What cowboy put this fiscal deficit in?

9 06 2010

That Cameron and Osborne should blame the previous administration for the mess they have inherited is hardly a surprise. It should also not be a shock that Cameron is painting the future as black. He then has the dual advantage that if things turn out badly he can say he told us so and if they do not he can claim the credit for turning the economy round.

What is more interesting is that beneath the rhetoric there does seem to be a genuine belief that the state in Britain should be smaller and have less role to play in all aspects of life. In this respect Cameron has been aided by the addition to his ranks of a section of the Liberal Democrats who believe in the free market. Clegg, Cable, Huhne and the (now departed) Laws were the four LibDems appointed as ministers in the cabinet. All of them contributed to the ‘Orange Book’ in 2004 which espoused the free market as a solution to the problems of the economy and which provoked controversy within the LibDems.

Having come late to the free market philosophy, and at a time when most other politicians and economists were moving away from it, they have some of the fervour of  the convert. Cable in particular, whose formative experiences were in the 1970s when the UK government failed abysmally to prop up failing businesses such as British Leyland, is possessed of a fierce belief that the state has only a limited role to play in the economy. He has promised to overturn Mandelson’s nascent attempts at reviving an industrial policy for the UK.

So now the government has both pragmatic and quasi-ideological reasons for cutting public spending and reducing the size of the state. Pragmatic in order to avoid a collapse of the confidence in those lending money to the UK and quasi-ideological through the concept of the ‘big society’ rather than the ‘big state’.

The problem with this approach is that it flies in the face of the history of capitalism over the past 100 years. The role of the state, in every developed and developing country in the world, has come to play a bigger and bigger role as time has gone by. Outside of the aftermath of wartime no state of any consequence has succeed in cutting public spending absolutely. Certainly no state has managed to do so after a recession. Even under Thatcher, in the supposed brutal period of the 80s, public spending overall continued to rise.

Why is this? Essentially because the free market has proved incapable of fulfilling many different and essential functions of society. No modern state for example has ever had an education system which is run as a private business. No modern state has had an entirely private health system. Even in the US, which is most committed to the free market, state funding of Medicaid is an essential part of health provision. In addition, individual national insurance schemes have never been able to pay entirely for payments to the unemployed.

Private businesses depend  on the state to provide cheap education, health care and unemployment benefits. To some extent the role of the class struggle in earlier periods was important in establishing the levels of provision of benefits from the state, but the elite as a whole understood that the state needed to subsidise welfare in order for the economy to function effectively. It was not the post war Labour government, for example, which architected the welfare state in the UK but the National Government under the Conservative Churchill which did so through the production of the Beveridge report in 1942.

The state has also had a key role in the building and maintenance of transport and other key infrastructural projects, which are too big for any individual private company to develop but which all businesses benefit from. Roads are one good example of this, but virtually all communication systems and infrastructure projects require massive state involvement and investment in their production or maintenance.

It is also the case that the state is now so large and so intertwined with private business that many companies depend on government contracts. The IT business in the UK, for example, has benefited over the past twenty years from many large projects in the NHS and in other government departments.

There are those who argue that it is the increasing role of the state which has stifled private enterprise, but the reality is that without ever-increasing state involvement modern economies could not survive. Capitalism is too feeble and unproductive in most modern economies to operate on its own two feet without massive state assistance.

 So what does this mean for the present UK government’s plans to cut spending? Firstly they will struggle to make any impact on the overall scale of public spending without doing huge damage to the way our society works. Secondly, whatever their pretensions to the opposite, the axe will fall hardest on those least able to defend themselves.

A version of this article appeared on Spiked





Why should anybody oppose public spending cuts, and how?

18 05 2010

Naturally, nobody welcomes having services they benefit from taken away. The bulk of public spending, about 63% of the total, goes on health, education, pensions and social security. Everybody at some time in their lives will benefit from these services. The problem is that the current  level of government spending can only be sustained either by borrowing more money or increasing taxation.

The government, and most economists, believe that borrowing more money would push the country even deeper in debt, which would worry  those who lend us the money so much that interest rates would soar. Eventually, according to this argument, the loans would dry up and we would be faced with default and have to be bailed out, like Greece, leading to even deeper cuts. While we await the specific details of the new government’s plans to tackle this problem it looks inevitable that it will involve a mixture of higher taxes and some cuts in public spending. (For a full treatment of the background to this approach see Sean Collins)

Given the way that financial markets work, looked at in this way it is quite a plausible scenario. So how should we think about what will be in effect an austerity budget that George Osborne , the Chancellor of the Exchequer, will be producing in  a few weeks time? We could all simply take the view that we do not want our public services to be reduced at all.  It would certainly be a good thing if there was a more general opposition to austerity measures,  to any attempt to take this country backwards in terms of the quality of life.

However, in the absence of an intellectual case against the cuts, any such anti-cuts campaign will almost inevitably take the form of special case arguments, as has happened many times in the past. This can take many forms. A popular one is that management should be cut, not ‘shop floor’ workers. Another is that this or that other part of the state, usually defence or the civil service, should take the brunt of the cuts, rather than health, education or welfare. This approach does not oppose public spending cuts per se, but tries to divert them elsewhere. However this pans out, the result is job losses somewhere along the line and a net increase in human misery.

So is it possible, or even desirable,in the light of the undoubted economic problems facing this country, to make a case against public spending cuts per se?  Before we begin to answer this it is important to grasp one vital truth about public spending. All of it is financed out of the proceeds from private business, whether  industry or services,  through corporate or individual taxation. If these parts of the economy are struggling, as they are today, then the proceeds from taxation will stagnate. The current severe deficit problem was created because tax revenues fell in the past few years, not because public spending rose. While increased borrowing can make up for this increased deficit for a while, eventually the borrowing becomes too much and we are back in the Greece scenario.

So the real question about defending public spending is how to regenerate and revitalise the productive parts of the economy to the point where increased revenue from taxation, and therefore more public spending money, becomes plausible. That is why the most effective way of opposing public spending cuts is to argue for policies which encourage faster economic growth. Here is where we begin to part company with the government concensus about austerity. A key element of pursuing faster economic growth is for the state to invest more public money in science and technology education, in the encouragement of research and innovation and  in new infrastructure. This approach would involve some reorganisation and reprioritisation of public spending, away from consumption and towards investment.

Most importantly, the government must generate enthusiasm for a more dynamic economy and society. This would mean challenging the risk averse, pessimistic and therapeutic aspects of British culture. It would mean rejecting the view that economic growth should be green and sustainable, all code words for slow. It would mean restoring the pursuit of excellence as a goal of society and it would aim to bring out the best in people.





And the election winner is…austerity politics!!

13 05 2010

So we now have a government that I am guessing virtually nobody in the UK who went into the polling booths actually voted for, a Con-Lib pact. To me it feels like a kind of coup d’etat, in a very polite English kind of way of course without the martial music.  This uncomfortable feeling is compounded by the announcement that a fixed term parliament of five years has been agreed. Not only did we not vote for this government but we are apparently stuck with it for five years.

Of course, there was so little between the parties in terms of policy that in practice any outcome, whether one party or a combination of the parties, would have made little difference to what is about to happen to us as a nation. As is becoming clear, all of the parties, and certainly this new government, are committed to a future of economic austerity.  Already there is talk of big tax rises, both direct through capital gains tax, and indirect, through VAT. While we are still waiting for detail on public spending , events elsewhere, such as in Ireland and Spain where wage cuts in the public sector are being implemented, are surely a harbinger of what is to come.

The almost unchallenged assumption throughout mainstream politics  is that austerity economics is the only way forward.  Much of the already pitifully small investment planned by Labour for upgrading the infrastructure of the UK has been scrapped or threatened with delays. The third runway at Heathrow will definitely not go ahead, the Crossrail project could be canned and the high-speed rail link  from London to Birmingham and beyond is in doubt.

What plans does this new government have to stimulate economic growth, which is the only alternative to austerity? There has been nothing in any of the pronouncements so far which has addressed this in any concrete sense. The focus is entirely on cutting the public spending deficit, mainly  to appease the financial markets, the same markets which were invoked as a reason why this coalition had to be put in place as quickly as it was.

Indeed the mood music is that the Liberal influence will make this government even more prone to sustainability and a green agenda than the last, another way of describing low growth expectations. Both Tories and Liberals are against state involvement in the fostering and development of new industries, something Labour’s Peter Mandelson was a late convert too.

The impression of a coup d’etat by a small, elite group of mainly upper middle class men will be reinforced once the cutting starts. One consolation is that this small group, cut off from any real social base or proper legitimacy,  may not even have the capacity to carry through a major attack on living standards.  But by the same token neither will it have the vision or decisiveness to take the steps necessary to modernise the UK economy. We are likely to be left with the worst of all worlds, an inward looking, pessimistic and unambitious elite which tries to micromanage the UK economy at time when boldness above all is required.

NB One of the main challenges for anybody who looks at the prospects ahead and recoils, is to develop an alternative approach to the economy. This means more than anything looking at why and how economic growth must be put at the centre of economic policy. Daniel Ben-Ami has put together a very helpful list of people who are trying to work in this direction. If you wish to become part of this, do get in touch with anybody on that list.





UK politics is broken beyond repair-no coalition can fix that

12 02 2010

A recent opinion poll attracted a lot of attention because 70% of those polled agreed that Britain had a ‘broken society’. The striking figure which received less coverage was that even more, 73%, agreed that ‘politics is broken’. If you add that to the recent survey which showed only 56% of people in the UK thought it worth voting we can see what sorry depths politics has sunk to.

This nadir is also demonstrated by the fact that far from politics being at the centre of a discussion of the upcoming general election, the issue which now appears to be the main one facing the country is whether a coalition government would be a good or a bad thing. It is a remarkable demonstration of the weakness of the Conservative Party that it does not appear to be able to take advantage of the deep unpopularity of Gordon Brown’s Labour Government and win a clear majority.

Martin Wolf, writing today, makes the point that a coalition government would be a good thing because;

 ..the UK’s government has been the author of a flood of ill-considered, media-driven initiatives. Almost nothing is properly thought out. This is the result of the domination of a handful of people over the machinery of power, unchecked by party, parliament, bureaucracy or any other tier of government. Coalition government would make this change in desirable ways.

This is a case of right diagnosis, wrong medicine. Anatole Kaletsky made similiar points recently by implying that what we need is more concensus politics, like the Chinese, if we are to recover our social and economic dynamism. The cheap and shallow politics that Wolf refers to is a product of the end of big aspirational politics, which used to be ideologically framed, and its replacement by a short-term managerial approach. This short-termist approach dominates every party. Putting the parties together in to a coalition would not change this.  Politics is not petty because of the existence of different parties. It is petty because the parties have nothing else to offer except these ‘media driven’ idiocies. It is petty because of the absence in any of their programmes of any vision for a better society.

It seems we have reached the bottom or close to the bottom of a cycle of general cynicism towards politics and the political process. The question is are we condemned to bump along the bottom for a long time or will there be any reaction? There is certainly no sign of any recovery at the moment. There are some attempts to inject some politics into the general election campaign and these should be supported. It is difficult to encourage participation in a general election which is so devoid of policies which can make a difference, but the effort still has to be made. Without a democratic revival we are condemned to drift, frustration and cynicism.





What’s the plan,man?

15 07 2009

A8XEFT1CAXT4P7TCA1JOBWCCAJXXQ6PCADUCE7FCAE9O5HFCA2AB2C1CA7RY56NCAUP751PCACXR496CAOP464QCA32RQJMCAHWA3EHCABORIQTCA60IOB9CA95NVCGCA2Q5ZWXCAXXBXCXCAOWF5TWCAX8VIECStill nearly a year away from an election and sunk in recession, the UK is drifting through both a political and an economic crisis. Reports from inside the civil service indicate that Labour’s loss of direction is causing civil servants to sit on their hands and wait for a Tory government to sort things out. Yet as Martin Wolf  argues convincingly in today’s Financial Times, the recovery from recession is going to be very hard work.

The UK lacks a strategy for the future or any kind of vision of what we want to achieve collectively. Politics has become short termist and tactical. (The most influential book on Tory thinking is called ’12 Months To Renew Britain’). There are some very important questions which require answers in order to develop a proper long term answers.

The first is, what’s the plan? New Labour had ten years of relative success based on the boom in financial services. Tony Blair now admits they were lucky. The financial services sector is not going to recover to play the same role as it did before. So what does any incoming government think is going to be the driver of the UK economy? And what are they going to do, through tax incentives, infrastructure improvements, educational policies to encourage whichever parts of the economy offer the most promise?

Is it possible or indeed desirable, for example, for the UK or any developed economy to reverse deindustrialisation? All western economies have seen a continued growth of services relative to industrial production. Yet service industries are notoriously people heavy and so tend to have lower levels of productivity.

Is it possible to reverse the trend for the state to play a greater and greater role in the economy?As James Heartfield and others have argued, the role of the state in the UK economy has encouraged flabby business practices and protected weak businesses from going under. Large chunks of state spending go back into the private sector. Is there a better way of doing this or should the state move out of  many of the areas it currently manages?

What is the legitimate role of the state? There are many things the state should be doing, to develop a modern infrastructure or education system for example which it is not doing well enough. At the same time as the state cannot operate on the big issues it seems to want to micromanage our daily lives through interference and intrusion on a massive scale. How can this be reversed? We need to have clarity on these questions when discussing what public spending we need and what we do not.

These are serious issues facing the UK. In the run up to next year’s election they should be the focus of discussion and debate for anybody who is dissatisfied with the lack of vision being shown by the main political parties.





Public spending we could do without: the civil list

15 06 2009

Public spendingGeorge Osborne has responded to claims that the main parties are failing to own up to their public spending plans by admitting that , apart from abolishing ID cards, they do not actually have any specific plans yet. He admitted that up until now he has ‘tip-toed’ around the issue. In the face of sustained media criticism, including from this blog although one is fain to deny any credit of course, Osborne has now admitted that something will have to be done, he just does not know what yet.

It is likely that the whole process from now will be like this, weak and faint-hearted, reflecting the political weakness of the main parties. Rather than giving a lead , politicians will shilly shally and end up responding to whoever shouts the loudest.  It would be better at this stage to conduct a rational public debate about the state and which parts of it we need to keep.

Let’s start by abolishing subsidies to the royal family

In that spirit I am inviting contributions about which parts of the public sector we could do without. I am not interested really in ‘efficiencies’ or ‘productivity’ as these are almost always euphemisms for sacking people, usually ‘middle management’. Besides applying usual standards of productivity to welfare for example is often a nonsense.

Instead I would like to know which big chunks of the state and the accompanying funding we should get rid of. To get the process started I suggest we abolish the civil list and other subsidies to the royal family. While this figure is in the millions rather than the billions it is a bizarre leftover from the past and should be abolished. Readers may infer an anti-monarchy current here and they would be right. The continuance of the monarchy in the UK is one of the hangovers from the past we could do without.

We should have a presidency instead. At least then if we ended up with a buffoon like Berlusconi it would be because we elected him. Under the UK system we could end up with the unelected buffoon Prince Charles as head of state instead.

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Public spending:why are they insulting our intelligence?

12 06 2009

I do not usually subscribe to the Jeremy Paxman thesis on politicians and truth telling, drawn from the ‘why are these effing lying bastards effing lying to me’ school. However, listening to politicians talking about the future of public spending I fear he has a point. The ‘debate’ over whether Labour or the Conservatives will cut public spending in the future has already been reduced to a level of mendacity I struggle to recall in any previous encounter of this sort. (Although David Miliband’s absurd claim that the nationalisation of Lloyds Bank was an ‘act of political radicalism’ shows that lying is now second nature).

Let us first of all rehearse the reality of the position of the public finances. As Martin Wolf has pointed out, by next year 53% of the economy will be accounted for by the public sector, but only 38% of the economy will go to taxes, leaving a gap of 15%, or roughly 180 billion in one year which will have to be raised either by extra taxation or extra borrowing, were public spending to remain on its current trajectory. Now, we have got used to dealing in billions and so the shock of this huge figure may not be what it used to be but this is still a lot of cash.

Maybe the political parties believe that tax revenues will recover to plug the gap, maybe they believe they will find eager lenders who will be happy to lend indefinitely on a vague promise that things will get better. Maybe they really do believe those things and so their protestations that there will not have to be big cuts in public spending are from the bottom of their hearts.

The problem with this is that no economists or financial commentators believe either of those things. There is a vast concensus, backed up by facts and figures, that public spending will have to be cut. Scour the financial press if you do not believe me. It is in fact a mere fantasy that the main parties want us to believe in.

So why are the politicians lying so brazenly? I think the easy answer is to assume this is what all parties do in the run up to elections. But the scale of the lying is such that we have to assume things are much worse than that. The real reason they are lying so brazenly is that they are simply afraid to tell the truth. They are now so weak and isolated they cannot imagine delivering a tough message, let alone a tough programme. This is the outcome of the continual erosion of political authority over the past twenty years.

Whatever we may feel about the rights or wrongs of public spending cuts, or which areas we want to see protected, at least we should be granted an opportunity to debate the whole issue openly and honestly. The lies of the politicians are merely an insult to our intelligence and an abnegation of democracy.

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