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Alternative Autumn statements: continued Tory failure versus Corbynomics

Osborne delivering the autumn statementHaving spectacularly failed in his stated goal of eliminating the deficit in the last parliament, George Osborne is repeating his experiment in this one. Both the June 2010 and 2015 Budgets proposed ‘fiscal tightening’ of £37 billion. In the first of these Budgets the main method was cuts in public spending. In the second it is the sole method.

In the latest Autumn Statement this now falls to £36 billion and takes place more slowly after the U-turn on implementing cuts to working tax credits. These are now effectively scheduled to take place more slowly under the guise of ‘reform’ to the Universal Credit system.

The effect of renewed austerity is reasonably predictable. The economy has not grown significantly in the last 5 years. As nominal GDP is approximately 16% higher, so the impact of almost exactly the same nominal cuts will be very similar as from 2010 onwards. Likewise, the starting-point for growth is about the same. In the 3rd quarter of 2010, ahead of that Comprehensive Spending Review the GDP growth rate was 2% and on an upward trajectory from the depth of the recession. In the recent preliminary estimate the growth rate in the 3rd quarter of this year was 2.3% and slowing from 3% following the election boost to the economy, as shown in Fig.1.

Fig.1 GDP Growth Since the Recession

The effect of the first round of austerity was to slow the economy to a crawl. Living standards fell and the deficit actually began to rise. GDP growth was 1% in both the 2nd and 4th quarters of 2012 and only lifted above that by the boost from the London Olympics. The economy is set to slow again in 2016 under the impact of austerity and based on past experience may slow towards 1% growth in 2017.

Policy Options

At the time of the March 2015 Budget there were blood-curdling forecasts of the decline of public spending to lower levels than the 1930s. This was entirely a political manoeuvre, a trap designed to get Labour to support unfeasible spending plans and so have nothing positive to offer in the election campaign, which Ed Balls duly jumped into.

In fact, it is the content of government current spending which matters far more than its proportion of GDP. Government spending on education, on health, on childcare and other public goods improves the living standards of the population. An increase in social security payments because of rising joblessness or in-work poverty is necessary but can only partially alleviate falling living standards. There is a world of a difference between current spending that falls because well-paid jobs are being created on a large scale, or falls because the NHS is being cut.

The medium-term history of the British economy is stable or rising Government current spending as a proportion of GDP, as shown in Fig.2. It is the composition of this spending which has adversely altered. To take just one well-known example, the public sector has almost given up on house-building but incurs £25 billion annually in housing benefit payments, which are paid to landlords – enough to build over 160,000 affordable homes. This reflects both slower growth and rising inequality.

Fig.2 Government Current Spending (lhs) & Net Investment (rhs) as a Proportion of GDP

The focus for cuts over the longer run has actually been to public sector net investment. This has been renewed by Osborne. The Blair/Brown government slashed public sector net investment to an all-time low (to meet other, extremely damaging Tory spending plans in 1997 to 2000). But Brown increased public sector net investment to 3.2% of GDP in response to the slump in 2008 and 2009 and this was responsible for the recovery. Osborne has effectively halved this rate of investment.SEB has previously shown that the private sector followed suit in both cases; increasing or decreasing its own investment rate in response to the rise or fall in public sector investment, with a time lag of 6 months. This is a practical demonstration of what is meant by the phrase state-led investment.

These very different trends in the components of government spending reveal the truth behind the Tory rhetoric of ‘deficit-reduction’, ‘living within our means’ and ‘shrinking the state’. Successive governments, of which this is just the most brutal, have not reduced total current spending as a proportion of GDP and have been content to borrow to fund that spending. They have simply changed its content. Landlords and others, after all, are part of the class of capitalists in whose interests economic policy is formulated.

State spending has not shrunk, but state investment has been savaged. The trend is towards minimal or even zero net public investment. This is because investment creates the means of production. If the public sector invests it owns those means of production. They are not owned by business. To the extent that the state owns the means of production it can direct the level of investment in the economy and its overall trajectory. Private business cannot directly make profits from the means of production it does not own, which explains the contrary drive towards privatisation.

Corbyn & McDonnell are right

The response of the Labour leadership is therefore correct. Prior to Comprehensive Spending Review Shadow Chancellor John McDonnell said his approach could be summed up as “investment, investment, investment”. Firm opposition from the Labour leadership to cuts in working tax credits produced Osborne’s U-turn.

Investment (Gross Fixed Capital Formation) has been in a long-term downtrend in the British economy. It was also specifically responsible for both the recession and for the weakness of the recovery. The long-term investment downtrend is shown in Fig. 3 below, which shows both total investment and Government investment as a proportion of GDP.

Fig.3 Total Investment and Government Investment as proportion of GDP

The startling fact revealed by this chart is that it is the slump in Government investment which is primarily responsible for the decline in aggregate investment. Over the entire period the peak to trough decline in total investment has been 26% of GDP to 15% in the recession. The decline in the Government component of that is 7.5% to 0.5%. It is the cut to Government investment which is driving the long-term decline in British, responsible for 7% of a total decline of 11%.

As the chart also shows, the decline in investment in the current cycle began in 2006, long before either the financial crisis or the recession itself- and was led by a private sector decline. The rate of investment is decisive for the trajectory of the economy as a whole.

The policy focus must not be on investment in general, with exhortations or bribes to the private sector to invest. This has been tried by Osborne and failed. It must be direct investment by the public sector itself, in housing, transport, infrastructure, renewable energy and education. The private sector will follow.

This is why the proposed Public Investment Bank is so important, supported by measures such as PQE and changes to the tax system to penalise unearnt income such as shareholder dividends while promoting investment. The Public Investment Bank can mop up the idle cash of the large corporations, and direct it for productive investment. Crucially, it also allows the public sector to reap the benefits of that investment, so that it acquires a larger and enduring weight in the economy able to sustainably increase investment over the long-term.

This article first appeared at Socialist Economic Bulletin

 

3 Comments

  1. Will says:

    Government spending ( on any thing ) creates demand in the economy. Investment is importan but so to is spending on every thing else.
    Reducing housing benifit, or any other payments to people who actually go out and spend the money they have risks local conomies in those parts of the country where little economic activity takes place.
    I’m disappointed that John McDonell seems unwilling to defend government spending on welfare as a good thing in itself for the economy.

  2. John Penney says:

    A good analysis. Another source worth looking at for anyone interested in anticipating where the UK economy , as part of the world economy, is likely to be heading , could look at Richard Murphy of the Tax Justice Network’s daily blogs. Richards’s analysis , alongside many other economists on both Right and Left, is that the world, and also UK, economy, having failed to fix any of the dysfunctional financial sector distortions behind the 2008 crash, is heading for ever-deeper contraction – and quite likely another 2008-style financial crash within 5 years.

    Whether the most dire , “second 2008-style meltdown” scenario, of these prediction pans out, or not, it is clear that with China in long term slowdown, Japan tipping back into its 20 economic recession, and the EU economy now only being kept at all buoyant by yet another round of property-bubble producing QE, the optimistic assumptions behind Osborn’s dodgy and sketchy “Long Term Economic Plan” simply aint going to happen.

    This means that the high government intervention Left Keynsianism correctly proposed by Jeremy and his team will be the only serious, credible, “economic narrative” in town leading up to the 2020 General election – with recession inducing Austerity Voodoo Economics utterly discredited.

    Unfortunately the damage done to our social and economic infrastructure by 10 years of Osborne’s snake oil economic medicine will see the UK in a very weak position, within an even more precarious worldwide Slump, to carry out the economic rebuilding which will be required.

    We must always remember that, regardless of the bogus mantle of economic competency that his total mass media support provides for him, Osborne is actually a complete economic ignoramus, driven entirely by short term political tactical considerations and his overwhelming class-driven desire to transfer wealth from the many to the few. This economic incompetence will drive the UK economy off a cliff – with the current property bubbles and ever rising private debt bubble – and once again effectively completely unregulated speculative financial sector going full tilt with its speculative chicanery, guaranteed to implode before 2020.

  3. stewart says:

    left futures,corbynites and the rest of these middle class spoilt bratts rebelling against there middle classness and privilege are the biggest con since the moon landings,when are we going to get a working class party and a working class leadership that truly represents the majority of people in this country that are working class !!! i mean,corbyn and his ilk was not brought up and lived in sink council estates was you,oh no,you all live in the posh middle class leafy surburbs but for some strange reason you think you represent working class people.no you dont.your just a laughing stock that has sentenced us to another 20 years of tory rule and misery.shame on you and corbyn.

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