Sunday, 27 January 2013

Austerity isn't working?

The narrative we are expected to swallow by the Conservative led Coalition Government and those on the right, is that the UK had a massive structural deficit and that it was all the fault of the previous Labour administration, especially the then Prime Minister Gordon Brown for 'maxing out the countries credit card'. Therefore we were told that there was only one way to our salvation and that was strict austerity - things were so bad, we had to have an emergency budget. For example we were told that last government left the biggest debt in the developed world.

In order to sell the strict austerity package to you and me, we had to be convinced that it was really really bad, and that there is only one way to salvation -  that the reason for cuts in our working conditions, be that working hours or wages or health and safety or job security; or cuts to welfare - is to ensure all our future prosperities, we are all in this together remember, rather than a ideological driven neoliberal approach. See: The Guardian: The march of the neoliberals.

However, the deficit myth is simply wrong, but don't take my word for it, read what Conservative economist Ramesh Patel has to say:

Finally! Exposed! The Deficit Myth! So, David Cameron When Are You Going to Apologise? Exposed! 

Osbornomics Via Childish Proverbs, Idioms, Soundbites, Tricks and Utter Bollocks!

Not that the previous Labour Government should escape blame totally, in the context that during his tenure as Prime Minister Gordon Brown had increased public spending by too much, based on overoptimistic forecasts of the economy. Although he cant be really blamed for not foreseeing the collapse of the world economy in 2008.

In the words of the IMF "[In 2008] [t]he financial meltdown originating in the U.S. mortgage markets reverberated around the world, and led to the deep retrenchment of the world financial markets and the largest global recession in living memory."

And then put simply; because I am in essence a simple man, the money dried up, confidence was lost, nobody trusted what the other said and economy stalled. This required a massive bailout by central banks and governments to stop the world economy falling into a deep depression.

I think it's important to remember that the financial meltdown occurred primarily because we had over leveraged private debt. And not as we are led to believe due to massive public Ramesh Patel says "Labour in 1997 inherited a debt of 42% of GDP. By the start of the global banking crises 2008 the debt had fallen to 35% - a near 22% reduction[..]. Surprisingly, a debt of 42% was not seen as a major problem and yet at 35% the sky was falling down?"

In 2008 world confidence had collapsed, the world economy had in effect stalled -  it needed a kick-start to get going. But with private debt over leveraged and banks not lending to one another, it was down to governments to provide the stimulus to kick-start the world economy. And I'm not just talking about the bailout of the banks, but direct support to businesses to keep workers on during the difficult period etc...

In the UK we had a conventional Keynesian approach to a recession, increased public spending and tax cuts as a means of kick starting the economy. And as such I suppose you could say it was working,.for by the end of 2009 growth had returned, albeit small at 0.4%.

To paraphrase, the Keynesian Model is - you cut the structural deficit during the boom years, and you spend your way out of a recession. However, you cant carry on increasing public spending (in real terms) over the long term, because that could lead to the economy overheating resulting in inflationary pressures reducing the competitiveness of the private sector resulting in a lower GDP and lower tax take.

I think what is often forgotten is that had Labour won in 2010 they also had plans to cut public spending and lower taxes, but that they proposed to do it over a longer period than that proposed by the Conservatives. I recall reading somewhere that the difference between the two parties was around £5 billion, which in the context of GDP of over a trillion is a small drop in the ocean.

In essence I think, we had two approaches a Keynesian approach by Labour and a neoliberal approach by the Conservatives. Neoliberals believing in small government, low taxes and self regulating markets; and that how a person spends their well earned money should be left to the individual.

And in the 'emergency budget' of George Osborne, the Chancellor, the Conservative led coalition Government set in motion strict austerity measures, with an aim of restoring confidence, retaining the UK's AAA rating and eliminating the structural deficit by the 2015/2016 financial year.

Now and again put simply - a central premise of this approach is that by cutting public spending and red tape you make more money available to the private sector who then find it easier to invest which results in a growing economy. And there is evidence from history that shows that in certain circumstances this fiscal contraction approach does indeed result in growth in the economy driven by the private sector.

However, there is a growing consensus amongst economist; I think, that this is not one of those circumstances. Professor Robert J. Shiller gives a much more knowledgeable explanation in his post: Does Austerity Promote Economic Growth?

And it's evidential that Plan A isn't working as explained by Guardian Economics Blog.

'The only plan on the table' had at it's heart a need to inspire confidence in the private sector; especially from overseas investors, that the UK was a safe bet for which to do business with, that the plan was credible not only in the short term but also the long term, and that investment for the long term was also safe in the UK.

Now ask yourself this question - do you think the recent announcement by David Cameron that there is to be an IN/OUT referendum on EU membership in 5 years time, for which he would say YES to staying in the EU only if he gets some powers back, although we ain't sure which powers he's referring to, is it more likely  or less likely that overseas investors will see the UK as a safe bet?

If you want to see how bad the recession of 2008 was compared to others I refer you to the Guardian - Recessions compared: how does Britain's GDP compare to every recession since 1930?.

Not unsurprisingly following such a recession there is a period of low growth, as  you ain't going to recover over night. And growth is key, if you are going to reduce your structural deficit in the long term, you have to accept that initially your structural deficit will grow, by the very simple fact of growth being lower than inflation. (the Bank of England inflation target being 2%)

What you hope to avoid is falling back into recession, because then you will have lower GDP and lower tax receipts and rather than investing in infrastructure for growth, your paying the price for a failed economic policy.

We know there is plenty of private monies available, the Bank of England alone has dumbed £357 billion into the economy, and that large multinational are sitting on trillions, but there seems a reluctance to invest. We know this because lending to SMEs contracted in the three months to November, statistics from the Bank of England show - see Bdaily.

And if the private sector isn't investing, and public confidence is still low as well as disposable income, and export markets are weak and the service sector is still de-leveraging - where will growth come from?

What we need this time is not "austerity" but "investment in growth-boosting infrastructure measures." - not my words but those of Mayor Boris Johnson

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