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What can we expect from renewed austerity?

AusterityThe new Tory government will renew its austerity offensive shortly with the publication of an ‘emergency Budget’ on July 8. It is simple to demonstrate that the previous austerity programme caused the economy to grind to a halt (and with it the improvement in government finances).

Supporters of austerity like to claim that austerity led eventually to recovery. But this is logically impossible. A force applied from one direction, the downward pressure on the economy, cannot sequentially have the effect of lifting the economy. Most children learn these cause and effect relationships through play at the ages of 2 to 4, with marbles, wheels and water.

Therefore the actual course of events of the last round of austerity will prove instructive as to what can be expected in the next 5 years. This has important political as well as economic implications.

Anyone tempted to throw in their lot with Tory economic policy, for example among the Labour leadership contenders, will be obliged to defend the impact of Tory austerity. As there is no solid basis for the current ‘recovery’ which is supported by increasing household debt and borrowing from overseas, the inevitable bust will occur. The ‘Barber boom’, the ‘Lawson boom’ both ended with a slump, and the feeble Osborne recovery reproduces them in a worse environment.

According to the IFS the Tory Government plans imply £45bn of ‘fiscal tightening’ in this parliament equivalent to 4.1% of GDP, although we have yet to see the actual plans of the emergency Budget in June. This is approximately equivalent to the fiscal tightening of the last parliament although it is suggested that all of it will be achieved with cuts to public spending rather than in combination with tax increases as previously. The axe will fall heavier this time.

The previous programme of austerity caused a double-dip recession in most sectors of the economy. The economy had been growing at a very modest pace of 2.1% in the 4 quarters before the last Coalition took office. The double-dip recession in production, construction and agriculture is shown in Fig.1 below. Only services continued to grow.

It is notable too that industrial production (including manufacturing plus energy) is still below the level the Coalition government inherited in 2010. No industrialised economy can sustain growth without growth in industrial production, as the label implies.

Fig.1 Most Sectors Experienced A Double-Dip Recession
Source: ONS

In real terms there was no growth in Government consumption spending in both 2010 and 2011. This turned a modest recovery back close towards recession, only saved by the growth of the service sector in 2012 plus the Olympics effect.

We have already seen how austerity caused a sharp renewed slowdown in the economy as a whole. There is no logic to claim that austerity also led to eventual recovery. Instead, as Tory poll ratings plunged after the ‘omnishambles Budget’ and the economy risked falling back into outright recession, Government policy was changed. There were no new Government spending cuts from 2012 onwards. Government consumption was allowed to grow and the austerity offensive was put hold (Fig.2).

Fig.2 Real GDP & Government Consumption
 
Table1. Real GDP Growth Real Govt Consumption Growth
Source: ONS

The result of increased Government consumption was a modest expansion. Real GDP grew by 2.8% in the pre-election year of 2014. But this was little more than the 2.1% growth achieved in the year prior to the imposition of austerity. Over the 5-year period 2010 to 2014 real GDP growth has averaged just 0.75%. This is exceptionally weak by historical standards and is striking after a sharp recession, when the usual pattern is for a more rapid recovery. GDP growth has only matched the growth of the population so that per capita GDP has stagnated. Under these circumstances living standards cannot rise.

Investment

However, there is no such thing as a consumption-led recovery. It too is a logical impossibility. Economies are dominated by production. As the proportion of GDP devoted to consumption rises, economic growth tends towards zero. The reverse is also true; as the proportion of GDP devoted to investment rises, so GDP growth increases (including the growth of consumption within that).

Without production, the expansion of which relies on investment, consumption can only be increased by further borrowing.

One of the central fallacies of Tory economic ideology is the idea that by shrinking the state the private sector will thrive. As Government is the largest single customer of the private sector goods and services, the opposite is the case. Cutting public spending damages the private sector and exacerbates its weakness.

Cutting public investment has been a central part of austerity and a key way that government spending has fallen overall. The deficit has fallen by damaging future growth.

This has been the effect of the previous round of austerity. The entire crisis was caused by the slump in business investment, which caused unemployment to rise and Government tax revenues to fall (hence the rise in the deficit). The weakness of business investment can be seen as early as 2006 (Fig.3) and in the sharp decline again in 2008.

Fig.3 Business Investment & Government Investment

Source: ONS

Under the Labour Government investment was increased in 2008 and 2009 to offset a crisis caused by this private sector weakness (Building Schools for the Future, bringing forward planned capital infrastructure projects, etc.).

The Coalition slashed Government investment. The effect was predictable. The recovery in private sector investment was halted. It is only in 2014 with a pre-election rise in Government investment did business investment begin to accelerate again.

If the Tory government attempts to close the deficit by cutting its own investment, or acts on the belief that the private sector will deliver better and more investment in public services, then the effect will be the same once more. Business investment will be cut again. There is no ‘productivity puzzle’. Without investment productivity cannot grow and living standards cannot rise.

‘Welfare’

The Tory Government has also announced plans for further cuts in social security. 64% of all households are in receipt of one type of social security benefit or another, over 20 million households. They, we are the majority.

The previous Coalition Government managed to remove somewhere between 1 million and 2 million households from entitlements that were in receipt of small sums. Most of those of working age in receipt of benefits are actually working. Either their pay and/or their hours are too little to subsist on wages alone. A large proportion of these are single parents.

The Tory party and a supportive media have waged a relentless campaign against ‘welfare scroungers’ in ‘benefits Britain’. The reality is that this is the majority, whose general welfare and wellbeing benefits us all. Not only do cuts in entitlement cause enormous hardship to millions, it actually hits everyone economically. ‘Presenteeism’, being at work but not engaged with it through insecurity or concern for childcare of healthcare responsibilities is widespread and on one estimate is said to depress the economy by £15 billion.

Entitlement to benefits is a function of low pay, disability, old age, poverty and excessive rents. Britain has one of the lowest levels of social security protection among richer industrialised economies. Britain spends 0.4% of GDP on unemployment benefits compared to 1% for the OECD average. In contrast, Britain spends 1.5% of GDP on housing benefits where the benefit goes to landlords while the OECD average is just 0.4%.

Table 2. Social Protection Expenditures As A Proportion of GDP %
Source: OECD

A recent report by Shelter shows that the annual subsidy to private landlords amounts to £14bn, which is greater than the planned welfare cuts. The cuts to welfare will cause enormous human misery. Cutting the handout to landlords would remove incentives for buy-to-let and so act as a brake on the upward spiral in rent and property prices.

In the wider picture, the deficit will soon fall to around £85bn annually and below. Handouts to the corporate sector (tax breaks and incentives) amount to £85bn annually. The entire deficit could be removed by ending this corporate welfare without any of the damaging cuts planned. This alone would address the question of the deficit. But for sustainable growth, public sector-led investment is required.

This is a slightly modified version of a recent presentation for Labour Against Austerity in the House of Commons which first appeared at Socialist Economic Bulletin

Image copyright: alexis84 / 123RF Stock Photo

6 Comments

  1. Robert says:

    Brown has gone, what we have left in labour now are a bunch of Progress drones, most will dream of Tony Blair. If Cameron dreams are of cutting welfare you can bet labour is in ending it, these days.

    I’ve never seen a labour party so full of educated careerist gutless wonders.

  2. Barry Ewart says:

    Good points Michael about ending the corporate welfare of £85b and this would eliminate the deficit.
    When I was a mature student (the first in my working class family to go to Uni) one of the best things I learnt was that there are 2 welfare states – a working class one (associated with being minimal, cheapness and stigma) and an upper class one (associated with luxury and a sense of entitlement).
    And of course the Tories with their allies in the Right Wing media have set neighbour against neighbour re working class welfare and people are distracted from tax cuts for millionaires who become invisible as the rich are usually distant from most people’s lives.
    The upper class are subsidised on practically everything via tax relief (on private health and education and even public schools).
    In housing we need rent controls in the private rented sector and the billions saved from the £18b housing benefit bill could be used to refurbish the thousands of empty homes around the country to rent or buy – we could even set up cooperative housing social enterprises to do this or (let local authorities do it) and because these properties are already there it would save new build and land.
    We also need to reintroduce taxes on private landlords with multiple properties which were abolished by the Coalition.
    We could also use windfall taxes on big business, tax the rich & land and have an EC Financial Transaction Tax (and include Greece) so the financial sector pays for the mess they caused.
    And Michael is bang on – then state-led public investment and the private sector would pour in behind to feed the chain.
    But work sister parties internationally so all doing similar things like a living wage, decent health & housing, more democratic public ownership etc. etc. and this should generate a global feel good factor!

    1. J.P. Craig-Weston says:

      I wrote this in response to Micheal Meacher’s last article; about the further curtailment of basic Trade Union, (civil,) rights but I think it’s as pertinent to this as it is to that article.

      It austerity for most, for, “the others,” no so much.

      This is the underlying logic/policy that is driving this.

      Once upon a time, the Labor party, the one that I grew up with would have been screaming all this from the roof tops.

      “………………imposing what is effectively a ban on strikes altogether is dragging Britain down the path adopted by dictators and authoritarian regimes.”

      Indeed.

      Once again we find ourselves on exactly the same page here regarding the direction that the Tories are taking this country in, this is American corporate neolibral economic policy; also called American ethical nihilism, (the only criterion for, “good,” is financial profit,) at it’s most blatant and brutal and uncompromising.

      Anyone familiar with the history of the American interventions in South and Central America or in the Caribbean and the Middle East, (both current and historic,) can already see where all this is going.

      America demands a completely supine submission to the American hegemony from all it’s client states, that brooks neither opposition nor neutrality; and has toppled democratic governments all over the world, usually on the pretext that they were under the influence of communism, (these days they prefer to use the threat of Islamic fundamentalism,) and replaced them with an American sponsored and militarily backed junta of one form or another; self styled elites, repressive, unrepresentative and anti democratic.

      I recently came across an account of life as worker for the United Fruit Company in Guatemala during the great depression of the 1930’s were the workers there were simply forced to work for appalling wages under threat of execution if they resisted or objected.

      This is more recent;

      http://www.thejakartapost.com/news/2013/05/04/labor-activists-face-rights-struggle.html

      It also worth noting that groups such as G4S make a point of promoting there services in breaking up and suppressing unions and all forms of opposition to government, democratic or not, all over the world.

      The Labor party in the UK and even our, (now limited to the public sector,) trade union movement have all but forgotten where they came from and why they even came to exist.

      1. J.P. Craig-Weston says:

        ‘Presenteeism’, being at work but not engaged with it through insecurity or concern for childcare of healthcare responsibilities is widespread and on one estimate is said to depress the economy by £15 billion.

        Seriously?

        1. J.P. Craig-Weston says:

          The sentence, “However, there is no such thing as a consumption-led recovery,” whilst true requires clarification in the context of American post war economic and foreign policy; which always views other countyies as nothing but potential consumers, (markets,) for American, (traditionally their trade surplus; before America became effectively a purely rentier economy,) goods and services.

          In oder to maximize both corporate profitability, (good old neolibral economics,) and dependency it is usual to either suppress or even phase out indigenous (the UK is now a post industrial society,) industrial production, (any and all potential competition with American corporate business interests,) and anything, (particularly,) such as social programs, that might take money away from the purchase of America goods and services.

          So it’s us doing the consuming and America, (whose own deficit shows little indication of ever abating,) that reaps the benefits.

          Which leaves us with a foreign owned and controlled economy, without any meaningful manufacturing or, “adds value,” services, based on cheap labor, exploitation and the stripping of any and all natural resources, (re: fraking for example,) by foreign, (read American,) companies paying little or no tax.

          1. J.P. Craig-Weston says:

            Also, ” “However, there is no such thing as a consumption-led recovery,” is so blatantly wrong that I skidded right past it; and had to back track and do a re-take.

            What; other than a consumer, (demand driven,) kind of an economic recovery is there?

            It was of course such, “demand,” primarily for American weapons and loans etc, that finally ended the great depression of the 1930’s with WW II and nothing else.

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