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Austerity measures

From Jonathan Timbers

Thursday, 16 February 2012

David Telford defends the government's austerity measures in the NHS thread. I take issue with him, but think I ought to do this in a separate thread.

The government's austerity policy is wrong because:

1) by reducing demand so dramatically before the private sector starts to recover, it inhibits private sector recovery and therefore deepens the economic slowdown

2) it believes that the public sector is a burden on the private sector, when in fact a strong economy has a strong public sector and a strong public sector (e.g. Singapore, Sweden etc). The government's p[olicy is predicated on the notion of markets returning to equilibrium when 'burdens' or 'distortions' are removed. This assumes that markets are naturally in equilibrium, which is bunkum.

3) the deficit (not to be confused with national debt) is best tackled through growth not spending cuts

4) there is 25 billion pounds of improper tax avoidance every year - tackling this would go a long way to reducing the need for cuts (there are also billions lost to non payment of tax and tax evasion) as well as offering the possibility of tax cuts for small businesses in productive sectors of the economy and those on low incomes

5) it underestimates the economic contribution of the public sector

6) it underestimates the qualitative contribution of the public sector to our lives

7) it ignores the role that capital controls can play in managing the economy, and rebalancing it (see the IMF analysis of how Iceland has dealt with its much more severe problems).

There is a need to focus the public sector on service delivery and public projects rather than regulatory activity and there is a significant problem in maintaining a strong public sector when the private sector is so weak, particularly as deleveraging (or whatever it's called) of private debt has not fully happened yet. Imbalances in both the private and public sector may entail job losses, but these need to be aborbed into other sectors of the economy. We should not be doing what the government is doing: digging a big hole and filling it with the broken futures of British families because of failed neo-liberal ideology.

Frankly, David, the government couldn't run a day trip to Blackpool, let alone manage a crisis in Western capitalism of this magnitude.

From David Telford

Thursday, 16 February 2012

Jonathan, I should perhaps explain that I don't think Austerity measures are required perse as I think the word's meaning is associated with creating hardship which clearly isn't something to aspire to. I think the correct phrase is prudence which is dangerous as it so easily gets associated with The Scottish PM who ironically had very little to do with prudence!

The government's prudent approach is correct, initially we need to understand how we got in this mess:

1) You make a major error in assuming that we can somehow get back to a 2005 level of growth with just a bit of spending. I think you yourself admitted elsewhere that the phony boom created by the availability of credit and low cost imports was exactly that. It created phony wealth and when you do so, it creates a bubble which is set to burst. Add fuel to this bubble by trying to create more demand when it's already over-heated is absolute crackers. The Scottish PM not only will go down in history as the worst PM in living memory but the only Chancellor to ever spend his way out of a boom.

2) When the perfect storm of the banks crashing, over-extension to debt from individuals and business along with an increase in import costs, Keynesian thinking suggests that government should start spending all that money it took in taxes when the good times were rolling. The text books don't suggest when the good times roll, the government spends like mad to get the holy grail of full-employment because when times are good, the markets will look after themselves and full employment will follow in the absence of voluntary unemployment or classical unemployment. The problem with spending in the good times is that when the bad times kick in, government has nothing to kick start the economy.

I agree that the government can kick start the economy, I'm happy to be Keynesian in this regard. However, so are the government.

3) We have a very scarce resource in the way of money to get the growth in the economy. In such a situation the government should be spending money in areas that will employ people in the short term and provide a comparative advantage in the long term. Such an example is the M1 North of Harrogate. Nissan were promised a motorway right up to their plant in Washington when Mrs Thatcher persuaded them to take car building up to the North East. Wary of the disastrous government strategy relocating of industry in the past for instance, Triumph's move to Speke in the late 50's and Hillman to somewhere in Scotland, Both Nissan and Thatcher's government wanted to ensure the infrastructure would be put in place to give Nissan a fighting chance. Only now do we have a motorway being built, employing 1000's of people which will give a true gateway for the north-east economy. This is proper infrastructure investment with real benefit in the future for business in that region. This is investment that is going ahead. Similarly in Manchester, the light railway is being built, rejected was the ridiculous congestion charge proposal of the Labour council and in went an investment giving a gateway from the airport into the city providing an infrastructure for business to thrive. This is all good and along with further coalition government plans, the UK will be a stronger place to do business.

4) This all costs money and the government has had to borrow it. It's far better borrowing cash to pay for these improvements than spending it on a bloated public sector. It's far better to spend £50k on a guy to build a road than spend £50k on having a nuclear-free secretariat within your local council surely. Cutting non-jobs like these to pay for real investment is good, it's not austerity, it's prioritising.

5) As employees from the public sector migrate to the private sector they move from absorbing taxes to creating wealth and tax income.

6) The UK and Singapore are not really comparable, Singapore's GDP is strong despite it's public spending not because of it. Indeed, Singapore spends around 18% of it's GDP, the UK is on it's way to 50%. I also go back to the need to spend wisely, the UK wasn't doing this.

7) The deficit can be tackled through growth, without a doubt I agree with that but you assume spending creates growth. The multiplyer effect is much sptronger if the spending creates a product that is valued rather than a hey-nonny nonny 'nice to have' service.

8) With the best will in the world, you will not create growth, wealth and jobs on the basis of removing 25bn of tax avoidance. I'd love a simple low taxation strategy in this country but throughout all colour of governments, there have been good intended loop-holes which lead to tax avoidance. On the one hand, we can't shout from the rooftops that the UK is the best place to make films because of it's attractive tax structure for the arts and then cry foul when high earners are avoiding tax by investing in film. Every government wants to crack down on tax avoidance, few are very successful. HMRC have taken a brave move on Rangers FC this week but the outcome may wipe out pretty much every major football club in the country and one of our successful exports (the premier league) will return to being a little sport that has no real interest outside it's local.

9) I don't underestimate the economic contribution of the public sector, we need a strong state to provide law and order for business, healthy and educated workers to produce goods & services. I simply think that is all that is needed, the balance of the workforce must produce to pay for those who provide society's framework.

10) You give a fairly difficult argument in "it underestimates the qualitative contribution of the public sector to our lives" qualitative is difficult to measure.

11) Yes we ned global capital controls, not unilateral.

12) We neeed to focus on providing the private sector, a low cost framework to do business and be competitive, not focus the public sector on service delivery.

I agree, I don't trust the government to deliver much and for that reason, I want government's importance and power to be minimalised and there when needed. The coalition are not perfect but they had a very bad hand and the previous lot were atrocious. The alternative from Ballsup is as insipid as he managed when he was The Scottish PM's right hand man and what's more, he admitted he would have to make the cuts anyway and his plans were not really costed. Can he afford to remove student fees? No! Can he reduce VAT? No! Did he make up the figure that a 20% Vat rate would cost? Yes! Can he afford to keep all the non-jobs in the public sector? No! Can he afford to keep Trident? No! Can he afford to keep the defence budget at the level it was? No! Is a banker's tax going to work? No! Has he got any figure for his schools rebuilding program? No! Does he have any idea if it will be effective or understand diminishing returns? No! A national insurance holiday is welcome and surprising given his boss increased Employers' NI by 54% - this from a government who's raisen etre is full employment! Is Ball's 5% VAT rate going to be easy to regulate? No! Will it do any good? Doubtful. Is B&Q really struggling? No!