March 2021

By Tom O’Leary

There are widespread claims that British Chancellor Sunak is implementing Corbyn and McDonnell’s economic policies even though this has been explicitly denied by both of them. Simultaneously, there is the claim that Biden is resurrecting Keynes with his $1.9 trillion stimulus packages.

These claims are important to examine, and not simply because they are at risk of sowing widespread confusion.  It is also important to set out what the recent changes in economic policy represent on both sides of the Atlantic, especially as they are likely to be influential in the Western countries as a whole as the latest iteration of neoliberal economic policy.

Source of confusion

In Western Europe (and to a lesser extent in the US) the dominant economic policy from 1950 to 1980 was ‘demand management’.  This was characterised by a loosening of fiscal and monetary policy when there was an economic downturn and the reverse when there was a perceived risk of ‘overheating’ and inflation.  This policy fell apart in the economic crisis of the early 1970s and was replaced by Reaganism and Thatcherism from 1980 onwards with what have become known as neoliberal policies.

This failed policy of demand management was incorrectly understood as ‘keynesianism’.  It is not in the scope of this article to explain why this is not a product of Keynes’ thought, and this has been done rather well elsewhere on SEB.

The point emphasised here is that this policy of demand management is not effective, as its failure in the early 1970s shows.  This is because simply increasing demand does not automatically lead to increased production, and still less it does not automatically lead to increased investment, that is the growth in the means of production.

However, after the horrors of World War II and the following 20-plus years of economic rebuilding, growth and prosperity in Western Europe and the US, the associated ideas of demand management maintain a powerful attraction. This includes in the European labour movements and their Lefts.  Yet it remains important to dispel this confusion, as it disarms all of these forces in their response to the latest economic turn in the major Western economies.

The turn in economic policies

Just as they did in the 1980s, the US is leading the Western economies towards a new economic policy, with Britain as its most faithful follower.  To understand that economic policy it is necessary to take account of the key developments in the US, which is both the stimulus packages under Biden and Trump taken together, the two British Budgets in March 2020 and 2021 and the various stimulus packages all across in the advanced industrialised countries.

These policies can be summed up as providing a safety net for business (including tax breaks, loans and guarantees as well as direct subsidies).  For payroll workers there is an element of wage support, although this also includes wage cuts in most instances.  There is little or no support for more marginal workers, the unemployed, those forced into ‘self-employment’ and others.

The latest Biden package totalling $1.9 trillion includes an innovation, a $1 trillion stimulus to household spending.  Trump called his own earlier package ‘stimulus measures’ but they were nothing more than temporary and partial subsidies, very little of which went to households (mainly a $600 cheque to households, meant to cover 3 months’ expenditure).

Biden’s is a genuinely large but temporary boost to household incomes, equivalent to approximately 5% of GDP. Taken with the Trump package that was mainly directed towards business the total additional government spending in response to the pandemic is $4.1 trillion, or just under 20% of US GDP.  Little wonder that the economy is expected to grow at a rapid pace this year.

In Britain, the Office for Budget Responsibility (OBR) estimates that the total support offered by the British government (which is overwhelmingly to business) at £356 billion, equivalent to approximately 12.5% of GDP. In the other advanced industrialised countries the support measures are sizeable, adjusted downwards in line with the shallower contractions in GDP generally seen elsewhere.

Rising government debt

All of this increased expenditure combined with falling GDP have led to sharp increases in government borrowing.

Government debt issuance in the OECD (Organisation for Economic Co-operation and Development) is expected to be a new record, equivalent to US$19 trillion in 2021 after $18 trillion in 2020 and compared to US$11.2 trillion in 2019. The level of debt issuance was previously on a declining trend in response to the moderate growth of the OECD economies. So, it can be stated that the entire increase in new debt is a product of the economic crisis caused by the failed response to the pandemic.

These totals far exceed the levels of government borrowing seen even in 2008 to 2010.  But this is because the depth of the current economic crisis far exceeds the impact of the Long Depression.  There is also a distinct possibility there is a China effect. Simply leaving the US economy to its own devices threatened to open such a huge growth gap between the US and China that it would soon become irrecoverable.  The huge stimulus is designed to close that growth gap.

Sharply rising government debt and a large temporary boost to spending that may have confused commentators in their wildly inappropriate comparisons. But it should be noted that the initial response to the 2008 crisis was also to increase government spending, and only when the recovery was secured this was followed by vicious austerity in 2010.

In this crisis, it is already clear that increased subsidies and one-off boost to incomes are being combined with structural, that is long-lasting austerity measures. This is shown in the way that Biden reneged on his campaign pledge for a $15/hour Federal minimum wage and cut unemployment benefits.  Sunak is cutting government current spending, increasing taxes on workers and maintaining a pay freeze on public sector pay, as has been shown previously on SEB. 

Macron in France is still battling for his Thatcherite labour market ‘reforms’, while Germany is eyeing privatisations.  All of these are different aspects of a shared drive towards austerity, modified by national conditions.

Will it work this time?

The main factor in determining the level of production is the amount of labour available and its quality (skills, training, education).  But increasing the level of production per worker without simply increasing their hours requires an increase in the means of production, through investment.

The reason ‘demand management’ failed was because in a capitalist economy investment is driven not by ‘demand’ but by profits.  Firms may either find that additional output is not profitable for a variety of reasons (additional costs or low availability in acquiring raw materials, intermediate goods or necessary labour). Alternatively, they may prefer to try pushing prices higher in response to increased demand, especially if they expect that increase to be temporary.  Others may find they have the additional capacity to meet the rise in demand without creating additional productive capacity.

This certainly seems to have been a factor in the US, the leading capitalist economy over a prolong period (and the G7 economies generally).  The level of capacity utilisation in the US economy is shown in the chart below.

Chart1. US Capacity Utilisation

Source: FRED

There are two important factors to note from the chart.  The first is that the rate of capacity utilisation in the US economy is lower than 75%. There would have to be an enormous, sustained increase in the level of consumption to oblige US capitalists to increase their investment on the confident assumption of future profitability.

Secondly, which reinforces the first point, is that it is also clear that the rate of capacity utilisation in the US economy has been on a long, unbroken downtrend over several decades, only interrupted by cyclical swings.  Reversing that downtrend would require a qualitative change in the overall conditions of the US economy to boost profitability, not simply a one-off boost to household incomes however large.

It should be noted too, not entirely as an aside, that this decline in capacity utilisation is mirrored by the same long-term decline in investment as a proportion of GDP in the US economy, as shown in Chart 2 below.

Chart 2. US Gross Fixed Capital Formation as % of GDP

Boosting demand will not be enough to sustain growth over the medium-term, because it is unlikely by itself to create the scope for profitable investment when there is already such a high level of idle capacity.  Instead, by themselves the stimulus measures will do only that, stimulate economic activity for a year or two against a backdrop of otherwise very weak growth.

However, as previously noted the governments of the advanced capitalist countries are not simply boosting ‘demand’.  They are also imposing austerity measures right now, the most important of which is the surge in unemployment and cuts to pay. 

Just as ‘demand’ or consumption does not determine profitability, so it is possible to increase profitability even if consumption remains unaltered (or receives only a temporary boost).  Profitability can be increased if the rate of exploitation is increased, specifically if wages for the same work are cut or if work is increased for the same wages. 

Both of these are being imposed now, the former largely on manual and other workers who are forced to attend work even under furloughs, and latter largely on stay-at-home, mainly ‘white collar’ workers.  Pay per hour worked is cut in either way, initiated by furlough schemes, underpinned by rising unemployment (the mechanism of the ‘reserve army of labour’) and supplemented by measures such as no increase in the Federal minimum wage, or cuts to unemployment benefit, or public sector pay freezes, cuts to Universal Credit payments, and so on. 

These austerity measures are integral to the whole economic plan, which is why it is extremely foolish and misleading to compare them to the policies of Corbyn, McDonnell or Keynes.  They amount to an all-round attack on wages and the social wage even while there is a temporary boost to demand.  In fact, the enormous sugar rush effect of the trillion dollar boost to household incomes may help to mask the effect of these impositions.

This is not so different to the stimulus in 2008 and 2009 followed by austerity from 2010 onwards.  The first is meant to revive capitalism and the second designed to boost its profitability by placing the burden of the crisis on the shoulders of workers and the poor.  The scale of the crisis caused by allowing the virus to circulate means the scope of policy measures is far greater and the two episodes, of stimulus and austerity, have been concertinaed.

Their purpose is to alter the relationship between labour and capital in the advanced industrialised economies in favour of the latter, to increase the rate of exploitation and then to lay the basis for a rise in profitability leading to a self-sustaining rise in business investment.

This did not work after 2010.  It remains to be seen whether it will work this time around.  It would be guaranteed to fail if there were large-scale resistance to these impositions. But that has yet to materialise.

By Diane Abbott MP

It is a modern miracle how incredibly damaging Tory Budgets are given a warm welcome by the overwhelming majority of the media, the miraculous status undimmed by the fact that it happens year after year.

The consensus was that last week’s Budget was a “spend now, tax later” plan.

The opposite is true. Aside from measures to try to cope with the pandemic which a clearly reluctant Chancellor is obliged to extend, the substance of the latest Budget, like the 2020 Budget, is to cut spending and raise the taxes on working people now.

In addition, far from there “being no money left,” there is in fact an enormous tax giveaway to big business.

The talk of tax hikes in the future on corporate profits is pure conjuror’s trick, designed to distract from what is actually happening now, using a policy that may never be implemented.

But as damaging as this austerity Budget will prove to be, there is even worse to come from its serial failures to address the multiple crises of British society, including the pandemic itself, the prospect of catastrophic climate change, the huge and deepening inequalities in society, the housing crisis, the crises in public services and in our basic infrastructure.

Robin Hood in reverse

In any sober assessment of this Budget it should be clear that the austerity policy has been reintroduced with a vengeance, following on from last year’s 5.7 per cent real-terms cut in government current spending (the day-to-day spending on schools, hospitals, public services of all kinds).

At the same time the support measures the Tories announced are mainly short-term and overwhelmingly to support business.

As this government’s policy has repeatedly shown, in a negative way, and other countries in a positive direction, the economic health of any nation depends on its public health.

The best gift the government could have given to businesses (and far less expensive) would have to suppress the virus with a zero-Covid policy. It still could, if it changed policy.

These are among the austerity measures that have not got the publicity they deserve:
• A public-sector pay freeze (except for nurses, whose 1 per cent rise is still a cut in real terms, after inflation)
• Another cut in government current spending (£4 billion)
• A rise in council tax (£2bn)
• A freeze on income tax thresholds (which means 1.3 million of the lowest-paid workers are brought into the tax net and ordinary workers lose out by paying more tax than if the thresholds had risen with inflation).

Together these amount to a huge attack on living standards of ordinary people.

At the same time, taxes for businesses are being cut massively.

Ignore all the spin about the big rise in corporation tax on profits, which is way in the future and may never happen.

Companies will soon be able to claim £13 for every £10 invested.

This “super-deduction” of tax is a huge tax giveaway amounting to around £27bn.

The Office for Budget Responsibility (OBR) says the policy will not boost business investment over the medium term, just simply bring it forward in the short term. So it is just a giveaway to business.

Together, this is the transfer of incomes from ordinary working people and the poor to big business and the rich.

It is the classic definition of austerity, and the same type of policy as George Osborne, David Cameron and the Lib Dems adopted. It is Robin Hood in reverse.

No-one should be fooled by the kerfuffle over a proposed corporation tax increase.

This is not due to be implemented until the financial year beginning in April 2023.

So any tax payments are years away and the government could scrap it at any point.

The missing elements of a Budget

This government specialises in not implementing measures it has previously announced.

One of those, dating from the general election, is that it would tackle the housing crisis that it helped to create.

But the Budget subsidies for mortgages and deposits are useless on their own.

There needs to be a huge programme of affordable homebuilding, otherwise these measures simply drive prices even higher, making homes even more unaffordable.

There was also next to nothing in the Budget about tackling catastrophic climate change, either in terms of investment to combat it or providing for a green recovery.

Two different Commons committees have said there are no plans to put government declarations on climate change into practice.

The Public Accounts Committee (PAC) says ministers have “no plan” to meet climate change targets, two years after setting them in law.

And the business committee says the vital UN climate conference scheduled will fail unless its goals are made clear.

In addition, the 110-page “Red Book” document from the Treasury, the word “inequalities” or “inequality” were mentioned just once!

And this was in the false messaging about levelling up, which we now find is only happening in Tory areas.

In addition, the government has not published an equalities impact assessment of the Budget.

Yet black and Asian people have been much more disproportionately hit by the economic fallout of the crisis, along with poorer households and young people.

They have also been disproportionately hit by the death toll in the pandemic. The Budget literally had nothing to say about any of this.

Underlying all of this is a complete failure to grasp the real relationship between the economy and the pandemic.

Notoriously, the Treasury’s Eat Out to Help Out scheme could not be sustained because cases and then deaths rose again, and the scheme itself probably contributed to that.

At every stage, “putting the economy first” has been disastrous for lives, and for livelihoods.

The OBR forecast is now that unemployment will rise to 5.9 per cent, while we know Covid-19 cases are likely to rise once more with schools and colleges reopening again on Monday.

Instead of dealing with the pandemic, the Tories are using it as backdrop for a renewed austerity policy against the bulk of the population.

Diane Abbott is Labour MP for Hackney North and Stoke Newington.

The above article was first published here by the Morning Star.

Pre-Budget Briefing

From the Office of Diane Abbott MP  diane.abbott.office@parliament.uk

*In March 2020 the official forecasts for the year were that GDP would grow by 1.1% in real terms and by 1.8% in 2021, and that the unemployment rate would remain steady at 3.8%

*In the event the economy contracted by 9.9%, a virtually unprecedented slump in peacetime and one of the worst outcomes in the G7.  Unemployment has risen to 5.1% and a recent survey for the Resolution Foundation shows that many more expect to lose their jobs.

*The importance of this disparity is not to highlight forecasting errors, but to underline the gravity of the current crisis and its effects on real people’s lives, as well as to highlight a key failing of this government.

Under This Government, The Economy Isn’t Working

*That failing is not just the disastrous response to the pandemic, which means that this country has one of the highest per capita death tolls of any advanced industrialised country.  It is compounded by the false notion that there was a trade-off between public health and economic well-being.  There is not, and repeated delays in lockdown and repeatedly ending them too early to ‘save the economy’ have led to both a public health and an economic crisis of enormous proportions.

*As is frequently the case at the approach of a Budget, the economic crisis is portrayed primarily as a crisis of government finances.  But this again mistakes a symptom for a cause.  Government finances are under pressure because of the economic crisis, and the economic crisis is a reflection of the failure to suppress the virus.

*Those economic consequences are stark.  1.4 million new people have begun to claim unemployment benefit since the pandemic began.  Millions of people have seen their pay slashed.  Young people, and Black and Asian workers have borne the brunt of job losses.  Others have been ‘fired and rehired’ on lower pay and worse terms, while the government has stood idle.

*Underlying this bleak scenario is the fact that some basic functions of the economy are not working (as shown in the chart above). There is lots of misplaced talk of government largesse, of the ‘gap narrowing between Conservatives and Labour on spending’ and even that the current Chancellor is ‘carrying out Corbyn/McDonnell spending plans.’.  The fact is that a public health and economic crisis is exactly the time to increase Government Consumption. Yet this government cut it.  ONS data shows that General Government Final Consumption Expenditure fell by 5.7% in real terms in 2020 compared to 2019.  To be absolutely fair to the Chancellor, this is exactly what he said he would do in the last Budget, which is a renewed bout of austerity.

*Naturally, with over a million people losing their jobs, millions more either in fear of losing of their jobs and/or having to live on much lower pay, Household Consumption fell by 10.7%.  The government as a whole has allowed the pandemic to drag on for a year, rather than for weeks in those countries which suppressed the virus.  But the fall in Household Consumption simply highlights that the Chancellor has also not done enough to support jobs and incomes for employees, and hardly done anything at all for the millions of self-employed and The Excluded.

*The other area of extreme weakness is in Business Investment.  In all the heat generated about the role and level of corporate taxes, there has been very little light shed on the key variable these are meant to influence, which is Business Investment.  Supporters of cutting taxes on profits frequently claim that this will boost Business Investment.  Yet, while this country has one of the lowest level of taxes on company profits in the OECD, unfortunately it also has one of the lowest rates of business investment too.  And Business Fixed Investment also fell by 10.7% in real terms in 2020. The weakness of Business Investment is a chronic one, which has become acute and is not much higher in 2020 than it was 2005.

*Economic prosperity cannot be sustained by encouraging Consumption.  The terrible effects of the Lawson and Barber booms pale into insignificance to the damage wrought by the Chancellor’s wholly misconceived ‘Eat Out to Help Out’ scheme (research from the University of Warwick says it was associated with one-sixth of all new cases over the summer).  More fundamentally, people cannot sustainably increase their Consumption unless their incomes are also rising. That requires rising incomes and rising output, which both require rising Investment.

*In addition to the current public health crisis there are multiple crises of the British economy, including in dilapidated infrastructure, unaffordable housing, run-down public services and severe inequalities.  Probably the most dangerous and pressing of all is the crisis of climate change.  None of these can be address by increasing Consumption and require increased Investment instead. 

*Currently, despite lots of talk of incipient inflation, the UK government can borrow for more than 25 years at an interest rate under 1.4% per annum.  Investment in all of these areas outline above yields a return on investment that is far greater than the cost of borrowing.  It is irresponsible not to borrow to investment when interest rates on government bonds are so low (even below the rate of inflation!).

*The economic plan to revive the economy must begin with suppressing the virus (and transferring the private sector shambles of Test & Trace to the public sector).  All those who cannot go to work should be furloughed on full pay up to £25,000 a year and the same should apply to the self-employed. In addition, a wartime level of borrowing to invest should begin both to overcome the current crisis and to tackle the longer-term structural issues that blight our economy and wider society.

*The virus must be suppressed, the underlying economic factors must be addressed, and the pressing issues of climate change, housing, jobs, inequality and so on must be tackled, otherwise they will all simply deteriorate further.