Do we really have austerity economics in the UK?

Many right wing commentators make the point that public spending is higher now than under the last Labour Government in both real and nominal terms. They dispute the charge made against the present government by the left that they are engaging in the ‘austerity economics’.  Even the deficit (they mean the government’s budget deficit)  they will admit, when pushed,  is higher than the last Labour government’s deficit. So why are we being so harsh when they are clearly doing their best? If we want austerity , they argue, just look at what happens in the Eurozone.

Is there any justification for their defence? Possibly. GDP per person is just about the same as it was a decade ago. There were no accusations of austerity economics then and most voters  in the UK felt fairly well off. Or, at least they did in sufficient numbers to re-elect a Labour Government in 2005. So, why is the general feeling that we are worse off now than we were then? If the published figures are correct, and there is no reason to dispute them as far as I know, then the problem must be one of distribution of the available income.

Ironically, the best defence the Tories have against the charge of austerity economics is that there would be no austerity if everyone had a fairer share of what was available. They might not go for that though!  GDP per person is now twice as high as it was when Mrs Thatcher first won a general election. She and her government were of the opinion that the left were reactionary in quibbling about the distribution of the proverbial cake, and that it was better for all if we just concentrated our efforts into making a bigger cake.

Well, we’ve done that. The cake is now twice the size, but there are more homeless now than there were then, with higher levels of unemployment and underemployment. Terms like “Zero Hours Contracts”  and “Food Banks”are in existence now which weren’t then. So why the problem? It has to be caused by how the available wealth and income is divided.  There is no alternative explanation.

That would be the socialist explanation of why we have austerity. An economist would perhaps adopt a different tack as has Professor Bill Mitchell:

“Austerity occurs when the government runs deficits that are too small relative to the spending and saving decisions of the non-government sector. In this context, it is moot where the revenue comes from. The impacts of running insufficient fiscal deficits usually does impact on the poor and disadvantaged, most notably, because it causes mass unemployment and/or underemployment. And I don’t diminish the concern we should have for those distributional consequences. But from a macroeconomics perspective that is not the point. Austerity is about the sufficiency of the deficit contribution to total spending and national income generation.”

So how does this work with the present bout of austerity in the UK?

John Redwood recently made the following claim on his blog:

“The most recent figures show the UK deficit gradually reducing, with tax revenues growing more quickly than the growth in public spending, as planned.”

There are two problems here: Firstly he, I would suggest David Cameron and George Osborne too,  thinks that reduction is a good thing. Secondly,  he thinks the UK’s deficit is the same as the Govt’s budget deficit which it clearly isn’t. A better description of the UK’s deficit is the net loss of ££ to pay for the net import bill and which is currently some 5% of GDP.

So, it must follow that if Government reduces its own deficit to below 5%, as it has recently done, that it is simply pushing the economy into recession. That’s austerity. Everyone will run increasingly short of money. Gross aggregate demand can then only be maintained by increased private sector borrowing which of course just inflates the bubble economy.

London property is rated as the most overvalued in the world with a bubble index of 1.88 and the rest of SE England can’t be far behind.

http://www.theguardian.com/money/2015/oct/29/london-house-prices-most-overvalued-world-ubs

If the Government wants to run a a 5% deficit in trade it has to run something like a 7-8% deficit in its budget to allow those in the economy who wish to save (rather than borrow) some capacity to do so.

Pushing it down to only 4% is a recipe for disaster. The economy is now hanging by a thread. The bubble will burst sooner rather than later and we all know what happens to real economies when bubble economies burst.

Even looking at this kind of economics from a right wing perspective, I can’t see it makes any sense. Firstly it will reduce the electoral chances of the Tory Party. Voters who become economically disadvantaged and become reliant on State support will vote for parties offering better rather than worse support. Secondly, it will hinder their desire for a smaller state. That is only going to be possible when workers have sufficient spending power to afford private sector alternatives to those services the State now provides.

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7 responses to “Do we really have austerity economics in the UK?

  1. reallyniceguy2014

    A radical Tory policy would be to eliminate poverty and natural labour voters trying to convert them to Conservatism.

    On the deficit with the rest of the world, isn’t this simply the emergent sum of Rest of the world decisions to save in the pound, not a government choice? Again, why would a right wing government try to suppress and meddle with, nanny state style, the outcomes of private sector spending and saving desires and decisions? Financial Stalinism or what?

  2. reallyniceguy2014

    Reblogged this on My WordPress blog.

  3. The crux of the problem is clearly that too few – politicians, economists, accountants – understand what money is and how important is [a] the amount available to the economy [b] the source of the money – i.e. who creates it and [c] in particular whether that money is created as debt or as a debt-free asset. Too many think that productivity creates wealth and that wealth creates money. All of that is nonsense! You can manufacture shed-fulls of cheaply produced goods but if no-one has the money to buy them they are worthless – and you are skint! It’s time that some “would be capitalist economists” realised that!

    • OK but all money is debt. It can’t be debt free. Government issued money is a liability just like any other issued money. But it’s not a liability that causes Government any real problem in the same way that non-government liabilities might be a problem to you and I.

      Another way of looking at it is to think that Government is like the ‘banker’ in a game of Monopoly. The ‘banker’ hands out money, when we pass GO etc, but he has also to accept that money as a payment for tax whenever a player is required to do so in the game. That’s the liability. The banker/govt is always in debt. That is quite natural and of course he has to be for the players to have any money.

      • You still fail to differentiate between Sovereign Money [as is cash etc] which is an asset and government debt issued as bonds. As economies expand a parallel expansion in sovereign money is essential to avoid exponentially unsustainable increasing debt.

      • There’s no reason to regard cash or bonds as anything other than IOUs of govt.
        If govt issues a new currency of 100 million, by spending it into the economy, and gets 60 million back in tax in the first year its deficit and its debt is 40 million.
        If in the second year it issues 100 million and gets 80 million back its deficit is 20 million and its debt is 60 million.
        The debt being just the sum of previous deficits.
        This is true regardless of whether bonds have been sold to private buyers. They are just as asset swap of one type of IOU for another.

  4. Thanks for this post. Osborne’s plans do indeed make no sense. The balance of payments deficit has fallen recently but is still quite high and unless the private sector starts to borrow unsustainably again, the only way for the govt deficit to continue to fall is if the foreign balance improves further, otherwise we are headed for another crisis driven by rapid rises in private sector debt. A weaker pound, and a boom in the surplus countries in the Eurozone driven by domestic demand (starting with Germany) would be a big help, as some of this is beyond our control. Sadly, none of this looks like happening soon enough.

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