The Coalition Government is embarking on an unprecedented round of spending cuts. “It is as tough a package of retrenchment as the IMF imposed on Greece, a country on the brink of bankruptcy and twice as tough as the famously harsh measures Canada took between 1994 and 1997. It is three times tougher than Sweden's measures between 1993 and 1995. In British terms, it is immeasurably tougher than what we did after the IMF crisis in 1976 or after the ERM crisis in 1992….No country has volunteered such austerity.” Will Hutton, The Guardian 19.06.10 Are the cuts justified and do the assumptions behind it stand up to scrutiny?
Our current level of debt as a percentage of our GDP is 63% or £903bn. The CG considers this to be dangerously high and threatens the economic future of the country
In the Maastricht Treaty, negotiated during Margaret Thatcher’s period as PM, the EU set a ceiling of 60% debt as a percentage of GDP. At the time, this was considered harsh. We’re not that far off of it.
But look at the history of national debt. The debt to GDP ratio has almost always been more than 60% since records began. When we were building the welfare state the UK debt rose to 261% and stayed over 100% well into the 1960s. And this was also the time when we were rebuilding cities destroyed by bombing.
Here’s another way of seeing it – as a graph. You can see that our current debt is pretty low. So why do we believe the story that it’s high? The UK has had much larger debts than today, but it has managed to service repayments without any need for severe austerity cuts to the public sector – in fact, while growing the public sector. Experts say that countries are at great financial risk if repayments of this debt are 12% or more of GDP. Our repayments are nowhere near this at around 4%. Anyway – more of that later.
We could afford that level of debt after the war because we had cheap American money. But we have cheap money now – and the government owns two banks! Also, our debt is nothing like the debt that Greece has or Spain. Our debt is long-term – 13 years or more. Anyway, debts are never paid off. Think about it. You may pay off your mortgage, but the next owners of your house bring a mortgage, and the next. Your house probably always has a large debt attached to it. It’s still standing.
Now look at other countries’ debts. Pretty random-looking, isn’t it. But look closer. Canada is the model for our public sector cuts – they went through this between 1994 and 1997. But they now have a debt ratio even larger than ours! So even if there was a debt crisis – which there isn’t – savage cuts don’t do anything to help. But look at some countries with debt levels our government is aiming at – Uruguay, Algeria, Ecuador, Yemen, Turkey, Namibia.
So there’s no debt crisis at all. But then the government says there’s a ‘fiscal deficit crisis’ – this is not debt to GDP, but our capacity to balance our outgoings with our income – on an annual basis. So basically, the deficit is the difference between what we pay out – much of it to the public sector; and what we earn – much of it through taxation. The government says that we pay too much to the public sector – but, equally, we could say that we collect too little in taxes, especially from people who can afford to pay more. Anyway, what we pay to the public sector may have gone up every year in recent years – but a lot of it goes straight out again to the private sector. Remember – when we cut school building programmes the construction industry immediately took a massive blow. Think of privatised prisons, health services outsourcing to private medicine, school services outsourced, some police functions being privatised – all of that is money draining out of the public sector.
But we should go back to GDP as well and look at what that is. Actually, it’s a pretty flexible idea and is heavily influenced by the volume and circulation of money in the economy. It is also based on a survey of information on sales collected from: 6,000 companies in manufacturing 25,000 service sector firms 5,000 retailers 10,000 companies in the construction sector. Data is also collected from official sources in agriculture, energy, health and education. Still - in 2008 there were 2.1m businesses registered for VAT and PAYE, which means the GDP survey represents 2% of businesses, and this does not include small businesses with a turnover of less than £60,000. How reliable is this as a measure of economic activity? But the scary bit is this. GDP is all of this multiplied by what is called the ‘velocity of money’ – e.g. how many times a pound is spent in the economy. This is ‘V’.
And here’s the evidence. Look how the supply of money fell in recent years. Again, the same question: is it the public sector ‘debt’ that’s too high? Or the money to pay for it too low? Why do we have only to believe in the first of those two options?
But even so – what we gave the banks is investment – we can get it back. So why count it as debt? But that’s not the point, either. If banks are going bust means we have to give them billions of pounds, why don’t we give just a few millions to stop universities going bust – as they are about to do? Because our economy depends on banks – you might say. But doesn’t our economy depend on universities, too? Don’t you think there’s another reason?
Let’s look at the debt, then. Michael Moore’s film about American capitalism showed that the banks had hijacked the American economy and persuaded the government to give them billions of dollars of Tax-payers money - while making it impossible for people to borrow money. Same here. Look at this graph – you can see how much of our debt is made up of money given to the banks.
Why scary? Because the banks virtually control both the volume and the Velocity of money. They can turn it on and off like a tap. When they wanted to increase their property assets they gave us cheap and fast money to buy second and third homes. After the crisis they want to raise the price of money (which is, after all, what banks sell) so they restrict it and cut down its Velocity. They lend less and charge massive prices for it – some mortgages are priced at 4%, 5% - even 8% above the base rate; some small businesses are offered loans and overdrafts at 15%. Vince Cable is helpless as was Peter Mandelson. This is what it means when Michael Moore say that the banks have hijacked the economy. It’s happened here.
It started to happen when Margaret Thatcher chose to ‘rebalance’ the economy – shifting it from manufacturing to financial services. So we closed productive steelworks, factories, farms and small producers - and then deregulated and cut taxes to encourage insurance, hedge funds, investment banking, loan companies and the like. We ‘demutualised’ (equivalent to privatised) building societies and allowed the private sector to buy vast tracts of state property – utilities, railways and eventually schools, hospitals and prisons. All this to create business in money. Has it paid off? What growth rates has the new financially-based economy generated.
But how significant is public debt? The level of private sector debt on individuals and businesses, is 4-5 times larger than the national debt. But that’s thought to be sustainable. One law for the public and another for the private? But the issue is not how big the debt is, the issue is the capacity to pay it. Will Hutton pointed out that “uniquely, the term structure of our debt is very long – around 14 years.” and “the level of interest on the national debt in five years time as a share of national output is more than manageable .” That begs the question, why is the government wanting to pay off the national debt in 5 years?
But why? Well – maybe because the banks who corporately control wealth – have as their number one goal the personal and corporate accumulation of wealth. Take money from the public sector, give it to banks. Isn’t that what we’ve been doing? But look at the effects - look at the Gini Coefficient. The Gini Coefficient measures household incomes. The lower the Coefficient, the lower is the gap between rich and poor; the higher it is, the more inequality there is. See it rising? Incidentally, doesn’t this suggest that there is capacity in the economy to raise more money through tax, as wealth and income have concentrated amongst a smaller group?
So we either tax wealth more than we do – or we cut the public sector.
Surprise, surprise! Growth under a finance and bank led economy has flatlined around 1%, whereas manufacturing in the 20 years before that supported the UK to grow at 2-5%, albeit more erratic. As a result of this shift our economy and the size of our GDP are vulnerable to the banks supply of money in the system. But, again, there’s a scary side to this. Look at the ‘tiger economies’ – Indonesia, China, India, Malaysia, Brasil, Chile – their growth rates are between 6% and 10%. We compete for world wealth with them. This means that we are steadily getting poorer as they steadily get richer.
The CG talks about a ‘bloated’ public sector – but it is not what it used to be. Over 20% of the sector is outsourced to private companies, representing around £124bn, and this is set to increase. If 5% of that is private sector profit, £5-6bn per year is flowing out of the state coffers. The relationship between the public and private sector is complex and we should talk about the difference between the public sector and public services.
So – rather than just swallow this supposedly ‘unavoidable’ truth, what might be good questions to ask?
So – no national debt crisis – and the fiscal crisis depends on how you see things. If you think we ought to cut back public services in order to channel more money to the banks and the wealthy classes and cut tax, then you will think there is a crisis in the fiscal deficit. You may, for example, believe in Thatcher’s famous ‘trickle-down’ policy – that the more money the wealthy have the more ‘trickles down’ to the poor. But if you think that is unfair or inefficient, you will be inclined to think that the crisis is that we don’t collect enough taxes, our growth rates are too small and wealth accumulations are too concentrated. You don’t, incidentally, have to be a socialist to think that – but you do have to put a higher value in public serves than in the banks.
Now you might go and read Red Harvest by Dashiell Hammett – he invented the detective Sam Spade and wrote The Maltese Falcon. Hammett was always worried about how easy it is for gangsters to take over society and Red Harvest is a story about gangs getting together and doing just that – and corrupting society in the process. By gangsters he meant financial gangsters – the banks. It’s happening. Crisis? A goofy idea?
Is There an Economic Crisis
BELIEVING IS SEEING the debt crisis as just another story – or why are we prey to a single narrative?
CURRENT DEBT – GDP RATIO <ul><li>....about 63 % </li></ul><ul><li>(we owe about two-thirds of what we are worth – like having a mortgage) </li></ul>
...and what does the Maastricht Treaty allow? <ul><li>(i.e. What did Margaret Thatcher sign up to?) </li></ul><ul><li>......a debt limit of ............. 60% </li></ul><ul><li>.....but how does that stand historically....? </li></ul>
Britain's Debt / National Income Ratio, 1691-1990 Year Percentage Year Percentage 1688/91 6 1901 43 1759 137 1911 39 1801 197 1921 179 1811 202 1931 207 1821 288 1938 171 1831 231 1941 154 1841 175 1945 261) 1851 150 1950 240) look! 1861 123 1960 133) 1871 86 1970 82 1881 73 1980 52 1891 53 1990 35 Source: Mitchell (1990). 1980 and 1990: Central Statistical Office (1992) Red = period building the Welfare State
....or look at it another way Our current debt is at an historically low level
“ ....but cheap American money in the post-war period ,” you say? … Government has cheap money now – interest rates are low and Government owns banks “ but that was long-term debt,” you say. … So is ours today – 13-14 years. “ ....but that post-war period, too, was a time of great austerity ,” you say? … But we were building a welfare state then, free universal education, expanding the university sector– right now we are dismantling the welfare state and abandoning state funding of higher education .
....and another way to see debt...looks pretty random, doesn’t it? Source: CIA World Factbook (Notice: Canada went through extreme austerity measures only recently and has a higher debt than the UK!)
<ul><li>Built-in (structural) imbalance of Government’s incomings and outgoings – e.g. Public sector costs + servicing the debt against tax receipts, proceeds from growth and exports. </li></ul><ul><li>So – are Public Sector costs too high – or GDP/growth/tax receipts too low? You can work on both sides of the equation. </li></ul><ul><li>CG says 80% cuts (one side) and 20% tax receipts (other side). Why? Why not 50/50...20/80...0/100? It’s political. </li></ul><ul><li>But what does ‘structural’ mean?! Look at recent history. There’s a dynamic relationship between deficit and borrowing – they balance each other out. </li></ul>
Conservative Government We borrowed our way out of debt under Thatcher!!
But what is more structural than the tax take? Is this where the deficit is ?? Source - Eurostat newsrelease – June 22 nd 2009 Tax as a proportion of GDP (2007 - %) EU 16 40.4 Austria 41.9 Belgium 44.4 Czech Rep 36.4 Denmark 48.9 Finland 43.0 France 43.6 Germany 36.2 Hungary 39.3 Iceland 41.4 Italy 43.3 Luxembourg 36.9 Norway 43.4 Spain 37.2 Sweden 48.2 UK 36.6
<ul><li>GDP = Consumer spending + Business Investment + Government Spending + International Trade income </li></ul><ul><li>It’s an estimate, based on surveys of < 2% of UK businesses. So it’s a guide a rough indicator – not a fact </li></ul><ul><li>And GDP is multiplied by the Velocity of money - </li></ul><ul><li>(how many times a £ is spent in 1 year). Increase V and you increase GDP. But banks have RESTRICTED the flow of money – so artificially dampening GDP. </li></ul>
<ul><li>This is investment – we have bought shares in banks. Why count it as debt? </li></ul><ul><li>In the long term how much will we recoup from these investments? </li></ul><ul><li>more importantly…. </li></ul><ul><li>If we can invest in banks and make public sector pay – why can’t we invest in public sector and make banks pay? </li></ul>
<ul><li>UK net debt is £903 bn </li></ul><ul><li>Excluding Financial sector intervention , debt is £771 bn* </li></ul><ul><li>Or 54% of GDP! </li></ul><ul><li>Source: Office National Statistics ( updated June 18, 2010 ) </li></ul>*This includes £100bn+ of the banks’ debts that is now UK Government debt
<ul><li>Increasing or reducing the supply of money into the economy through household and business lending – i.e. Manipulating the Velocity of money </li></ul><ul><li>EXAMPLE: housing equity renewal increased from £4bn in 2001 to peak at almost £18bn in 2004, an annual injection of between £10-14bn into the system during the 2000s. Since 2008, as a result of the credit crunch, banks have pulled £8bn per year out of the system and slowed down the circulation of money by making loans expensive (i.e. To raise the price of money – their main commodity) </li></ul>
<ul><li>So – is public sector cost too high? </li></ul><ul><li>Or GDP too low? </li></ul><ul><li>Or growth too low? </li></ul><ul><li>Or tax receipts too low? </li></ul>
<ul><li>What kind of society do we want when the economy is performing to capacity? If we are cutting the ‘structural’ elements of debt that means we don’t plan to bring them back. What do we want: </li></ul><ul><ul><li>Free health care? </li></ul></ul><ul><ul><li>Winter fuel allowance? </li></ul></ul><ul><ul><li>Good schools? </li></ul></ul><ul><ul><li>Historically low taxes on the wealthy? </li></ul></ul><ul><ul><li>A well run railway? </li></ul></ul><ul><ul><li>Child benefit? </li></ul></ul>
<ul><li>Financial services share of UK GDP rose from 5.7% in 1995 to 7.6% in 2007 </li></ul><ul><li>The manufacturing sector share of UK GDP has fallen by over a third from 20.3% in 1997 to 12.6% in 2007 </li></ul><ul><li>Source: International Financial Services, London Report 2008 </li></ul>
<ul><li>Private sector debt is about 4-5 times larger than public debt and that is sustainable </li></ul><ul><li>Anyway, it’s not debt that matters – but our capacity to pay it (like a mortgage). And our capacity is historically high, because: </li></ul><ul><ul><li>Increased wealth and income inequality (see the Gini co-efficient) </li></ul></ul><ul><ul><li>UK’s long-term debt repayments (14 years) </li></ul></ul><ul><ul><li>Government access to cheap money (we own two banks!) – </li></ul></ul><ul><ul><li>Doesn’t that make the value of debt historically low? </li></ul></ul>
The Gini Coefficient – the most disgraceful curve of all Low = lower wealth disparities; High = greater inequality Public sector compensates for wealth inequalities – so why are we not EXPANDING the public sector???
<ul><li>Notice that the Gini Coefficient has been rising (more wealth concentrated on the wealthy) while higher rate taxes have been reduced (the wealthy taxed less). So the money to pay for public sector has shrunk. Where can it come from? </li></ul><ul><li>..........not from growth...the financial sector has suppressed that! LOOK! </li></ul>
Growth rates The financial sector and banks in recent years also suppressed growth – compared to 6-10% growth of ‘tiger economies’
<ul><li>Public utilities privatised - prisons, more and more schools, many health services, council services etc </li></ul><ul><li>Around 20% public current expenditure outsourced to private sector (£124bn) with more to come as ‘commissioning’ steps up; </li></ul><ul><li>Around 20% public sector employment transfer to private sector over recent 2 decades </li></ul>
<ul><li>YES…..…BUT…….. </li></ul><ul><li>Not between the public and private sectors </li></ul><ul><li>Between the financial and manufacturing sectors </li></ul>
<ul><li>The UK is not broke – “there’s no money left!” is economically illiterate. We have the 6 th highest GDP in the world </li></ul><ul><li>What about our assets in bank holdings ? </li></ul><ul><li>Why pay off 100% of our deficit in 5 years, when our debt is historically low and we have 14 years to repay our borrowing ? </li></ul><ul><li>But national debt is never paid off – its part of the dynamic of a healthy economy. YOU may pay off your mortgage – but the next owners bring another one – your house ALWAYS has debt </li></ul><ul><li>Why not explore options to meet debt payments and reduce the deficit? i.e. pay more when we have growth, reschedule loans in 10 years, increase wealth taxes, public enterprise. </li></ul>
<ul><li>National debt? NO </li></ul><ul><li>Current account deficit? Depends on your values - it’s political </li></ul><ul><li>Economic governance? YES </li></ul><ul><li>Democracy and public debate? YES </li></ul>
"Thinking's a dizzy business, a matter of catching as many of those foggy glimpses as you can and fitting them together the best you can. That's why people hang on so tight to their beliefs and opinions; because, compared to the haphazard way in which they are arrived at, even the goofiest opinion seems wonderfully clear, sane, and self-evident.” Dashiel Hammett ...so...why are we prey to single narratives?