The cuts haven’t worked; it’s time to challenge austerity more strongly


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9:10 am - January 24th 2013

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by Ivo Petkovski

This week, yet another expert lined up to warn that that cutting public spending at the rate Osborne insists on has contributed directly to a triple dip recession, and has not helped growth in any way.

Among many others, Nobel prize laureates Paul Krugman and Joseph Stiglitz have repeatedly argued that austerity is counter productive to growth, even if we accept – and many don’t – that perpetual ‘growth’ is either realistic or desirable.

Figures released this week by the Treasury show that both government spending and the deficit are on the rise compared to this time last year. In other words, exactly the opposite of what the government said would happen. The conclusion that the austerity program is ideologically driven is getting harder and harder to dismiss.

The idea of an ideologically-driven government is not a problem in itself, provided that a majority agree with the ideology. That is by no means the case with the austerity doctrine – it was presented as a necessary evil, at a time of general panic over the 2008 crisis, and a deeply exhausted Labour opposition. Even in that climate, Cameron and Co. couldn’t get a proper mandate, and events since have done nothing to build confidence that their ideas have any pragmatic foundation at all.

Between now and the next election the burden of proof should shift from the government’s critics to the government themselves. Labour should pursue this more aggressively than they have been doing so far – it’s not enough to dispute some cuts while generally agreeing that deficit reduction is the priority.

Ed Miliband and Ed Balls should spend the next two years wresting the agenda back – they should firstly cast doubts on whether we need to reduce the deficit at all. As Stiglitz and Krugman have argued, growth can be better stimulated by keeping more money in the economy via public spending, which can be offset by progressive taxation measures, such as the Robinhood Tax.

Labour should refuse to engage with the idea of benefit cuts and cuts to public spending, except to ridicule it. Francois Hollande’s socialists recently won a majority in France on just such a platform, and at the time of writing, the markets have not brought fire and brimstone to France.

Labour taking such a sharp step to the left may be against the public mood, and there might be a price to pay in the polls, but with two years until they face election, they can afford to pay that price right now. Also it’s impossible to know how many currently disengaged voters would migrate to Labour if they presented themselves as a properly left-wing alternative.

There will be plenty of time to be centrist when the election comes nearer, and by moving to the left now, they could shift the axis of the whole debate. George Osborne has provided them with the perfect starting point. His austerity measures aren’t working – that’s fact – so it’s on Labour to sketch an alternative.


Ivo Petkovski writes the I to the Vizzo blog and for Guardian CIF

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Reader comments


It’s not ideology. We’re out of cash and in debt to the tune of ~ £100K per person already.

Well of course it hasn’t worked. Because govt debt never caused the global meltown. It was reckless and fraudulent bankers who destroyed the economy.

the global elites only had 2 concerns. 1the banks must be protected at all costs, and 2, more tax cuts for themselves.

So the banks were bailed out, and govts gave assurances that any unknown bank debt would be guaranteed. In effect the private debt has been converted into public debt..

And second, tax cuts for the rich. This can only be done by attacking spending on the poor. Hence benefit cuts. The rich elites don’t care if the economy is stagnant for years. They don’t care if people are unemployed. (In fact they like it. Makes workers more prepared to take pay cuts, and work longer hours.)

All of the govts policy is ideological choice. They WANT to cut welfare. They Want to cut taxes for the rich. They want to privatise the NHS, and education. It is all about transferring ever more wealth from the working and middle class to the rich elites.

I read this article, and immediately wondered what plaent the authoer was living on. Checked who it was, and wasn’t surprised to see it was LC’s latest loony-lefty economic polemicist.

Remember Ivo, dreams are *inside* your head and reality is *outside*.

Let’s jsut take a few points from the article:

“firstly cast doubts on whether we need to reduce the deficit at all”

So we should jsut keep spending regardless? Isn’t a 10% deficit enough for you? What happens if that spending doesn’t pay for itself in terms of growth? Or more likely the bond markets decide (rightly) that the UK has become fiscally incontinent, and demands higher interest rates? Or simply that we run up so much debt that the interest costs themselves start to preclude spending on anything else (like Japan, where they account for 60% of government revenues).

My guess is you simply have on realsitic answer for any of these points.

“As Stiglitz and Krugman have argued, growth can be better stimulated by keeping more money in the economy via public spending, which can be offset by progressive taxation measures, such as the Robinhood Tax.”

And lots of very serious economists (Reinhardt and Rogoff best example) have also show that debt?GDP over about 90% reduces growth, state spending above 45% of GDP has little or no effect etc etc.

Then there is the Robinhood tax. Even the EU report on it said it wouldn’t raise any money, not least because it would damage growth so much, and the costs would be passed through to end users, raising costs for everyone.

“Francois Hollande’s socialists recently won a majority in France on just such a platform, and at the time of writing, the markets have not brought fire and brimstone to France.”

No, it’s just brought people leaving and thoroughly shocking PMI numbers – a reliable indicator of an upcoming recession. Certainly hasn’t brought growth or prosperity to France.

Sometimes, as I have said before, I hope idealogues like Ivo, whose ideas have littel basis in reality actually get into power. Then they can test their policies to destruction. The UK would quickly be bankrupt, and they would be removed from power for generations. The only cost would be the massive destruction of wealth and prosperity for the working and lower middle classes (and their pensions) who the left claim so earnestly to care about.

3 Well we all know what planet you live on. Planet brown nose up the backside of the rich.

You should be on Downton Abbey. You would be ideal as a butler for your elite masters. Serving, and groveling to the idle rich elites.

Govt policy is not to create growth. It is ideologically driven to cut welfare, and cut taxes for rich. Crises capitalism always leads to the rich stealing from the poor. Which is why no action has been taken to stop the banks from repeating their criminal ways. No bankers in jail for their fraud. Because the elites will want more cuts in the future. Their greed is insatiable.

5. Alisdair Cameron

“Labour should refuse to engage with the idea of benefit cuts and cuts to public spending, except to ridicule it. ”
Aye, the trouble with that sentence is the first word. Too many high-ups still obsessed with triangulating their way ever rightwards,running scared of the Mail. And others who aren’t bothered about triangulation, because they’re right-leaning uber-Blairite types in the first place.

“Ed Miliband and Ed Balls should spend the next two years wresting the agenda back – they should firstly cast doubts on whether we need to reduce the deficit at all.”

That’s exactly what they *shouldn’t* do.

First of all, it would make them look like idiots. Nobody, but *nobody* doubts that the deficit needs to be reduced. The government can’t just keep on borrowing £125bn a year in order to plug the gap between tax revenue and public spending, and for Labour to pretend otherwise would be suicide. The question isn’t whether we need to reduce the deficit, but what’s the best way to do it.

Secondly, it would mean missing a political open goal. The Coalition have consistently emphasized the crucial importance of reducing the deficit. They are failing dismally to achieve what they set out to achieve. And instead of attacking them for that and saying ‘here’s how we’d do better’, we’re supposed to say: ‘oh well, the deficit doesn’t need to be reduced anyway’?

I suspect, though, that “they should firstly cast doubts on whether we need to reduce the deficit at all” is not really what you mean. Otherwise why follow that comment up with this:

“As Stiglitz and Krugman have argued, growth can be better stimulated by keeping more money in the economy via public spending, which can be offset by progressive taxation measures, such as the Robinhood Tax.”

After all, if the deficit doesn’t need to be reduced at all, why does it matter if we stimulate growth or not? Why does it matter if we offset public spending using progressive taxation measures?

So I suspect you’re falling into the Tory trap of conflating the need to reduce the deficit and the need to reduce spending. They want to make it appear as if every £1 of spending cuts Labour opposes is £1 of deficit spending Labour supports. Your proposal is that they say “yep, that’s right”. It’s not right.

7. Ivo Petkovski

Tyler / Shrugged

As percentage of GDP, our debt is on a level with other comparable economies, so there’s no reason at all to think that our bonds are about to get downgraded – but even if we accept that this IS a risk, and the debt needs urgent reduction, why not do it by one of the following ways:

1. Robin Hood tax. At 0.01% per transaction, this would bring in an estimated £25billion per year, which would seriously reduce the need to cut spending. It’s not at all clear that this would pose any serious risk of capital flight either, and definitely not at a level that would negate what we’d gain from it.

2. A one-off tax of 20% on the 10% richest people in the UK would generate £800bn, enough to clear the debt altogether, and eat into the deficit (by eliminating the debt interest). Again it’s pretty unlikely that this would trigger enough capital flight to offset the gains made.

Why do we not do these things?

Last week in the news we heard that Goldman Sachs are paying an average of £250k per head to its employees this year, and in the meantime in parliament they are discussing ways to cut income and services for people that subsist on £67 per week, while costs of living continually goes up. Corporation tax has been cut by 7% since 2010 – and this state of affairs is a good thing, because it promotes ‘growth’?

It’s a basic moral argument, as much as an economic or political one – redistribution before growth. I genuinely think that if a mainstream party – i.e. Labour – were to make this case, then people would vote for it. And even if Labour are constrained by their poll ratings, right now they can afford to not worry about that because the election is so far in the

8. Ivo Petkovski

GO

I think a case can be made that deficit reduction isn’t essential, especially if you question whether ongoing growth is itself possible or desirable.

But I also acknowledge that saying this would be political asbestos, so reducing the deficit by progressive taxation is a way for Labour to stand on principle without relegating themselves to the wilderness for decades

” austerity is counter productive to growth ”

Look I agree that the coalition policies have damaged the economy. However, apart from cuts in capital investment that has harmed the construction industry it is not ‘austerity’ that is depressing the economy. Government spending is contributing to GDP growth. Therefore, it makes no sense to say that government austerity is being counter productive to growth.

Especially when you say that:

“both government spending and the deficit are on the rise”

Government spending on the rise can hardly be austerity.

“growth can be better stimulated by keeping more money in the economy via public spending”

We are obviously keeping more money circulating in the economy if government spending is on the rise.

We could increase the deficit by reducing VAT to 15% and cutting employers NI contributions especially for employees under 25. Those things would do more for the economy than the ineffectual coalition policies. However, just going on about ‘austerity without a clear definition of what is meant by austerity gets us nowhere.

Tyler, are you REALLY that bloody obtuse?

Even the IMF is telling Gideon to back off:
http://www.bbc.co.uk/news/business-21175407

@ Ivo

Again – dreams vs reality.

“As percentage of GDP, our debt is on a level with other comparable economies”

Apart from the fact that it is increasing at a dramatic pace, that official debt/GDP ration excludes all sorts of unfunded liabilities like PFI and pensions. Add those in and the true comparator takes us up to equal footing with Japan at over 200% of GDP.

“there’s no reason at all to think that our bonds are about to get downgraded”

Except the ratings agencies saying it’s likely to happen.

“1. Robin Hood tax. At 0.01% per transaction, this would bring in an estimated £25billion per year, which would seriously reduce the need to cut spending. It’s not at all clear that this would pose any serious risk of capital flight either, and definitely not at a level that would negate what we’d gain from it.”

EU has stated that an FTT would reduce overall taxation, as well as growth. Saying it wouldn’t is simply ignoring th evidence. It would also massively increase costs of funding and for everyone – reducing consumption which is a major driver of any economy.

Let me give you the example I’ve used before – a household mortgage. Let’s say over 25 years. 0.01% sounds like a tiny additional cost, right? Problem is, the bank doesn’t borrow the money for 25 years to give to the borrower. It borrows from money markets, which is short dated borrowing. Normally out from a few days duration out to a week maybe. 3 months in the money markets would be a long time….and costs proportionally more.

For argument’s sake though, lets say the bank funds that mortgage every 3 months, and that 3 month money is the same price as 1 week money (it’s not, it’s about 0.03% higher) so we only talk about the cost of the FTT. Every time the bank goes into the money markets it would have to pay that FTT…

So the FTT actually costs 25 x 4 x 0.01%, or 1% over the life of the mortgage. That will ALL be passed down to the consumer. And it’s a MASSIVE assumption the bank can do all it’s fnding in the 3 month area.

“A one-off tax of 20% on the 10% richest people in the UK would generate £800bn”

No it wouldn’t. People would immediately leave if they were about to have all their hard-earned expropiated. You also ignore the fact tha tmost of that wealth is already ied up in property, and isn’t in a liquid form that can jsut be taxed away without other severe consequences. That 800bn number is nonsense Richard Murphy and the like spout bollocks about.

“I think a case can be made that deficit reduction isn’t essential, especially if you question whether ongoing growth is itself possible or desirable.”

Yet again you give no answer or even indication of how such a deficit would be financed. Do you think we can simply run up infinite amounts of debt?

12. Shrugged...

Ivo

A 20% tax on the 10% richest people?

First, define ‘rich’. Then define ‘people’ – it’s not as obvious as it sounds.

A tax on what? Their assets, so that they have to sell their homes? Their capital, watch it move to the Channel Islands faster than a very fast thing. Their income? It’s already taxed at 50% inc NI. How much more do you want?

Barking.

Are you REALLY that bloody obtuse, Tyler? Even the IMF is now telling Gideon to back off because his policies aren’t working:

http://www.bbc.co.uk/news/business-21175407

“Government spending on the rise can hardly be austerity”

And by the same token, Richard, austerity cannot therefore accurately be called a deficit reduction strategy: yet that’s what it’s being sold as.

And if it’s so self-evidently FAILING in that purpose, what conclusion is left except that it’s an idealogically motivated stick with which to beat those parts of the UK electorate that the Tories consider to be “not the right sort”?

” Francois Hollande’s socialists recently won a majority in France on just such a platform, and at the time of writing, the markets have not brought fire and brimstone to France. ”

I think you are being delusional if you do not recognise the storm that France are heading into. Here are their latest PMIs released today.

France Composite Output Index(1) drops to 42.7 (44.6 in December), 46-month low

France Services Activity Index(2) falls to 43.6 (45.2 in December), 46-month low

France Manufacturing PMI(3) slips to 42.9 (44.6 in December), 4-month low

France Manufacturing Output Index(4) drops to 40.8 (43.3 in December), 4-month low
http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=10584

Here is a chart of the decline in their M1 deposits as capital flees the country. They are heading in the opposite direction of the rest of the EZ. Big trouble lies ahead for France this year.

http://moneymovesmarkets.com/journal/2013/1/24/french-worries-rise-as-pmi-slumps.html

16. Renie Anjeh

This is deeply ideological and unworkable. Any government will have to make cuts, even the Atlee Government had to make cuts and extend rationing. A Robin Hood tax needs to be global. I agree that the Coalition has cut more than needed in an extremely short time but no government has ever solved a deficit problem just by tackling tax avoidance alone. Labour should stick to the Tories’ ‘spending envelope’ for the first three years of Govt and then introduce a zero-base budget spending review. We should make the argument about priorities on spending, whether we should be allowing Vodafone to get away with £6bn of unpaid tax and whether we should be giving tax cuts to millionaires. Any spending on growth will have to met with other areas of revenue. Let’s be realistic, we cannot fight 2015 with the answers of 2010.

Ivo

“I think a case can be made that deficit reduction isn’t essential, especially if you question whether ongoing growth is itself possible or desirable.”

I can’t make any sense of this at all. Can you sketch such a case? How could a country with zero growth sustain a deficit of £125bn (and rising every year, assuming it wanted to maintain spending on public services at current levels while also meeting the additional costs arising from an ageing population and increased debt interest costs)?

Butler troll ” No it wouldn’t. People would immediately leave if they were about to have all their hard-earned expropiated.”

Firstly most rich people have never done a hard days work in their life. They either inherited it or stole it, or are lazy land owners living off other peoples rent. I have noticed of how tories insert politically correct language into this debate. The rich are always described as “hard working” which is a lie. And the poor are always feckless and lazy. Whicb is also a lie.

I wish the rich would fuck off. But please sell all your assets, take your sprogs out of our schools and take them with you and sign a pledge NEVER to return. They wont be missed.

Haha ~ sally sums up perfectly what the author and his like really feel, useless twats who cant get anything in life via there own productivity, absolute mental juveniles.

Tyler is not the only poster to confuse deficit with structural deficit.

To be clear, the government had a structural deficit reduction strategy. They don’t and never had a deficit reduction strategy. Here’s why…

The deficit itself is largely irrelevant, because the deficit is cyclical. During a recession it rises, only to fall during recovery.

The current neoclassical and new-keynsian theories hold that following a recession, you do not need to do anything to enable recovery, the economy naturally returns to its equilibrium point. All those hopelessly wrong forecasts are based upon this principle.

However because of the nature of this recession, a proportion of the tax paying economy was permanently lost, therefore the deficit is structural. That is when the economy returns to equilibrium there will still be a deficit.

There are problems with focussing on the structural deficit. The main one being that calculating the structural deficit is higly prone to error. You need to calculate the output gap – that is the difference between current GDP and the economy’s estimated equilibrium point. There is a 5% spread in estimates of the output gap. If the output turns out to be larger, George has cut too hard, if it’s smaller austerity has to continue for longer

And the longer it goes on the more likely that it causes permanent damage to the economy – one such process is known as hysteresis, which would increase the size of the structural deficit.

Try this chart on Britain’s national debt as a percentage of national GDP, which shows that to be about 75pc, well short of the 90pc which would worry some:
http://www.economicshelp.org/blog/334/uk-economy/uk-national-debt/

In Tuesday’s news:

“Britain’s coveted AAA rating came under further pressure today after official figures showed another leap in public sector borrowing.

“The figure, excluding financial interventions such as bank bailouts, was £15.4 billion in December, compared with £14.8 billion in the same month the previous year. . .

“It comes after an unexpected increase in November, when borrowing rose to £17.5 billion, up £1.2 billion from last year, after tax receipts were dented by lower energy company profits.” [Independent 22 January 2013]

On the evidence, with Osborne’s strategy, our debt position is deteriorating, not improving, and not least because there is a looming risk of a triple-dip recession in GDP.

“Britain’s economy shrank 0.3pc in the final quarter of 2012, signalling output was stagnant over the whole of last year, the National Institute of Economic and Social Research forecasts. ” [Telegraph 11 January 2013]

From the BBC website on Thursday:

The IMF chief economist has told the BBC that Chancellor George Osborne should consider slowing down austerity measures in his March budget.

“We think this would be a good time to take stock,” said Olivier Blanchard, speaking to Radio 4′s Today programme.

@ Bob B

UK government debt is not well short of the 90% level….it will be there in a year or two with current deficits.

UK debt/GDP ratio is calculated in several different ways, but for arguments sake Eurostat has it at 85%, as does the CIA. IMF has it at 94%. It’s only the ONS who have it down at 71%.

Regardless, that is being added to at about 10% oof GDP per year, so we are certainly going to cross 90%.

The it is worth noting that that debt/GDP number DOES NOT include many of the off-balance sheet liabilities that the government is obliged to pay and fund. PFI and pensions are the biggest ones, and depending on what metrics you use those are worth between 100-150% of GDP. So the typical comparison to Japan with their 225% debt/GDP is not apples with apples as they at least have a fully funded pension system, with liabilities included in their national debt which the UK has not.

I suppose Sir Philip Greed is a shining example of Tyler’s hardworking rich people!

http://en.m.wikipedia.org/wiki/Philip_Green

It is only a matter of time before we face this from the neoliberal ideology grinding us into the dirt too..

http://thinkprogress.org/economy/2013/01/24/1493421/north-carolina-governor-distance-taxes/?mobile=wp

Through hard work, regressive pay and taxes
We carry their amoral, scrounging asses…

Do you admire the likes of that, Tyler?

Also Sir Philip Greed isn’t the most egregious example of the scrounging scum that rise to the top – here is what a world famous subversive loony leftie had to say about rentiers…

http://www.landvaluetax.org/current-affairs-comment/winston-churchill-said-it-all-better-then-we-can.html

Tyler

Check the news reports: with Osborne’s policies, government borrowing is rising year-on-year, not going down, while the economy is flat-lining at best. Simple arithmetic shows that means the national debt GDP ratio is rising. The debt situation is getting worse, not better. With the sharp decline in manufaturing in the final quarter of last year, the economy certainly isn’t rebalancing.

Einstein’s insight accounts for Osborne’s predicament: Insanity is doing the same thing over again and expecting different results.

As Clegg has just admitted, the government shouldn’t have cut back infrastructure investment in its first year of office as steeply as it did.

All that stuff about Labour having planned even deeper cuts for that year is just for the birds. Those cuts were *planned* years before, before the bankers created the financial crisis brought about by the catastrophic gumming up of the wholesale money market as trust between bankers collapsed.

The big failing during the time of the Labour government was too little regulation of the banks. Charles Goodhart first warned about the burgeoning house-price bubble back in 2002 and Warren Buffett warned back in 2003 about prospects of impending financial crisis created by the increasing trade in complex, opaque financial derivatives:

“The rapidly growing trade in derivatives poses a ‘mega-catastrophic risk’ for the economy and most shares are still ‘too expensive’, legendary investor Warren Buffett has warned.”
http://news.bbc.co.uk/1/hi/business/2817995.stm

Also Tyler

Here’s a document published by the United Nations too…
After you have read it, come back on here and continue claiming George Osborne is right. As opposed to been safely right wing for you.
http://unctad.org/en/PublicationsLibrary/tdr2012_en.pdf

And this proves austerity has not affected the super rich
http://mobile.bloomberg.com/news/2013-01-01/billionaires-worth-1-9-trillion-seek-advantage-in-2013.html

And what of the alternative?
http://www.sd-commission.org.uk/data/files/publications/prosperity_without_growth_report.pdf

The claims of neoliberal ideology have been proven to be a failure by 30+ years of socioecenomic chaos worldwide, with nothing but ever larger bubbles been blown ever more desperately. We are paying the price for the free ride of the super rich.

@Shrugged

“We’re out of cash and in debt to the tune of ~ £100K per person already.”

Where on Earth did you get that figure from? Whether you are looking at overall population, or purely the working age population, it’s nowhere near that much.

You also have to consider that current gilt yields are so low, that the market is essentially agreeing to *pay us* to borrow money from them.


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