Debt myths

Dennis Leech says Labour has to ditch the pursuit of balanced budgets or become irrelevant

The media and the Tories are frightening people daily with scare stories about the economy. We are told that the UK faces the deepest recession in three hundred years and, therefore it follows, that the highest priority is to keep the level of government borrowing down. The same message keeps being repeated again and again by commentators using lurid tones and frightening language to tell us what the level of the national debt is without putting it in proper context.

People are scared into the belief that the scale of government assistance in the fight against coronavirus has to be cash-limited if our children and grandchildren are not to inherit an unbearable burden of debt they will have to pay back during their lifetimes.

This is economic nonsense. Labour needs now to step up to confront this narrative for the scare story it is, something it has always lacked the courage to do until now.

Austerity is the wrong policy because it derives from a false view of how the economy works. The government in Westminster is not like a household. Politicians who talk about tax revenue and government spending in the same way as they would discuss the income and outgoings of a household are being highly misleading. We have had ten years of this false logic under George Osborne and it has only resulted in a decade of austerity and a very slow recovery from the 2008 crash. And, by the way, it did not succeed in Osborne’s stated aim to bring down debt as a percentage of national income. Unfortunately, some economists – notably the Institute for Fiscal Studies – give credence to this.

Labour must say loud and clear that Government and the private sector are not rivals competing for a limited pot of money. Government spending does not crowd out private sector growth. On the contrary, they are partners that trade with each other in the same economy. Government spending stimulates the economy by putting unemployed resources to productive use. In the present pandemic circumstances, where jobs would otherwise be lost without government financial support, it is keeping the economy going and preventing recession.

And we should make the point that a government economic stimulus that creates jobs also creates wealth in the form of output of goods and services. The answer to people who say “how can we pay for it?” is “by increasing production by putting the unemployed to work, otherwise their labour would be wasted”.

The recession is partly a supply-side shock to production due to the necessary Covid-19 restrictions – the earnings of businesses like pubs, shops and restaurants, for example, are down because of social distancing reducing their productive capacity – and partly a demand-side reduction – a drop in consumption due to a fall-off of consumer confidence and people saving more. Government aid is needed through the furlough scheme and in other ways like tax reliefs to keep the businesses going.

But it is more than that. This is not just about the survival of the businesses affected. Most importantly, it is also necessary to consider the knock-on effects. Without Government aid there would be a lack of effective demand due to the drop in workers’ incomes. It is vital to address this issue not only to prevent large scale unemployment – and even the destitution of people who are barely surviving on very low wages and are already on the edge of poverty – but also to give the fight against the virus a chance of succeeding. It is in all our interests that everybody in society has the means to self-isolate if they have symptoms or test positive and not infect others as they try to earn a living. Taking the pandemic seriously requires policies that will increase the incomes of low paid workers. The main priority is to make sure that all members of society have enough incentive to behave in a socially responsible manner.

There is too little serious debate on the left about economic policy. Many left-wing commentators frame all economic problems as deriving from the contradictions of capitalism. Important, even fundamental, though Marxism is as an overarching theory of a capitalist economy, there is still a need for the left to talk about economic policy. Socialist parties in democracies need economic manifestos for government. Whether an economy is capitalist or socialist, questions of macro-economic policy, concerning unemployment, inflation, economic growth and so on, are salient and need to be debated. That needs a realistic view of how the economy works that goes beyond class.

Unfortunately, in the recent past – probably since Gordon Brown was chancellor – the Labour party has tended to follow the neoliberal Tory view in treating the state as being like a big household. (Margaret Thatcher used to say that her greatest achievement was Tony Blair.) If it continues to do that, as it has done under a series of shadow chancellors – most recently John McDonnell, who adopted a fiscal rule not very different from his predecessors – it will be ineffectual in government.

Aneurin Bevan stated the case against basing policy on focus groups and opinion polling. He wrote, in In Place of Fear: “Then there is the disposition to smooth away the edges of policy in the hope of making it more attractive to doubtful supporters. It is better to risk a clear and definite rejection than to win uneasy followers by dexterous ambiguities.“

What greater dexterous ambiguity is there than making a promise that a future Labour government will balance the budget and pay down the national debt while at the same time bringing jobs and green economic growth – when such ambitions are inherently contradictory. The 2015 Labour manifesto promised to eradicate the current deficit “as soon as possible”, by cutting spending in all Whitehall departments except health, schools and overseas aid. Ed Balls said: “while jobs and growth are vital to getting the deficit down, they cannot magic the whole deficit away at a stroke”.

That was in 2015, after five years of Osborne’s ineffectual and disastrous pursuit of what he claimed was fiscal responsibility but was anything but. Had Labour won and Balls implemented his policy the result would undoubtedly have been stagnation and further damaged Labour’s reputation for economic competence.

Today things are seriously different: we have the coronavirus crisis on top of the debt overhang from the 2008 crash. The idea that the way to deal with it is to continue the fiscal policies of the Tories is delusional because it is based on false economics. And the crisis is now so much worse that these policies are no longer even feasible.

What about borrowing?

The stock response to any demand for Government spending is to point out that Government borrowing is sky high. There are several responses to this: it is not so high really once you put it in context; it does not matter anyway because the Government is not like a household with a credit card; Government spending does not increase the debt burden but reduces it if there are unemployed resources; the Left needs to have a serious debate on the ideas of Modern Monetary Theory.

First, the national debt increased from 41 percent of national income (as measured by GDP) in 2007 before the 2008 crash to about 83 percent by 2020, after the banking bailout, recession and following Osborne’s long austerity programme. This is not high by historical standards – remember that after WW2 it exceeded 240 percent. It is predicted to rise next year to 115 percent of national income, an almost unprecedented increase. Surely this is unsustainable?

But hang on a minute. What exactly counts as debt? Borrowing is a burden if the interest payments are high, or it has to be repaid. In fact the UK government has never had any difficulty in borrowing so paying off the debt is not an urgent priority, and interest rates have never been lower, so debt is cheap and not a burden on the taxpayer.

But even more significant is the fact that the extra £300 billion it has raised this year is effectively borrowed from the Bank of England – Government-owned – through the so-called Quantitative Easing programme. This is on top of the £645 billion already outstanding. So it turns out that about a third of the national debt should not be counted since the Government owes it to itself!

Second, the way to bring the level of debt down is by growing the economy. In current circumstances where there is spare capacity a fiscal stimulus package that allows people a decent standard of living will do that.

Third, the Labour party needs to engage with the ideas of Modern Monetary Theory. They could start by reading the new best seller by Bernie Sanders’ economic adviser, Stephanie Kelton, The Deficit Myth.

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