Friday 23 August 2013

The financial crisis wasn't caused by government overspending

At the 2009 Conservative Party conference David Cameron said, "why is our economy broken? Not just because Labour wrongly thought they'd abolished boom and bust. But because government got too big, spent too much and doubled the national debt."

This remains the dominant narrative of the coalition government, it is also largely accepted by the Labour Party, and few in the media question it. The case for austerity measures and cuts in public services is based on several assumptions: that the level of British government debt is unprecedentedly high, that our debt repayments are unsustainable, and that cutting public spending will get us out of the crisis.

But is there are any statistical basis for austerity? In a powerful presentation in 2011, Dr Saville Kushner showed that our debt is not only manageable, but in fact lower than it has been for much of the 20th century. In 2011, British government debt was 64.6% of GDP, compared with 72% in Germany, 95% in the USA and 200% in Japan. During the Second World War, British government debt peaked at 250% of GDP, and only fell below 100% in the mid 1960s. In this time, the British economy was growing, the welfare state and the NHS were founded and large scale infrastructural projects were underway. Our debt is not abnormally high compared to other countries, nor compared to our historical record, and debt is not the evil it is made out to be.

National debt is not like personal debt - it is never paid off, and it is not an impediment to the economy. Dr Kushner compares national debt to a house - a mortgage can be paid off, but the new buyer will take out a new one. No government is striving to eradicate national debt. The EU Maastricht Treaty stipulates that government debt shouldn't exceed 60% of GDP. In other words, our debt is only just above the threshhold - hardly a "debt crisis."

Kushner goes on to debunk the myth that our debt repayments are too high. In 2011, the cost of servicing our national debt was £120 million per day. That sounds like a horrifying figure until you put it in perspective. In 1981, we were paying the equivalent of £174 million per day. As a proportion of our GDP, the cost of our debt is lower than under the Thatcher government. Most of our debt is low interest and long term - we have 13 years to pay it back.

In their report entitled "A brighter future for the British economy," Michael Burke, George Irvin and John Weeks argue that at the last election, the Conservative Party "launched a propaganda campaign to convince the public that it was the irresponsible fiscal policy of the outgoing Labour government that was the true culprit." They argue that in reality, the recession was caused by the private sector and long term structural issues in the economy. As they put it, "the cause of the surge in public borrowing is the refusal of private companies to borrow for investment."

Now, in the words of MP Jon Trickett, "right-wing politicians and academics want two contradictory things at the same time: rapid deep cuts and expanding demand to achieve private sector growth." This simply cannot work. In a paper entitled "The £100 billion gamble," George Irvin, Howard Reed and Zoe Gannon argue that "trimming the proverbial fat is virtually impossible when you are faced with public services that are already lean and under-resourced." For years we have been fed the idea that we can solve our economic problems by cutting waste. But the logic doesn't work. As Burke, Irvin and Weeks say, "falling demand results in falling output, which in turn results in falling private employment. To reverse this process it is necessary to replace the falling private demand with public sector demand. But the Tory-led government wants the opposite."

Government cuts damage the economy by reducing demand. Axing jobs and laying off staff creates unemployment and a slump in demand. Cutting benefits only hurts the most vulnerable and will not solve our economic problems. Cuts actually make the economy less competitive as they lead to the deterioration of infrastructure and the skills the workforce can offer. Rather than introducing a new round of cuts, we should endeavour to expand government revenue and stimulate demand. This can be achieved by government borrowing, and targeted investment into the economy.

Once the myths surrounding our debt and its causes have been exposed, all sorts of things become possible.
The two papers I have mentioned above propose a wide range of options. Why not increase our national debt to 80% or even 100% as the USA has done, in order to invest in infrastructure? We could embark on a large scale housing programme and build a high speed rail network, which would create thousands of jobs, increase the government's tax intake thereby reducing the deficit. We could introduce a land tax and a financial transactions tax to boost government revenue, which would enable us to pay the higher costs in pensions and care for the elderly which we will soon have to face.

The financial crisis was not caused by government overspending and cuts will not get us out of it. The real crisis that Britain faces is the lack of imagination and ideas among both the coalition government and the opposition. All manner of reforms and alternatives are feasible if we challenge the myths surrounding the economy.


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