Austerity – nothing changes

Ann Pettifor explains how ‘balancing the budget’ broke Britain  

It’s settled then: austerity was, and will continue to be, hugely damaging to the British economy. The economists that called austerity “expansionary fiscal consolidation” – as if to fool us all – have been discredited and laughed out of court. That is in part because, due to austerity, the British economy has lost around £400 billion of GDP compared with what we were forecasted to expect by the OBR in 2010. Compared to pre-1979 trends, GDP has fallen short by £2 trillion or nearly half. At the same time, those with wealth have seen it treble by £7 trillion – as the TUC’s senior economist, Geoff Tily explains in a 2023 report, From the Doom Loop to an Economy for Work not Wealth.

Thanks to the Great Financial Crisis, which was then exacerbated by austerity – advocated initially, albeit tentatively, by Labour’s Alastair Darling and then by George Osborne – public debt rose from 56.6% of GDP in July 2009 (i.e. after the financial crisis) to 90% of GDP in 2013. This rising public debt can be attributed to the 2010 Conservative-Liberal Democrat coalition government’s determination to worsen the crisis by making the biggest cuts to state spending since the Second World War. They planned the loss of 900,000 public sector jobs between 2011 and 2018. As a result, the unemployment rate remained above 7% after 2009 – including youth unemployment and long-term unemployment – and both absolute and relative poverty increased. Now, one in four British children live in poverty

All that Britain’s (and the EU’s) austerity achieved was to further enrich the already rich: the 1%. Workers (the 99%) have lost out badly both in terms of income but also public services, no doubt as intended. Average real wages for British workers are not expected to return to their 2008 level until the end of the 2020s!  

We now live within an economy designed to serve the interests of the wealthy, not workers, as the TUC argues.  

Having noted those facts, we must not fall into the trap of arguing that public deficits and public debt do not matter. The fact is that high levels of public debt are a consequence of economic policy failure, not a cause. British Government debt has risen because the economy was plunged into a slump by the Great Financial Crisis and then gradually weakened by austerity. At times of economic weakness, when unemployment is high and employment is low-paid and insecure, tax revenues fall, just as night follows day, causing public deficits and debt to rise. Public debt rises because of a) financial crises, b) the resulting fall in revenues, and c) the rise in welfare spending on e.g. unemployment benefits. 

‘Follows’ is the operative word here because tax revenues do not finance economic activity (investment, employment, income). Instead, tax revenues are a consequence of economic activity. When employment, investment and incomes are low, tax revenues fall, naturally. When the economy enjoys full, skilled and well-paid employment, tax revenues rise, and the government budget is restored to balance.  

When politicians of both the left and right tell us that to pay for this or that public service, they will, and they must, raise this or that tax, they are deliberately misleading the public. Taxes do not pay for services and infrastructure. Credit or borrowing pays for the initial investment in both the social and physical infrastructure of the economy. Those services and that infrastructure investment create jobs. Employment generates income – wages, salaries, sales income and profits – for the individual, households and for firms. That income generates tax revenues for government. Higher paid incomes generate higher tax revenues. To raise government income, there is no need to raise taxes (except for redistribution reasons, from the rich).  

To raise government income and balance the budget, governments should create and stimulate the creation of well-paid, skilled jobs. It is tax revenues from well-paid employment that ultimately ‘balances the nation’s books’.  

In a debate on the austerity of the 1930s, Keynes, in a radio interview, famously responded in this way to the Conservative, Sir Josiah Stamp, ex-director of the Bank of England: “But, Stamp, you will never balance the budget through measures which reduce the national income… it is the decline in national income which is upsetting the budget.”

That is why it is an economic imperative for the Sunak Government to increase the pay of public sector workers, reverse the long-term decline in real pay, and restore balance to the public finances. If Government fails to do so, real incomes relative to inflation will continue to fall, families will snap their purses shut, firms will make losses, tax revenues will fall, private debt will rise, and the economy will continue to scrape along the bottom of OECD country tables.  

Government debt’s value to the City of London 

There is one more point about government borrowing that both Labour and Conservative governments choose to ignore: the bond market – that thing so feared by the Clinton administration – is heavily dependent on government borrowing (i.e. bonds) for the capital gains made by bondholders in the City of London and on Wall Street.  

That is because government bonds (debt), often described as ‘short-term paper’, are used as the safest and most valued form of collateral for big Wall Street and City of London institutions. These include asset managers, such as Blackrock and Blackstone, private equity firms and hedge funds. They use highly valued government bonds much as we would use our home or car or gold jewellery as collateral to borrow against. The difference is this: they use it to borrow billions in the globalised economy. As John Dizard of the Financial Times explained in 2021:  

“Short-term paper from the highest-rated government issuers, such as the US Treasury or the German government, can be lent and re-lent multiple times after its purchase. This ‘collateral reuse’ is a form of leverage that turns borrowing by trusted governments into liquidity for the world monetary system.” 

Or to put it more plainly: borrowing by trusted governments is transformed (multiple times) into new money for the globalised private financial system, known as the ‘shadow banking’ sector.  

There is another important dimension to government debt: a dimension of supreme importance to citizens – both here, in the EU and the US. Pension funds invest in government bonds (debt) because, unlike cash, bonds generate interest every month or year – providing income that helps pay for future pension pay-outs. Without the income pension funds gain from holding the ‘safe asset’ that is government debt, many pensioners would be bereft in their old age.  

It is high time the left rejected the ideology of the right and the far-right: that rising government debt, not the failing economy, is the problem, and that austerity is the answer to balancing the budget. Nothing could be further from the macroeconomic truth.  

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