|SocialismToday Socialist Party magazine|
Issue 193 November 2015
The Tories’ austerity agenda
The Tory government’s economic policy is ideologically driven. Savage austerity and cut-backs are designed to make working-class and middle-class people pay for the system’s crisis. Meanwhile, the wealthiest in society continue to benefit. JUDY BEISHON writes.
In his Tory party conference speech in October, Chancellor of the Exchequer George Osborne made it clear that his policy is to continue with austerity in the name of eliminating Britain’s budget deficit and reducing the national debt. Having already forced millions of the most vulnerable in society into desperate circumstances, he praised his "sound economic policy" and declared that if you "borrow money you don’t have… it’s always the poorest who suffer". This, he said, is "the most unkind, uncaring thing a government can do".
Coming from a government that has deliberately boosted the wealth of the richest in society at the expense of the poorest and the majority, Osborne’s nauseating remarks turned reality on its head. The Institute for Fiscal Studies has confirmed that during Osborne’s tenure the poorest 30% of the population have lost more than the richest 10%. His hacking down of public spending has been devastating, to the extent of £98 billion so far, according to Osborne himself.
Since 2010, local government funding has been cut by a massive 40% in real terms, destroying many vital services. One recently revealed consequence was that of 1.8 million requests to councils for help by the elderly last year, only 8% of them secured a long term care package (Health and Social Care Information Centre, 7 October).
Osborne’s summer 2015 budget contained the ploy of increases in the minimum wage (estimated to cost big business just 1% of its huge profits) but also £12 billion of welfare cuts, most of which will hit millions of tax credit claimants next April. Osborne wants to go much further. To fulfil his aim of changing the budget deficit to a surplus in the present parliamentary term, he intends to make another £20 billion of cuts in his November spending review. Following a net loss of nearly 400,000 public-sector jobs already, at least the same again is predicted over the next few years if Osborne’s plans are realised.
Pushing working-class and middle-class people into a greater struggle to get by has been accomplished by big hand-outs to the rich. Osborne has cut corporation tax from 28% to 20% and it will be 18% by 2020. He lowered the top tax rate from 50% to 45%. The rich have also benefited hugely from rises in asset (property and share) prices and from Osborne’s privatisations. These include his rush to sell the publically owned shares in RBS and Lloyds banks at a loss to public funds just when those banks are returning to making massive profits.
Osborne has announced that councils will be allowed to keep the business rates they raise and set the amount. But this is not so that more money can be raised for local services – increases will be capped and can only be made if a majority of local businesses agree to them! His goal is to reduce public spending back to 36% of GDP, a level that it was squeezed down to for a short period towards the end of Tony Blair’s first government. The pensions and health budgets are much greater now than they were then, in proportion to GDP, so other departments are to be forced to suffer astronomically.
This is all political choice and not economic necessity, as Labour leader, Jeremy Corbyn, and shadow chancellor, John McDonnell, have pointed out. It is for the interests of the rich and big business that Cameron and Osborne have run an ideological campaign against the budget deficit, arguing that state expenditure has to be massively shrunk in order for the economy to be successful and for ‘everyone’ to benefit.
The national debt
Osborne became chancellor in 2010, when the economy was recovering from the deep recession of 2007-08. To dig the economy out of acute crisis, under Labour’s Gordon Brown and supported by the Tories, interest rates were reduced to rock bottom levels, the bankers were bailed out with £133 billion (plus much more in government guarantees) and £200 billion of quantitative easing (QE) was electronically created by the Bank of England, along with other expansionary measures. There was a further £175 billion of QE during Osborne’s chancellorship.
The national net debt had risen to 52% of GDP by the May 2010 general election (excluding public money used to rescue the private banks), up from 37% in 2007. Under Osborne it has risen significantly more, to over 80% of GDP by August 2015. This is less than the percentages in the US or France and it has been much higher in previous historical periods. In 1947, following the second world war, the debt-to-GDP ratio was 238% of GDP. Ten years later – during which the welfare state was being developed – it was still as high as 122% of GDP, not falling below 80% until 20 years later, in 1967. Journalist William Keegan points out in his book, Mr Osborne’s Economic Experiment, that in 2010, "the Debt Office was having no trouble in managing the debt, which had an average maturity of some 14 years". And it is being managed similarly now.
Nobel prize winning economist Amartya Sen is among those who have condemned Osborne's scaremongering on the debt, pointing out in a lecture on 23 May: "While a national debt may have many costs… it is not quite like an individual person’s debt, which is owed to someone else (someone quite different)". Less than a third of the UK’s debt is owed to overseas lenders and nearly 30% is owed to the Bank of England. But, concluded Sen, "figures of seemingly large public debt may be handy enough to frighten a population with imagined stories of ruining the future generations".
Osborne and Cameron imply that the economy could sink under the weight of the budget deficit (which is continuously increasing the national debt), and that ‘business confidence’ can only be maintained by reducing it. Economist Paul Krugman commented: "Business leaders love the idea that the health of the economy depends on confidence, which in turn – or so they argue – requires making them happy". (Guardian, 29 April) The Tories have raised the spectre of a Greece-style collapse, despite major dissimilarities between Greece’s situation and Britain, including that the Bank of England borrows in its own currency and can always create more money.
Instead of acknowledging that the increase in the budget deficit between 2007 and 2010 was due to the 2007-08 worldwide crisis and subsequent slump, and the rescue measures afterwards (a crisis which the excesses of the private banks had played a major role in triggering and worsening), it suited Osborne’s ideological cuts agenda to blame it on Labour government ‘profligate spending’.
Then, when the economy was starting to pick up in 2010, rather than stimulating it as much as possible by making use of low interest rates to plough money into public investments, Osborne embarked on a course of savagely slashing public spending in order to reduce the deficit, spuriously claiming that it would spur the private sector on towards recovery.
However, even IMF figures showed that between 2009 and 2013 the most ‘austere’ countries had the lowest rates of GDP growth. Keegan explains in his book that when growth started to pick up in 2010 it was cut across by the spending cuts, to the tune of an estimated cumulative 5% of GDP from 2010 to 2014. The result was ‘flat-lining’ of the economy from 2010 to 2013, during which Osborne resorted to austerity-lighter budgets than his 2010 cuts bonanza.
He has also had other considerations. Following the 2011 riots in Tottenham that spread elsewhere – an outcry against injustice, poverty and lack of opportunity – he made some U-turns on VAT increases and other measures in his 2012 budget. That budget also followed the magnificent two-million-strong public-sector strike against pension ‘reform’ on 30 November 2011, which no doubt helped to stay his hand. But the lack of an escalating mass anti-austerity movement since then, with lamentable inaction by most of the trade union leaders, together with the pitiful lack of opposition to the austerity agenda from the pre-Corbyn Labour Party leaders, gave Osborne the leeway to inflict more huge cuts in his 2015 budget.
The economy began to improve in 2013 onwards, leading Osborne to crow that his austerity was vindicated. But the growth was delayed and weakened by his austerity rather than being brought on by it. Also, he bragged that Britain has been the fastest growing economy of the major developed countries in the last two years, but this indicates the weakness of economies globally rather than strength of the British economy. It is, in fact, Britain’s weakest ever recovery.
The government and media have exclaimed that average wages are rising, by 2.9% in the three months to July compared to the same period in 2014 (4.4% in the private sector and just 0.6% in the public sector). A Financial Times editorial pronounced on 17 September: "Britain has not been this happy since the early 1960s. Inflation is zero, unemployment is low and wages rising steadily". But it then admitted: "Underneath the headline figures, living standards are still weak".
Research by the London School of Economics, published in April 2015, showed that real wages of the ‘typical’ (median) worker fell by almost 10% from 2008 to the end of 2014, so wage increases this year certainly will not compensate for that loss. Sky-high housing costs, tuition fee debts, childcare bills, increased pension contributions, etc, mean that very few people feel financially ‘happy’. There is relief that price rises are presently low or falling in some cases, and interest on loans is low, but when these eventually increase, it will put massive additional pressure on living standards.
Fault line in British economy
Journalist Will Hutton began a comment piece in the Observer on 26 July: "It has been obvious for years that British capitalism is profoundly dysfunctional. In 1970, £10 of every £100 profit was distributed to shareholders in dividends: today… companies pay out £70. Investment, innovation and productivity have slumped… Exports have stagnated. The current account deficit is at record proportions".
While recent productivity figures showed a slight increase, the UK lags in sixth place for productivity among the G7 countries. The government’s lauding of the number of apprenticeships it has initiated was punctured in October by the Sutton Trust, which revealed that most of the training is to a low skill level.
The current (trade and payments) account deficit is a far more serious problem for British capitalism than the present budget deficit and national debt. At 6% of GDP, the current account deficit is at its largest peacetime proportion of GDP since 1830 (Observer, 9 August). The greatest problem within it is the ongoing decline of Britain’s manufacturing industry and its reducing share of world exports. In his 2011 budget speech, Osborne announced a "march of the makers", but manufacturing – now only about 12% of the economy – is in recession. The Tories refuse to intervene to stop closure after closure, recently hitting thousands of workers in the steel industry and also solar panel producers, among others.
The Socialist Party calls for the nationalisation of these plants, to be run under workers’ control and management, to maintain the jobs and skills. Osborne’s claim that ‘prosperity’ will be founded upon budget surpluses, rather than on science, technology and production, would be laughable if it was not so destructive. As part of that idiocy he slashes funding for science and innovation in universities and colleges. But it is the development of the production of goods that ultimately determines the material wealth in society, which British capitalism (and capitalism globally) is increasingly unable to deliver.
An additional issue in Britain is the level of foreign ownership. Last year, Office for National Statistics research showed that foreign-owned companies in the UK (excluding the financial sector) account for nearly a third of the economy. For workers, it is equally bad whether the companies they work for are asset-stripped and downsized by capitalists at home or based abroad. But the high level of foreign ownership in the British economy means that an unprecedented amount of money – from the profits of those companies – is going to shareholders abroad and is less likely to be spent in Britain (Ed Conway, Times, 6 October).
Greece is a graphic demonstration of the impact that imposed austerity can have on growth prospects. Its economy went into free-fall, down to 30% of its pre-crisis size. As a result its national debt has become even more unsustainable: it increased from 103% of GDP in 2007 to over 178% in October 2015. Austerity goalposts can keep moving – more and more is demanded when the national borrowing requirement increases because of poor economic growth, or when debt interest costs rise.
Britain has not suffered a contraction of the scale in Greece, but growth has not been sufficient for Osborne’s deficit reduction targets to be met. In 2010 Osborne pledged to reduce Britain’s annual budget deficit to £37 billion by the 2014-15 financial year. However, it ended up being £87 billion in that year. In 2015-16, Osborne intends to reduce borrowing to £69.5 billion but he was only 21% of the way towards that goal after the first five months. So, due to the growth rate falling short of forecasts, Osborne faces the prospect of lengthening his deficit reduction plan again.
The economists’ jargon is that ‘headwinds’ are threatening growth on a world scale. In Britain, the point is also being made that after six years of ‘growth’ we are now ‘due’ for a recession as part of the course of capitalism’s cycles. The idea of an approaching recession is shocking for the millions of people whose living standards have not yet recovered from the great recession of 2007-08.
In the period before this year’s general election in May, Osborne was reported as being happy to see low-interest loans pumping up housing values and fuelling consumer spending on cars and other goods, to feed a temporary feel-good mood in a layer of the electorate. Low commodity prices (including fuel), low inflation, and the rise in the value of sterling (cheapening imports) also helped him in this. But now that course is running out of steam and the problems that preceded the 2007-08 crisis are building up again, including high household debt levels, an ‘overheated’ London housing market, banks weighed down by dodgy loans, and a vast speculative shadow banking and asset management sector.
As the 2010 budget cuts significantly cut across economic growth, with the present background of growth slowing globally, the cuts announced and planned for 2015 inevitably threaten to push the economy into an earlier and more severe downturn. Osborne might become compelled to lessen austerity to try to mitigate a downturn, but whether the scenario is ongoing austerity or renewed recession, neither is acceptable for the majority in society.
Help from export markets will not be forthcoming because of slowing world growth. A declining growth rate in China is driving commodity prices down globally, with catastrophic effects on ‘emerging economies’ like Brazil. In Japan, QE has been expanded and the Eurozone is also creating huge amounts of money in a struggle against lack of demand for goods and deflation. There are many possible flashpoints that could step up the threat to growth across the globe, such as further turmoil in the Eurozone, the conflicts in the Middle East, or an interest rate rise in the US.
In Britain, growth has not been sound enough for the Bank of England to risk increasing interest rates yet but it has been considering a small rise (0.25% or 0.5%) in order to counter the ominous financial bubbles. Either way, when a downturn sets in, there will be little or no leeway to cut interest rates to stimulate growth, as their starting point will be low.
Paul Krugman has ridiculed the British government for "being stuck on obsessions that have been mainly laughed out of the discourse elsewhere" (Guardian, 29 April). But the choice between austerity and using public spending as a tool to stimulate growth is not a simple polarisation between hard-line ‘austerians’, like Osborne, and Keynesians who advocate the latter. Many capitalist economists globally argue for some application of both simultaneously. The OECD and IMF have criticised Osborne for the scale and pace of his cuts, fearing that he is going too far in jeopardising growth, but they do not oppose all fiscal tightening. Recently, IMF chief Christine Lagarde suggested that Osborne should borrow more money for infrastructure investment, to boost stalling growth.
Osborne’s ‘rules’ are not based on ‘standard capitalist macroeconomics’ (traditional policy nostrums), Krugman has pointed out. He wrote that "the great majority of British economists disagree with the proposition that austerity is good for growth". Krugman has described how Osborne searched around to find economic research that would justify his cuts mission but that the studies he found have "withered under scrutiny" (Guardian, 29 April). Along with spending cuts go ‘reforms’ to make it easier for bosses to hire and fire, attacks on trade union rights, etc, which also drive down workers’ living standards and wellbeing, and this means more ‘precarious’ workforces that are less motivated, financially insecure and less able to spend.
The Tories’ austerity agenda has been one of forcing working-class and middle-class people to pay the price for the failures of the capitalist market economy with its unsolvable contradictions and the drive for ever greater enrichment of the ruling class. Shrinking the public sector means the wealthy can be charged less tax to fund public spending and can be offered rich pickings from privatisations. Nevertheless, it is not a complete win-win scenario for the capitalists because, in reversing the gains and protections the working class has achieved, workers – the creators of value – become more and more de-skilled and impoverished, undermining the overall health of the capitalists’ profit-making system.
Guardian writer Polly Toynbee commented: "By 2020 the state will have shrunk to just 35% of GDP, smaller even than the United States, and far below the German 45% of GDP… Osborne repeats yet again that we have 1% of the world’s population and 4% of the world’s wealth, but spend 7% of the world’s welfare. Even the slowest brain works out that global welfare includes the likes of Somalia and Ethiopia". (6 October)
The Labour Party’s right-wing leaders have barely differed from the Tories and Lib Dems in their approach to the deficit – regarding bailing out the bankers, QE (Keynesianism for wealthy financiers) and public spending cuts. The post-war Labour governments led by Clement Atlee presided over austerity in the form of the rationing of many basic goods, but also embarked on a bold Keynesian programme of nationalising key industries and spending money on the new National Health Service, social security, infrastructure, housing and education, which raised living standards and helped to stimulate the economy.
These gains for ordinary people and their consolidation for a period were possible on the basis of a phase of economic growth, up until the 1973 oil crisis, based on large-scale investment and increasing industrial productivity. The development of the public sector was also due to the balance of class forces – the strength of the labour movement – and the threat felt by capitalism from the rival Stalinist system in the USSR and east Europe.
Austerity, Keynesians explain, is in essence anti-growth: it reduces purchasing by the state, business and households. In periods of downturn or stagnation they tend to argue for increased state spending, which can be financed by increased borrowing and maybe higher top rates of tax, among other forms of state intervention. Contrary to the contention of neo-liberalists like Osborne, they do not advocate never-ending, ever-increasing deficits, not least because the interest on the debt would become a major problem. Rather, they want debt reduction through stimulating economic growth.
Refusing at present to even fund infrastructure projects through borrowing is seen as particularly nonsensical. Ed Conway, economics editor of Sky News, wrote: "The average interest rate on government bonds is down to a record low of 1.5%. The average maturity on UK bonds is almost 18 years – compared with about five years in the US and Germany. In other words, should the government borrow for big projects today it could fix those low rates for the best part of two decades. The only thing stopping it from doing so is the chancellor’s preposterous surplus rule, which deems any borrowing bad, even if it funds to improve the country’s infrastructure for the future". (Times, 11 August)
However, Keynesian policies are not a solution. They are aimed at guiding capitalist governments more effectively through cyclical crises and towards resumption of growth. Keynesian measures may temporarily cushion the effects of economic downturn, in contrast to neoliberal measures which are most likely to exacerbate a downturn. But, in the final analysis, Keynesian measures attempt to make a system work that is unworkable, because of its inbuilt contradictions, as explained by Karl Marx. These have today developed to the stage of being a block on any further long-term advance in the living standards of the overwhelming majority of people in society.
To the extent that Keynesian measures are beneficial to workers compared to neoliberalism, they are welcomed by the workers’ movement. But their consideration of workers’ interests is in reality just a by-product of their goal of improving capitalism, which is a system based on the exploitation of workers in the drive for profit.
Furthermore, Keynesians have far less room for manoeuvre today than in the post-war boom, because the growth phases of British capitalism are much weaker, being based less on investment and increased productivity and more on intensified exploitation, the ‘race to the bottom’ in wages and conditions, credit-fuelled spending and speculation. Increases in public spending can still be achieved through workers’ struggle, but they will be even less secure than in the past.
Such is the short-termism, instability and inter-linking in the world economy today that a left government coming to power – led by Jeremy Corbyn or anyone else – would soon need to move to take measures against the capitalist system itself. Otherwise it would be pushed down the path of betraying workers’ interests, as the Syriza government in Greece has done.
Rather, socialist measures are essential, including taking the main industries and services into public ownership under democratic workers’ control and management, and democratic socialist planning of the economy. In the interests of the overwhelming majority, a socialist government would need to repudiate debts ‘owed’ to the super-rich, take democratic control of imports, exports and capital flows, and support workers’ anti-capitalist struggles internationally.