Saturday, 6 November 2010

Myths and Legends

The Government has now delivered, after much hype and soft selling, it’s Comprehensive Spending Review (CPR). The effects on public services, unemployment (across both the public and private sectors) will be devastating, unfair and hit the poorest and most vulnerable in our communities the most. The underpinning reasons for it are flawed and based on several myths.

Unfortunately the mass media and government “line” has been to promote these myths relentlessly over the past few months and, to a great extent, it has been successful. Increasingly I hear people say things like “I don’t like (this or that cut in service) but it is necessary to get the country back on its feet”. The assumption underlying this sort of statement – that the cuts are necessary - is based on right-wing, monetarist, myth and legend, rather than evidence and fact. It is also an ideology that well suits the bankers and financier who, having been rescued from near disaster by governments around the world, are still making themselves richer as if nothing has changed. Even the ex-Chairman of the Bank of England admitted that the mess we are in was all the bankers fault – but who is being hit now with the consequences?

Let’s look at five of these myths and legends in a little more detail.

1. Government debt is the highest it’s ever been.
The UK’s government debt is around 70 per cent of GDP (the total amount of goods and services produced in one year). That is certainly high, but it is far from unprecedented. Government debt never fell below 100 per cent of GDP throughout the latter part of the 19th century and between 1920 and 1960. It is only in the past decade or so (and has become a religious mantra for monetarists) to think of government debt needing to be around 40 per cent of GDP. Its doesn’t have to be at this level at all. Government debt at the levels we have a present is not a problem so long as the economy does not falter again and move into an even worse recession - which is now highly likely following the CSR.

If the same principle of 40% debt to income being applied to governments by the international financial system were applied to individual mortgages few people would be able to buy any  house at all. On a £30K per annum salary the mortgage available would only be £12K for example - hardly enough to buy the foundations!

2. Government debt is ‘unsustainable’
The sustainability of government debt is not dictated by its size, but by its makeup. UK Government debt is at a comparable level to other similarly sized economies but the UK is actually in a much stronger position in terms of the nature of its debt than others. While some countries tend to owe money to external financiers, the vast majority of UK debt – about 70 to 80 per cent – is held within the country (a bit like you owing your Mum or Dad money – but the family is as a whole is not in “debt”). The UK’s debt is also long term, making it less vulnerable to short-term speculative pressures and much more able to continue to finance its debts on a sustainable basis. There is no current UK debt "crisis" and there is no problem of “sovereign debt” which we so often hear about.

3. Spending on the public sector is ‘crowding out’ private sector growth
Public infrastructure and services are essential to private sector productivity, and so are no less critical to future growth than private sector investment. Who initiates and funds local road building or maintenance? Who provided the funding for all the jobs in improving Sheep Street and Silver Street in Wellingborough? Corby firm Weldon Plant went into receivership recently. It had loads of work from the public sector but went bust not because of the public sector but because their bank suddenly reduced its overdraft facilities. A classic case of the finance sector driving businesses out – whilst the public sector was sustaining it. The government has argued that cuts to public services will be taken up by the private sector – this is a myth as many companies will find over the next few months as public sector cuts hit them hard.

4. Cutting public spending will help us avoid economic disaster
As every first year economics student knows there are four main components of economic growth: (1) exports; (2) investment; (3) household spending; and (4) government spending. Over the past two years (following the US-led crisis in the finance sector), governments around the world stepped in to bridge the gap in the first three by providing debt-financed public sector stimulus packages. Billions and billions of pounds were also poured into saving the banking system itself – and the “toxic” debt passed from banks to governments. Ironically it is public spending that saved the banking system – whilst now the banking system is saying government debt is problem. This is a bit like helping you sister with a serious gambling debt problem and she then turns round to you and says you are financially incompetent because your finances are now in a worse situation and you have to make savings!

There is precious little evidence that the private sector or households are ready or able to step up their activity to fill the gap that will be left by cuts in public expenditure to help with future growth of the economy.

The CPR’s austerity programme will prematurely remove the foundations of the current, but tenuous, recovery and lead to a return to recession – a ‘double dip’. This will be disastrous for ordinary people as unemployment rockets, but also for future growth and the capacity of the state to control future government income.

5. There is no alternative to cuts
There are always political choices to be made and alternatives to the CPR are there – but not so well known - as the media rarely given them the “airtime” they deserve. Some of these alternatives include: Almost £4.7 billion could be raised each year from introducing a 50 per cent tax rate on incomes over £100,000 (that’s on those earning over £2000 peer week!); about £5 billion could be raised every year from a tax on vacant housing; £25 billion a year could be raised by closing tax loopholes; and a ‘Robin Hood tax’ on financial transactions could raise another £20 billion a year.

A shorter version of this blog was printed in the News and Views section of the Wellingborough & Rushden Herald & Post this week. See:

Independent Socialists in Wellingborough has also produced a new publication "Seven Deadly Myths".

Thanks to Red Pepper for much of the information that is contained in this blog and the above publication.


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