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How do the parties think they’ll reduce today’s deficit of £100bn to zero by 2020?

debtOsborne continues trying to taunt Labour about eliminating the deficit altogether by 2020. But he’s never set out any strategy by which he might get within even spitting distance of it. Economic growth isn’t going to do it. Under his current policies Britain now invests only 14% of its GDP, one of the lowest rates in the world. The global average is 24% and in China it’s 46%.

In the UK’s case, by the time provision is made for depreciation at about 11.5% of GDP, there’s only about 2.5% left. This isn’t even sufficient to keep our existing capital assets from being diluted down by our increasing population. We therefore now have no net investment per head of the population at all. For a modern industrialised nation this can only lead to relentless decline. With almost no net investment, a shrunken manufacturing base and an economy heavily constrained by the biggest trade deficit in the country’s history, the prospect for any significant improvement in productivity, incomes and growth is very poor.

All the normal drivers of growth are now pointed in the wrong direction. Business investment has recovered very weakly. Household borrowing, which at the height of the boom before the 2008 crash was pounding away at 4.6% of GDP, though clearly unsustainable, is now much more subdued in the light of falling incomes (which the IFS reported yesterday are, after inflation is taken into account, still below their level in 2001) and with household debt now exceeding £2 trillions and still heading north. All the main components of the balance of payments – the trade balance, net transfers abroad and net income from overseas – are all now trending in the wrong direction. That makes the budget deficit effectively the balancing item, and the most likely projection is that there will still be a deficit running at about £100bn per year by 2020. Why is no-one saying this?

To replace the missing demand caused by the very large and growing balance of payments deficit, the government has to run its own deficit corresponding with the leakage in demand caused by the foreign payments deficit. Otherwise all the loss in demand will have a knock-on effect in reducing income for either the household or corporate sectors, which will inevitably contract the economy further. Corporations will invest less while consumers will be cautious about racking up more debt.

On current policies any idea of wiping out the budget deficit by 2020 is just laughable. It is quite likely it will actually be higher than £100bn a year by 2020.

One Comment

  1. Barry Ewart says:

    Very good points Michael. I think Ann Pettifor here pointed out that big business is sat on something like £800b which it is reluctant to invest, “probably for ideological reasons.” Why don’t we just have a Windfall Tax on big business, say £1b each from the top 200 companies to wipe out the debt- it is the labour of working people which creates the wealth and makes societies work so we shouldn’t be shy about measures that get our share of this wealth back. We should also have higher taxes on the rich and could consider taxing land. We should also work with international partners to make sure TNCs pay their fair share of taxes. But don’t stop there – have a 5% EC Financial Transaction Tax which would bring in a trillion plus in the EC to end austerity (and those who caused the mess in the first place would be made to pay). We then need a strategy for longer term productive investment (with lower rates of return) and perhaps the solution to the global economic crisis is to meet global human need. Have decent health services in less developed countries, a global living wage, better global health and safety at work, more democratic public ownership (by country), free public transport (more efficient, environmentally friendly and helps the transport poor) and we could make things like toilets for the 2.5b in the World who don’t have access to them. Through the UN could also set up a Global Trust to fund solar panel farms in the World’s deserts to harness the free energy of the sun and to wean us off carbon and to address climate change. Perhaps a progressive Govt. in the UK could make two immediate symbolic moves – pledge to compensate all those who have suffered under the bedroom tax (to show we are with the poor) and give Greece back the Elgin Marbles (a sign of international solidarity). Yours in hope and solidarity!

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