy precisely because of the impoverishment of the population through austerity policies. Greece seems to be in a death spiral of a declining economy experiencing round after round of cuts. The country is like someone trying to lose weight by cutting off arms and legs. The IMF (dubbed ‘the financial sheriff’ by the late Anthony Sampson) has destroyed millions of livelihoods in the post-War period through enforced austerity policies upon country after country. Now the IMF has (sort of) apologised to the Greek people for the untold damage its policies have done to them. Its latest report states, “Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected re cession with exceptionally high unemployment.” In other words the IMF screwed up. The USA, in contrast to the Eurozone, has cut less and is growing faster as a result.

In his Bloomberg speech Ed Balls went through the entire history of austerity policies, showing how they failed every time. Chancellor Winston Churchill’s return to the Gold Standard in 1925 led directly to the General Strike of 1926, as Prime Minister Baldwin declared, “All the workers of this country have got to take reductions in wages to help put industry on its feet.” The General Strike was defeated and wages were savaged but full employment didn’t follow. Ramsay MacDonald decided that unemployment benefit, teachers’ pay and armed service workers’ pay had to be cut to balance the budget, and he split the minority Labour government to do it in 1931. That only led to the hungry thirties. Likewise Thatcher and Howe’s mantra that ‘there is no alternative’ led to record post-War unemployment in 1981. Ed Balls knew all this in 2010. What has changed?

Einstein defined madness as repeating the same operation over and over again, despite the fact that it didn’t work first time around. Is the coalition stark, staring, raving mad? There’s more to it than that. Osborne has cut corporation tax and the top tax on the rich. Not everyone needs to suffer, it seems. The recently published Sunday Times Rich list 2013 confirms that the wealthy are now better off than ever, unlike the rest of us.

OsBallsOsborne presents austerity as an obvious law of nature. ‘You can’t spend more than you earn’. In fact households do this all the time. People don’t camp in the park for twenty years to save up for a house. They borrow. Yet households have some constraints on their spending that nation states can ignore. Osborne recently complained that, ‘We don’t have a money tree.’ Martin Wolf, chief economics commentator of the Financial Times riposted, “First, there is a money tree, called the Bank of England, which has created £375bn to finance its asset purchases.” As we’ve seen, that hasn’t led to a recovery.

So there is a problem. The problem is not lack of money. Despite the Bank of England force feeding the banks with free money like a farmer torturing a goose to make foie gras through the process called quantitative easing (printing money) there has been no increase in investment and employment. This is because firms will not borrow from the banks if they see no incentive to invest. And capitalism is a system that runs on profit.

So what’s the hue and cry for austerity really all about? The crisis, let us not forget, started with the banks. The banks helped to crash the British and world economy. The deficit and the growing government debt were incurred to bail them out, and grew as a result of the recession they triggered. In a very useful recent book (Austerity: the history of a dangerous idea by Mark Blyth) the author spells it out. “That’s why we have austerity. It’s still all about saving the banks…Austerity is not just the price of saving the banks. It’s the price that the banks want someone else to pay.”

Austerity is presented as an ineluctable necessity, a law of nature – ‘there is no alternative’. It’s no such thing. It’s an ideological offensive by the rich. It’s a con. It’s an attempt to foist the burden of the crisis on to the workers and the poor. We don’t accept it, we can see through it – and the Labour leadership should too.

In his Bloomberg speech Ed Balls warned, “Be wary of any British economic policy-maker or media commentator who tells you that there is no alternative or that something has to be done because the markets demand it. Adopting the consensus view may be the easy and safe thing to do, but it does not make you right and, in the long-term, it does not make you credible.” You were right then, Ed.

We have been subjected to an avalanche of lies since 2010 from the Tories and LibDems. You would think that Gordon Brown, not the banks, was the one responsible for wrecking the entire world economy (Iceland, Ireland, the works!) and that Labour is guilty for the mess the British economy is in, not the banking crisis. The first duty of Labour’s leaders is to rebut these myths and, in doing so, show that austerity is not inevitable. That would inspire millions of working people struggling against the cuts. Instead Ed Miliband and Ed Balls have rolled over and capitulated to the pressure from the establishment. In doing so they have made the election of a Labour government that much more difficult.

The two Eds don’t seem to understand that austerity is not really about restoring full employment and prosperity. The coalition partners want to cut wages and the social wage. They are using the crisis as an excuse to restore profits at the expense of the working class.

Mick Brooks is author of:  Capitalist Crisis – Theory and Practice