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The Case against Austerity

11th July 2015

The Case against Austerity

Government debts and deficits – what’s it all about?

By Mick Brooks

Jeremy Corbyn is the only Labour leadership candidate who is firmly opposed to the policies of austerity. The other leadership candidates all dance to George Osborne’s tune. Austerity is the dominant political issue of our time, not just in Britain but all over the world. Supporters of Jeremy have a duty to make the case against the austerity throughout the labour movement as part of the campaign of Corbyn for leader.

Chancellor George Osborne proposed in his Mansion House speech the principal that the government should only ever spend as much as it receives in tax. Economic policy is to be entirely subordinated to balancing the government’s budget. This is not only to be the policy of the present Tory administration – it should be binding on all governments in future for ever!

At first sight this may sound like sturdy common sense. After all, you can’t spend money you haven’t got. It accords with all the ancient homilies we were brought up with, such as ‘cutting your coat according to your cloth’.
In fact it is not just nonsense. It is poisonous nonsense intended to distract our attention from the real problems of the country.

Labour and the crisis
We have been through a massive crisis of capitalism. As a result the Labour government felt it necessary to bail out the banks, whose insane speculation was the trigger for the crisis. Andy Haldane, chief economist at the Bank of England, estimates the total cost of the bail out at £1.162 trillion at its peak. Public debt, which had been a modest 35.9% of national income (GDP) in 2006-07 more than doubled in the wake of the recession. Because of the crisis government receipts fell sharply. In just one year – 2009-10 – national income fell by 6% and tax receipts by 18%.

Labour had inherited a national of 42.5% of GDP in 1996-97 and whittled it down in the years of prosperity before the crash. The criticisms by Chuka Umunna and Liz Kendall about ‘Labour’s deficit’ are frankly half-witted. The actual budget deficit in 2007 was just 0.4% - a tiny amount compared with the vast sums that the government juggles with.
Umunna and Kendall fail to understand that the state of public finances in a capitalist economy is determined by the accumulation of capital. They also spread confusion in the labour movement and provide aid and comfort to the class enemy, the Tories. Where were these people when the Great Depression struck? Did they even read the papers? Do they really think Gordon Brown caused the subprime mortgage fiasco in the USA and the economic crisis in Iceland, in Ireland and all over the world?

It is true that Brown favoured ‘light touch regulation’ that made the UK banking system more susceptible to a crash. The Tories complained at this time that deregulation wasn’t going far enough; at the same time they pledged to match Labour’s social spending pound for pound.

Tories have failed
The Tories have utterly failed in the task they set themselves in 2010 to get rid of the deficit by 2015. They should be reminded of their failure. The country is still running a deficit of over £70 bn. That means the national debt is still creeping up –now at more than 80% of GDP – over £1.5 trn.

The deficit is the difference between what the government gets in and what it spends. If the state is spending more than it receives then the national debt goes up. That is what has been happening for the last five years, despite the Tories’ (and their LibDem pals’) commitment to austerity. In a crisis-ridden capitalist economy the government can’t control how much tax income is generated in the private sector.

The Tories like to compare their budget with that of a household. First it would be odd for a family to shell out on a machine gun before paying the rent and buying food. But that is what the government is in effect doing in commissioning a Trident replacement while shredding the welfare state.

Borrowing, borrowing
Secondly households do borrow, and they have reason to do so. The same government that wants to abolish the national debt is urging citizens to put themselves in hock for enormous sums in order to gain a university education. The Tories are also encouraging people to buy their own homes by way of a huge mortgage. Household debt is bigger than the national debt as we shall, though households have been trying to pay down their debts since the Great Recession. All the same household debt is set to exceed £2 trn by 2020.

It may well be rational for people in a capitalist society to borrow in order to make their lives better. Households go through cycles of relative prosperity and other periods of desperate need and hardship. Only someone like George Osborne, born with a silver spoon in his mouth, could fail to understand this.

Is the national debt the only problem? According to a Report published by the McKinsey Global Institute called Debt and Deleveraging published in 2012:

• UK household debt was 98% of GDP
• Non-financial corporate debt was 109% of GDP
• Financial institution debt was 219% of GDP
• Government debt was 81% of GDP
• Total UK debt was 507% of GDP (all figures for the second quarter of 2011).

Overall the UK has gross debt at more than five times GDP. Britain is one of the most indebted countries in the world. Who cares? These figures have change against since the report was issued, but they give you an idea of the relative size of all these debts. The question we ask: why do the Tories have this preposterous obsession with government debt alone?

Is borrowing OK? It also depends on what you’re borrowing for, of course. Borrowing for consumption may not prove to be a sound bet. But Osborne is not even prepared to borrow to fund public investment. In taking this stance he is short-sightedly doing permanent damage to the infrastructure of the economy and its productive potential for the future.

The national debt has a long history. Formally set up in 1694, in reality earlier monarchs such as Edward I and Edward III were notorious for welshing on their debts clocked up to fund expensive foreign wars. As Marx explained, “The only part of the so-called national wealth that actually enters into the collective possession of a modern nation is – the national debt.” Bailing out the banks meant that their gambling debts became our property. Thanks a lot.

Despite the shock experienced as a result of the perceived need to bail out the banks in the Great Recession, the national debt actually remains historically low. Since 1694 the debt has averaged 112% of GDP, mainly to finance wars. They can always find the money to pay for a war.

Is the debt sustainable? Japan currently has an official debt/GDP ratio of 234% according to the McKinsey institute, It’s been very high for a long time and Japanese public finances are a murky affair. As long as the Japanese economy keeps cranking out the goods, then the debt can be serviced. With interest rates at such a low level because of quantitative easing, now is actually a good time to get into debt.

Greek debt
What about Greece? Their debt is ‘only’ 180% of GDP. It’s not sustainable, because of the weakness of their economy and the determination of their creditors to make an example of the Greek people. The debt soared from 120% of GDP in 2009 to 180% now. All serious economists regard this debt as unpayable. Sadly this did not include the economists working at the institutions determined to grind the Greek working class into the ground.

Is this debt just an accounting fiction, as Paul Krugman argues? The debt is a real ball and chain for the Greek people. They have to pump out and transfer real resources to their creditors, the banks in northern Europe who crashed the economy in the first place. As Krugman points out Greece is running the biggest primary surplus in the eurozone by far – more than 5% of potential GDP in 2014.

What does this mean? It means that Greece would be running a surplus and paying back the debt – if the country wasn’t paying interest, and interest upon interest, and interest upon interest upon interest.
It means that the Greek people are handing out a twentieth of all the wealth they produce every year to foreigners without getting anything back. The vast majority of the money we hear about getting ‘lent’ to Greece never enters the country. It is just recycled to north European financial institutions to pay off the interest. So, instead of getting the debt down, the burden just soars.

Over the past six years successive Greek governments have carried out suicidally vicious austerity policies to deal with the debt, overwhelmingly owed to foreign institutions such as the International Monetary Fund and European Central Bank.

Austerity also meant nearly a quarter of a million public sector workers losing their jobs (out of a population of 11 million) and public services being slashed to the bone.

Albert Einstein defined insanity as, “doing the same thing over and over again and expecting different results.” In that sense the policy of extreme austerity applied in Greece is clinically mad. It hasn’t worked in the past and will not work in future. All it does is weaken the Greek economy.

Fiddling the figures
Apart from anything else, even when times are good, the tendency to focus on the public finances to the exclusion of everything else can give a completely false impression. Gordon Brown picked up on the Tory scam of the Private Finance Initiative because the borrowing was not on the government’s balance sheet. For him it didn’t count! That wasn’t the real world of course. It was still borrowing and it still had to be paid back with interest. The rest of us are stuck with huge payments to private companies who have built hospitals etc and can now charge us for the privilege for the rest of our days.

One example: Hinchingbrooke Hospital. T he total cost of the Peterborough hospital is expected to cost nearly £2bn over the 33-year life of the scheme, nearly seven times the original £289m capital value of the building. They’re sucking us dry.

The Tories will use the deficit as an excuse to privatise, as they already have done with Royal Mail and chunks of RBS. In fact they’re giving away assets to their chums as a short term fix, assets that could have generated an income for the public sector for ever.

These Mickey Mouse accounting procedures will encourage outsourcing and privatisation. The only real change is that the Tories’ chums in the private sector are given the opportunity to make money out of public projects.

What’s it really all about?
Does all this mean the authorities, the representatives of capitalism who are dictating austerity terms to the Greek people, are bonkers? They are not trying to solve the problems of the weak Greek capitalist economy. They are delivering the Greek people into debt slavery. What they fear above all is the threat of a good example from the left wing Syriza government opposing capitalist austerity.

Likewise the real agenda of Osborne is to heap the entire burden of the crisis onto the backs of the working class. While contemplating £12bn in welfare cute, he’s also thinking about cutting the top rate of tax for rich people. The talk about the budget and the ‘need to balance the books’ is just a disguise for a smash and grab raid by the rich upon the poor.

No alternative?
There is an alternative. Of course there is. Britain’s debt to GDP ratio is currently running at about 82% of GDP. After the Second World War it peaked at almost 250% of GDP – three times as much. The Labour government elected in 1945 responded by setting up the National Health Service and the welfare state, not paying down the debt. That was what they were elected to do. That was their mandate.

How did the post-War debt come down? The British economy grew throughout the great Post-War boom and the debt diminished as a result. That was a one-off. It’s not going to happen again. As a result it’s crunch time. The boss class really feel the need to put the boot in and ‘balancing the books’ is the perfect excuse.

The debate about deficits and public debts is an old one. As the Great Depression bit in Britain in 1931, government spending increased while its income fell. The Labour government under Ramsay MacDonald was offered the ‘Treasury view’ – that all would be well if the government just balanced the books. Sounds familiar?

How were they to balance the books? By cutting public sector pay, cutting armed forces’ pay and cutting unemployment benefit. Ramsay MacDonald fell for it and went over to the Tories to form a national government. Did it work? Of course not. It just made poor people even poorer – as it was intended to do.

The ‘Guardian’ commented, “Viewed from Mars, or indeed from global financial markets, the biggest issue with the UK economy right now is not the government deficit.” The paper goes on to mention the balance of payments deficit. Britain now buys 6% of GDP more from abroad than we earn. How can this go on? Then there is the collapse in productivity since the Great Recession to be dealt with.  Surely it is more important to pay our way with the outside world and to make workers more productive than to balance the government’s books?

The fixation with debt and deficit detracts from the real problems of the UK economy. The economy should be a means of making us all better off. The Tories are distracting us from that real task by turning our attention to symbols, to worshipping a totem.  At the same time they are waging a class war of rich against the poor. They are using the rhetoric of austerity to drive down the living standards of working people.  Say no to austerity and to the Tories and their system.Support Jeremy Corbyn for Labour leader.