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Austerity isn’t supposed to help the economy – but to protect the rich

With Osborne’s fourth budget approaching, the Tory austerity programme is clearly in trouble. The news that a majority of people now think the cuts are not working is bad news for the Chancellor. This follows the stinging rebuke delivered to David Cameron on Friday by the independent Office for Budget Responsibility (OBR) which rebutted claims by the Prime Minister that the austerity programme was not responsible for lowering growth. The OBR stated the government’s deficit cutting strategy was responsible for knocking 1.4 per cent of GDP in the last two years leaving the UK economy on the brink of a triple-dip recession.

On top of this the loss of the AAA credit rating and the further contraction in manufacturing has led to deep divisions being expressed in the coalition. But it seems that no matter how bad the economy performs, Osborne and Cameron find a way to convince themselves that Plan A is working. The Budget will see even deeper cuts and impose even more austerity. The Tories absolutely refuse to accept that there is another way.

Why? The reality is that Tory policy on the economy has nothing to do with the credit rating, growth or deficit reduction. Growth has flat lined at best, the credit rating has been downgraded and the deficit is rising. Borrowing is set to be some £212bn higher than that planned over this government by the Tories. By any accounts, Cameron and Osborne have failed in their austerity policies’ aims of reducing deficit and debt. But, of course, it was never about this. Their austerity programme is succeeding in its central aim — a redistribution of wealth from the poorest in society to the richest. It has also succeeded in setting an ideological framework that there is no alternative to cuts and austerity.

The fact is that austerity is about transferring wealth to big business and the rich, at a dire cost from ordinary people and those with the very least in society. For example, when VAT was increased it hit people on lower incomes hardest. Yet at the same time corporation tax was cut. The effect of the two was ‘fiscally neutral’, i.e. higher VAT revenues were offset by lower corporation tax revenues. But the effect was to reduce the real incomes of ordinary people, while boosting the income of business, with no guarantee that this would be invested for the good of the economy. Moreover, reducing the money in people’s pockets takes that money directly out of the economy. And unlike the millionaires’ tax cut, any increase in income for middle and lower income people gets spent in the local economy, not siphoned off into off-shore bank accounts.

This profoundly unjust, and catastrophic, Tory economic policy was the reason why Unite put forward our motion – unanimously passed – at the recent London Labour Conference. We put forward a progessive alternative for investment and growth, beginning with the call for a Labour government to reduce VAT and restore corporation tax to 28p as one initial step.

All forms of austerity will end up reducing growth and increasing the deficit. The falling value of the pound, a deliberate ploy by the current governor of the Bank of England and his appointed successor, will only intensify the recession and thus lead to further calls for even greater austerity with further pay cuts, attacks on public services, welfare benefits and an ever increasing spiral of misery for ordinary people. Meanwhile, millionaires are getting their tax cut.

But there is a clear, and necessary, alternative to austerity. This is one based on investment, led by government. The £50bn fall in investment is greater than the entire fall in GDP during the current recession as other components of growth have increased (government spending and net exports). Government-led investment is the answer to the economic crisis. There is no evidence that borrowing for growth leads to an economic crisis, especially when the government effectively owns two of Britain’s biggest banks. In 1945 a Labour government began a massive house building programme, introduced the NHS and welfare state and nationalised key industries. This was at a time of much higher debt and deficit levels because of the war. The economy recovered and, because of that, the deficit dwindled away over time.

Recent Office of National Statistics data shows British productivity (output per hour worked) is 16 per cent below the rest of the G7 countries. This means that, without significantly increased investment, living standards will continue to fall even further behind other leading economies. Only governments are currently likely to increase investment. Private companies’ refusal to invest is one cause of the crisis – and there is no guarantee that increasing their profits will lead to this being changed. Indeed, there are plenty of resources; corporations are sitting on a cash mountain of £750bn and they issued nearly £80bn in dividends to shareholders in 2012 – an all-time record. The budget is an opportunity to make a real change to the economy and to people’s lives. All that is needed is a government willing to direct those resources to investment in housing, transport, infrastructure and education to resolve the economic crisis. It is extremely unlikely we are going to get this from Cameron and Osborne.

Mike Hedges is Chair of Unite the Union‘s London & Eastern Political Committee

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