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.
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.