The economic debate among the parties in the upcoming General Election will centre around ‘balancing the books’ of the economy. All three major parties are committed to reducing the deficit and debt levels of the public sector. But this is a false debate around an issue that is not central to the well-being of households in Britain. Michael Roberts explains
THERE IS CONFUSION HERE BETWEEN HAVING BALANCED GROWTH and equitable distribution of the wealth created by labour in our society and balancing the government’s books. They are not the same thing. Indeed, sometimes trying to balance the books of government creates imbalances and inequities in the broader economy.
That is precisely what is happening now. The Conservative-led coalition with the Liberal Democrats chants the mantra that the main task of economic policy is to remove the annual deficit of government spending over revenues and lower the ratio of overall public sector debt to GDP (annual output). This fiscal task is supposed to put the British economy back on a path of sustained and high economic growth in incomes and employment.
But this is nonsense. Government spending, excluding welfare transfers and social security contributions, (which is Peter paying Paul), is just 20% of national output. It is not decisive in reviving or damaging the economy. What is decisive is the expansion of business investment (15% of the economy) and household consumption (65%). The former depends on delivering high enough profits for business owners to invest in jobs and technology to boost productivity. And the latter depends on employment and wages rising enough to encourage more spending.
On those criteria, the current Coalition has dismally failed in its five years of office. Since 2010, real GDP per person is still below the peak achieved in 2008 before the Great Recession. Investment in real terms is still 4% below and manufacturing output 5% below and productivity per hour still over 1% below its peak before the Great Recession. Above all, net national disposable income per head (after inflation) is some 6% below the peak and real weekly earnings have fallen since the Tories took office in May 2010 in every quarter but two – the longest fall in real wages since the Great Depression.
So the UK economy is no success story and the average Briton does not feel that prosperity has returned in any way. And yet, the Tory-led government continues to argue that balancing the government’s books is what is needed. Osborne trots out what is basically a lie: that under the last Labour government, government spending was out of control and created a huge deficit and rising debt. This is just not true. Up to 2008, annual budget deficits were moderate, while the debt ratio was falling. That’s because when an economy grows and increases GDP, it can deliver more tax revenues and needs to spend less on unemployment benefit. So a rising GDP reduces the debt ratio.
The Great Recession reversed this for two reasons: first, the massive bailout of the British banking system with public money (loans, cash, guarantees); and second, the collapse of the capitalist sector of the economy, driving up unemployment and reducing incomes for tax revenues. That was the reason for a high budget deficit and rising debt when the Tories took over in 2010: the failure of the capitalist sector of the economy, which had to be bailed out by the public sector, which now has the bill to pay off.
The other myth propounded by Osborne is that he is succeeding in reducing the deficit and debt. After round after round of austerity measures aimed at cutting welfare to the poorest in our nation and at decimating central and local government services – slashing social services, flood control, highway maintenance, legal aid, hospital funding etc – the annual budget deficit as a share of GDP is still half of what it was in 2010 (10% then) and higher than nearly every other major capitalist economy, while the debt ratio is still rising. Osborne has continually revised back his deadline for ‘balancing the books’ from 2016 out to 2019, at the latest count.
That means if the Tories are returned to office in May, they will institute an even greater programme of austerity measures that will return the level of government services to pre-WW2 and the depression years. They plan to freeze universal credit and reduce government services (excluding health and education, although these will be cut too) by 30%. Public sector employment has already fallen from 22% of total employment to 17%. At the same time, they plan to continue with reducing taxes for the large corporations, boost defence spending (maintaining Trident) etc.
Osborne’s fiscal austerity programme is failing and is anyway irrelevant to the real task of delivering fast and equitable growth to the economy in jobs, incomes and better public services. It is really an attempt to reduce the tax burden on the corporate sector to be paid for by rest of us in higher social security contributions and taxes and reduced public services and investment.
And yet the lies and myths of ‘balancing the books’ are accepted by the Labour leadership. The two Eds accept the basic idea that the main task of economic policy is to end the government deficits and lower the debt ratio. The only difference is that a Labour government would take a little longer in achieving it by reducing the pace of cuts in government spending.
The Labour leaders should listen to the views of the electorate. They are not fooled into the necessity of fiscal austerity as the main issue. In a recent YouGov poll for the Sunday Times, only 27% of those asked reckoned that cuts in public spending was a priority in economic policy; while only 25% thought reducing the deficit through higher taxes was the priority. A whopping 48% thought that the next government should not prioritise balancing the books but spend more on better public services and on growth. But none of the major parties represent the majority on this, including the two Eds.
Balancing the books should not be the main economic issue of the next election. Faster economic growth, coupled with a redistribution of resources to raise real incomes and create proper public investment should be the main task. If the capitalist sector of the economy cannot do this – and this is clearly the case – it needs to be replaced. The public sector books will then right themselves.
» Michael Roberts blogs at thenext recession.wordpress.com/