Socialist Economic Bulletin

RIP ‘All in it together’, buried in PanamaBy Michael Burke

This Tory government, its economic and social policies and its financial scandals almost seem designed to provide illustrations of fundamental economic truths. “The history of all hitherto existing society is the history of class struggles”, famously wrote Marx and Engels in the Manifesto of the Communist Party. The Panama scandal reveals the big lie that austerity is about deficit reduction and the false mantra that ‘we are all in it together’. The entirety of government policy is an attack by one class on all its subordinates.

Whenever some Tory Minister or another announces another damaging economic policy or wholly regressive social policy and attempts to justify this in terms of a shared burden of adjustment, it can punctured by recalling just one word: Panama. ‘We’re all in it together’ has been fatally wounded.

Tory economic policies and the leaders themselves are often criticised in terms of incompetence or immorality. No doubt that these factors are present. But the same policies now in place have been pursued to different degrees before; public sector spending cuts, cuts to public sector investment, pay cuts, tax increases and benefit cuts for average and low-paid workers, tax cuts for business and the high paid, privatisations, and so on. This was the actual content of Thatcherism although it was cloaked with ‘monetarism’ and again when the pound entered the Exchange Rate Mechanism. The label changed but the policy was the same.

This policy consistency is not accidental. It represents a class interest. As a result the current government cannot be advised or implored to choose different policies. Only militant opposition combined with considered alternatives will work.

Tax haven hub

The focus of the anger has quite rightly been against David Cameron, who called tax avoidance ‘morally repugnant’ when looking for a cheap target in tax-dodging celebrities. But he is also a representative figure of the model of the British economy which his government inherited and which they are recklessly extending.

That economic model places the economy at the centre of an international hub of tax havens, with the City of London as its organisational focal point. Economic policy is aimed at promoting this international role, if necessary at the expense of other sectors of the economy. So, the departing permanent secretary to the Treasury recently told the Financial Times that steel was a ‘lame duck industry’ and should not be bailed out. This assessment clearly does not apply to the finance sector and the banks.

Table 1 below shows the level of bank liabilities (primarily deposits) in selected financial centres. They show the vast level of offshore wealth in tax havens. The data is from the latest quarterly report from the Bank for International Settlements.

The US is no stranger to tax avoidance itself, although to a large extent this is done onshore, through incorporation in Delaware or Nevada. But the UK economy and its dependencies and Overseas Territories have greater bank liabilities combined than the US itself. This is not an exhaustive list, as other territories, including Gibraltar, the British Virgin Isles, Belize and others are engaged in similar schemes.

The efficient management of savings should be a positive contribution to economic prosperity, by directing savings towards the most productive areas for investment. But this is not what is happening. A global system of tax avoidance deprives countries of tax revenues that could be used to for investment or social protection or public goods. This is not just confined to Britain and the biggest victims are the populations of the Less Developed Countries.

Worse, the capital does not lie idle in the banks, offshore companies and hedge funds. It is used for speculation in financial assets, stock markets, commodities and property which further distorts economic activity, and exacerbates inequality.

The current Labour leadership has nothing to do with these rackets and has always opposed their effects. The Labour leadership can only gain from the exposure of these scandals. One of its tasks will be to formulate policies which shift the whole financial sector away from tax-dodging and speculation towards productive investment. That is a major task. But the sums involved are so large that every incremental step has the potential for a huge positive effect.

National Demo for health, homes, jobs & education – End austerity now – Sat 16 April

Full details of this demonstration, organised by the People’s Assembly Against Austerity, are here.

Budget shows women bearing the heaviest burden of austerityBy Kerry Abel

This government’s budget and the entire austerity policy hits women harder than men. At the same time the government are consulting on gender pay gap reporting, because as they acknowledge, the gap between men’s hourly pay and women’s still stands at 19.2% the Tories are taking 81% of their budget cuts out of women’s pockets.

Despite making cuts to local government, the NHS and other public services in the period 2010-15, including £200billion from the NHS the Chancellor has not met his target to balance the books by 2015, so has come back for more. And they are taking from those least able to afford it. According to the Women’s Budget Group, households on the lowest incomes lose out five times as much as richest households.

This was not neutral budget. Women tend to be in the lowest paid sections of society, more likely to be on the minimum wage and have to stretch their wages further – 90% of single parents are women. The budget’s tax cuts mainly benefit rich men because they are disproportionately high paid. Analysis by the Tax Justice Network noted before the budget that ‘if George Osborne slashes the rate further in the Budget – from 45p to 40p for those on £150,000 or more – will put even more money in men’s pockets’.

How does this work?

The first channel for the uneven distribution of austerity is the aim of cutting public sector spending by £3.5 billion by 2020. The public sector – local government, schools and hospitals are disproportionately staffed and used by women. So any cuts will affect women’s employment prospects more as well as leaving them holding the baby, the disabled relative or older family member when a cut to a service bites.

Public sector workers have had only a 1% or less pay rise in the last five years and four more years is a real terms cut of 15-20% of their wages.

The government has outlined £3.5bn additional cuts to departmental budgets – excluding those protected areas of education, health, international aid and defence – which will need to be found in 2019/20, budgets that will have already fallen in real terms by over a third since 2010.

2019/20 will also be the same year that public sector employers will be faced with a £2bn increase in contributions to unfunded public sector pension schemes, which arises from the update to the discount rate applied to pensions. The Nuffield Trust estimate that this could mean a £650 million bill for the NHS virtually wiping out the marginal 0.7% spending increase planned for that year and leading to a real terms cut in health spending in that year.

Public sector employers will also be struggling to meet additional National Insurance contributions as a result of the abolition of the second state pension, a figure just shy of £3bn. With a cap on public sector pay due to remain until 2020 and the government already committed to further savings on redundancy pay and sickness absence, it is hard to see what more can be squeezed out of a public service workforce that is beset by increasing recruitment and retention problems.

This can be broken down even further in terms of health, education and wages. In November the Health Foundation analysis showed the government commitment to increase NHS funding by £10bn in 2020/21, but this is only an increase to the NHS England budget not total health funding. The NHS has been creaking under the pressure of the last parliament’s cuts and increased pressures on health spending arises from demographic changes and cuts to other budgets, especially social care. So some vital investment has been cut and will not be restored by this budget – junior doctor training, health visiting, sexual health and vaccinations are all at risk and hospital equipment neglected over the last five years.

Money has now been allocated to local government to spend on health and this is open to politicisation and inefficiencies, the postcode lottery of contraception availability is a prime example of this. But it is also a false economy, for every £1 spent on contraception the NHS saves at least £11. The Advisory Group on Contraception research found that the average abortion rate was around 9.7 per cent higher in areas where services were restricted, compared with areas with no restrictions. And some centres like the newly refurbished Margaret Pyke centre is faced with closure despite significant investment in 2013.

Health cuts affect care services and women suffer disproportionately and end up have to bear the burden when the state fails.

There has rightly been a campaign against and media outcry about the announcement of forced ‘academisation’ of all schools by 2020. There will be a wholescale move away from the national curriculum and the nonsensical idea that parents should not have a say in how the school is run. But this will also affect how staff are paid and how that pay is collectively negotiated. The compulsory move to academies is an attack on collective bargaining, which will result in less fair and transparent pay structures and this will affect women’s pay. Collective bargaining helps to create pressure for remuneration decisions to be fair and transparent, that starting salaries are fixed, that maternity pay is the same across the country and that teachers and school staff know they are being paid a fair rate for the job. Anything that undermines this opens up multi-tier pay deals that will leave those in rural or difficult schools less well paid. Wherever collective bargaining has broken down, women’s pay suffers.

It is shameful that the gender pay gap still exists and currently stands at 19%. The biggest single policy that closed the gender pay gap was the introduction of the National Minimum Wage in 1999 and reorganised public sector pay in the 2000s as part of large scale pay and grading programmes went some way to close the pay difference, but in recent years it has stagnated. Women are at the poorest end of the wage scale and the case for equality is not taken seriously enough. Legal requirements for policies to have no detrimental impact on equalities are routinely ignored, despite many commentators highlighting this issue.

The increase in the new National Living Wage is important and 61% of beneficiaries are women. Job growth is important, but women are disproportionately in low paid part time jobs (75% of part time workers are women). The move to low paid, zero hour contracts and spurious self-employment in unstable working environments is not the solution.

On top of this, the TUC have repeatedly pointed out that the ‘motherhood penalty’ still exists, by the age of 42, mothers who are in full-time work are earning 11% less. It is still culturally linked to the idea that men should be the breadwinners, and that women are seen as less committed to work when they return as parents. Research in America found that changes in work behaviour and time out of the labour market may explain some of the motherhood pay penalty but the majority is unexplained.

Unfortunately none of this will be properly dealt with by the gender pay gap reporting proposals from the government, currently being consulted on, due to come in from 2018 because the reporting system is voluntary and companies are not required to give information detailed enough to shine a light on the main causes of the overall gender pay gap within their organisation.

Cameron and Osborne often argue that strong public services like the NHS require a strong economy. But SEB has shown that their central policy of cutting taxes on profits and on high earners has not produced a strong economy. Business investment as a proportion of GDP was higher when the Corporation Tax rate was 30% than it is now with the rate at 20%. Capital gains tax is also down, the higher rate is being reduced from 28% to 20% and the basic rate from 18% to 10% – this is what led to private equity partners paying a lower rate of tax than their cleaners.

It is true that raising the tax free personal allowance will benefit low income women lifted out of paying tax but it disproportionately benefits higher earners and doesn’t help those who already earn less than the threshold. Quite simply these measures mainly benefit double income households where both are high earners.

The reality is that austerity constitutes both a frontal assault on public services and has led to economic stagnation. Under Cameron and Osborne, neither the NHS nor the economy is strong. And, because of the greater exploitation of women and their oppression, they bear the greatest burden of this.

In effect, the Tory policy is to cut pay and public spending in order to fund tax giveaways for businesses and the rich. It is a policy that disproportionately hits women and benefits only the tiniest fraction of society. It isn’t working. There is a clear alternative based on investment in the economy for sustainable growth. The benefits of that growth can be directed to protecting and rebuilding out public services, and so ending the Tory offensive against women.

Rotten Tory ideology laid bare by crisis in steelBy Michael Burke

In order to defeat Osbornomics it is necessary to understand it. A central tenet is that the private sector is the key to prosperity and that therefore everything possible should be done to promote and encourage it. The state should shrink in order to release the inherent dynamism of the private sector. The argument runs that it may be that some people fail temporarily so some sort of safety net may be necessary, if affordable. In this framework, if it is necessary to cut support for disabled people and the poor in order to fund tax cuts for high earners and business, then so be it.

The attack on disabled people has rightly been the focus of hostility to Osborne’s Budget. But this is not an isolated case, as all those who have suffered those cuts can testify. This has been a repeated pattern of Osborne Budgets, supported by all Tory and LibDem MPs beginning in 2010. The right of the Labour Party has had no significant disagreements with it.

At the same time, the long-term decline of the steel industry has turned into a full-blown crisis. In a very useful report the Institute of Public Policy Research (IPPR) debunks the myth that the crisis is due to ‘dumping’ of steel in the EU. The UK loss of market share in core industries producing intermediate goods, such as steel, is twice the rate of the industrialised countries as a whole over the long-term. Despite alleged ‘dumping’ by Chinese firms in Europe, German steel production rose by 2% in 2015.

The IPPR report shows that all of these industries combined have suffered a devastating reversal. While by the end of 2014 UK GDP had recovered by 4% from its pre-crisis level in 2008, the producers of core materials used in manufacturing and construction were still 20% below their pre-crisis level. They are in a deep crisis.

Two trends

These two trends are linked in policy terms; the repeated attacks on the poor and those who should be entitled to support, combined with a decline in key industries. In this way, the central proposition of Osbornomics is revealed by the most striking simultaneous giveaway in the 2016 Budget, which was the further cuts in the tax rate on corporate profits, as well as the cuts to Capital Gains Tax (CGT). 

Osborne has cut CT so that it now stands at 20%. In the 2016 Budget the announced cut to 17% is in effect funded by attacking disabled people and cutting public services sharply in real terms (after adjusting for inflation). He also further cut CGT. It should be remembered that New Labour also cut both CT and CGT.

All of this has been cast in terms of boosting investment and ‘freeing the private sector’. It is nonsense. In Fig.1 below the level of CT is shown against the proportion of business investment in GDP. It also shows the projected level of CT rates that Osborne has announced for future years.

Fig.1 UK Corporate Tax Rate and Business Investment as % of GDP

 

Both the tax rate and the investment rate have been in a long term downtrend. The high-point for business investment over the period was in 1998 and 1999 when the CT rate was 30%. Cutting taxes has not spurred investment. The new freedom for the private sector is a greater proportion of its post-tax return is free to fund excessive boardroom pay, share buy-backs and to fund speculation in financial markets, including housing.

Britain has an investment crisis. This has led to a crisis of production and of jobs. But cutting the CT rate has done nothing to address it as business investment continues to remain weak. All other things being equal, the cut in the rate from 28% to 20% has reduced public sector tax revenues by approximately £30 billion in the current Financial Year. If the private sector will not invest, then the public sector must. Any measures to begin to reverse this unproductive cut in taxes will lead to greater revenues available for public sector investment.

Steel should be renationalised and provided with large scale investment via a National Investment Bank. This and an all-round programme for investment is the way to generate growth and prosperity. On this basis there would be no more cuts to the entitlements of disabled people and others and the cuts to incomes can be restored.

.896ZBuilding an economy that works for all

.633ZOsborne slashes investment and growth. Labour would increase itBy Michael Burke

George Osborne’s stated aim once again is the elimination of the deficit. It was also his stated aim at the beginning of the last parliament. He failed spectacularly as by the May 2015 general election the budget deficit was still 3.1% of GDP. Yet the price of this failure is far greater. His policies have caused widespread misery and slowed the economy. Some economists believe that the damage done is permanent and the latest forecasts from the Office of Budget Responsibility (OBR), which Osborne relies on, have slashed its long-term growth forecasts for the British economy. 

The reason for this failure is a function of a complete misunderstanding of economics in two crucial respects. Investment, not consumption drives the economy. Secondly, Government finances are not wholly independent of the economy, but interact with it.  

In the course of the last parliament Osborne announced total spending cuts amounting to £74.2 billion. Yet total UK public sector current expenditure over the 5-year period from the Financial Year ending in March 2010 to the FY ending in March 2015 rose in real terms (after adjusting for inflation) from £672.8 billion to £673.3 billion. 

Cuts aren’t savings

Asinine right-wing commentators such as John Redwood and others claim that because current spending has not fallen there has been no austerity. The millions of public sector workers who have had their real pay cut, pensions cut or lost their jobs, the people struggling on ever-lengthening NHS waiting lists, the hundreds of thousands of disabled people who have had a variety of benefits cut, the carers who have had to cope with closed Sure Start centres, public sector workers fired, and so on, can all testify that is not the case.

There are three key reasons why cuts in current spending have not led to reductions in the current spending under Osborne. Cuts in one area lead to increased cost pressures. The largest of these is probably the cuts to social care putting pressure on the NHS Budget. Secondly, the economic effects of Tory policies increase Government current spending. So for example, rising in-work poverty puts upward pressure on in-work benefits, and rising housing costs increase the subsidy to landlords from housing benefit. Thirdly, Osborne has used Government finances to promote consumption, especially in housing as part of his re-election strategy. This includes ‘Help to Buy’ and a number of other schemes.

Fig.1 below shows that Public Sector Current Spending has only fallen modestly from elevated levels associated with the crisis (pushed higher by rising unemployment payments and other social protection). It is still way above pre-crisis levels. By contrast, it is government investment that has been slashed. This is a key contributor to weak growth and worse-than-expected government finances, including stubbornly higher current spending.

Growth is the key

A very clear exchange took place on BBC Radio 4 on the morning after Osborne’s Budget. The interviewer wanted to reduce John McDonnell’s policy focusing on investment to a secondary matter. Justin Stewart said, “We’ll come to investment. But you can’t balance the current budget with investment can you?” John McDonnell replied, “Yes you can. You raise the level of growth and so tax revenues go up.” This is precisely correct (and the interviewer was somewhat lost as a result). It is also the case that current budget outlays will fall too with higher investment-led growth as more people are in better-paid jobs.

The Labour contrast with Osborne is stark. As Fig.1 shows public sector net investment has been slashed under the Tories. The latest Budget shows the plan is to cut it further despite all the parading in high-vis jackets. In the years 2018 and 2019 the intention is that government capital spending will fall outright. As business investment has also been much weaker than forecast, the Tory government’s actions exacerbate the key failing of the economy. There can be no serious hope that productivity will increase or that exports will grow significantly with falling investment.

In fact, Osborne and the OBR seem to have given up on hope. Their previously over-optimistic forecasts have given way to a much reduced long-term growth outlook. But they have failed to understand cause and effect. Austerity halted a mild recovery in business investment and cut government investment outright. Hardly anyone, except Osborne is surprised then when growth is weaker as a result and government finances do not improve as expected.

The alternative from John McDonnell and Jeremy Corbyn is correct, borrowing for investment while aiming to balance the current budget over the business cycle. It should also be clear that this is the sustainable foundation of decent public services. Rising investment will primarily impact government finances by raising the level of current tax revenues, and to a lesser extent reducing government current spending. The greater the sustained level of investment, the greater the funds available for public services. A third impact of rising investment will be to increase government capital revenues, but this is a relatively small effect compared to the first two effects. 

This issue is crucial in generating popular support for an investment-led programme and will be addressed in future pieces.

.750ZWhy China can achieve its 6.5% growth rate targetBy John Ross

Economic targets for China were announced during the National People’s Congress of at least 6.5% annual GDP growth during the 13th Five Year Plan in 2016-20 and 6.5%-7.0% for 2016. Some Western economists claim such targets cannot be achieved. In fact, analysis of supply side factors, which will primarily be relied on to achieve this goals, shows clearly why China can achieve its 6.5% minimum growth goal.

Current international economic trends, particularly trade, are undoubtedly unfavourable owing to slow growth in the advanced economies. Slow trade growth negatively affects China’s supply side, as with all countries, by limiting its ability to benefit from international division of labour. In the next period China will consequently will have to rely primarily on domestic supply side factors to achieve its growth targets. Data on global growth in turn shows clearly which are the most powerful economic supply side forces and why these can successfully allow China to achieve its targets.

To understand clearly the fundamental reason China can achieve its economic goals the starting point is that an economy’s growth rate is strictly determined by the percentage of fixed investment in GDP divided by what is known as the Incremental Capital Output Ratio (ICOR) – the latter being a measure of the efficiency of investment, and equal to the percentage of GDP that has to be invested for the economy to grow by 1%. For China the latest internationally comparable World Bank data for these, for 2014, showed that China’s percentage of fixed investment in GDP was 44.3% and its incremental capital output ratio was 6.1. China’s GDP growth rate was therefore 7.3%.

Since 2014 the percentage of fixed investment in China’s GDP has fallen, probably to around 42-43% of GDP, which will be assumed to show why China can achieve its 6.5% growth target. Supply side factors may then be divided into the rate of fixed investment and those which determine the efficiency of that investment (ICOR).

The most powerful supply side factor for all countries studied is what are known technically as ‘intermediate products’ – one industry’s inputs into another which reflect increasing division of labour throughout the economy’s supply chain. In the US, the world’s most advanced economy, 52% of economic growth is due to growth in such intermediate products.

Growth of intermediate products is also crucial for understanding the role of innovation. Innovation is not just a few ‘big bang’ inventions. As an economy is an interconnected network it can only be as strong as its major weakest links. For example, merely installing the most modern machinery in a factory will not yield optimal results if there is not an adequate supply of component parts, if there is not sufficiently skilled labour, if the logistics system does not efficiently take products to and from the factory etc. Given the economy’s interconnectedness every part must function efficiently for successful operation. China has therefore stressed applying innovation across the entire economy.

Such a supply side division of labour requires a multitude of factors ranging from infrastructure to product standardisation – all of which China has to develop further for its supply side to function efficiently.

The second most powerful supply side factor is fixed investment – which is above all required to incorporate technological upgrading. Leaving aside intermediate products, internationally fixed investment accounts for 61% of economic growth.

The third most powerful supply side factor is growth in quantity and quality of labour – accounting for 29% of GDP growth globally. Given China’s working age population is not expanding improvements in education and skill are a decisive factor in this area.

Other inputs (scale of production, individual entrepreneurship etc) account for an average 10% of growth globally. These are technically termed Total Factor Productivity (TFP) and contribute to China’s supply side development.

Taking these factors together shows why China’s 6.5% growth rate is entirely realistic and why the claims of Western critics are erroneous. Given the fundamental ratios already outlined then for China’s economic growth rate to fall below 6.5%, from its 6.9% level in 2015, one or both of two things would necessarily have to occur.

• Either China’s ICOR, its efficiency of investment, would have to deteriorate substantially, or

• The percentage of fixed investment in China’s GDP would have to decline in a major way.

Without one or both of these occurring it is simply numerically impossible for China’s growth rate to fall significantly. Those critics claiming that China’s economy will not meet its 6.5% growth target, and who either do not explain why China’s level of investment or its efficiency of investment are going to drastically decline, are engaging in economic ‘hot air’ – unwarranted claims without any serous factual basis.

Given China’s current investment level and the efficiency of that investment there is no reason why it will not achieve its 6.5% growth rate.

John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

.496ZJohn McDonnell lays the basis to restore Labour’s economic credibility with the ‘Fiscal Credibility Rule’ By Michael Burke

Labour lost the last general election because it had no economic credibility, as the overwhelming bulk of opinion polls show. John McDonnell’s new ‘Fiscal Credibility Rule’ decisively and correctly addresses that issue.

“Labour would balance tax revenues and day-to-day spending over a five-year cycle, but this target would exclude long-term investment projects, allowing Labour to spend billions on projects such as housing, railways or high-speed broadband”, is how The Guardian summarised the new policy framework.

Despite an inevitably hostile Tory media McDonnell’s approach can succeed because it is correct. It stands in sharp contrast to George Osborne’s fiscal rules which place a ban on all borrowing for productive investment. This is Neanderthal economics which has the support of hardly any serious economist, even on the right. It also gets rid of the confusions of the ‘keynesian’ left of the Ed Balls type – which had little to do with the views of Keynes and fatally undermined Labour’s economic credibility.

Basic economics

All economic policies, including fiscal rules should be set within the basic laws of economics. Unfortunately after decades of the dominance of the Thatcherite economics which led to crisis, economic debate has been debased and a crop of crackpot ideas has grown up, Osborne’s among them. 

A significant increase in production requires investment in the means of production. Prosperity cannot be raised by no investment, as Osborne suggests. For example his policy has been to encourage consumption without increasing investment in areas such as housing. The net result has been a growing housing shortage. In effect he raised demand for housing without increasing investment. The effect was higher prices, just as the textbooks say. Across the whole economy the effect has also been to increase indebtedness. Household debt has soared along with overseas debt. This would be the effect of all schemes which see consumption as the key to growth.

Therefore McDonnell’s Fiscal Credibility Rule is correct. Increasing investment, and in conditions where private investment is low Government borrowing to achieve it, is the only sustainable mechanism for increasing output and the prosperity that depends on it. At the same time current or day-to-day spending will be balanced over the medium-term cycle. This too is correct, as it allows Government to respond to any downturn in the economy by raising spending. But under ordinary circumstances current spending should be balanced by tax revenues.

Misplaced criticism

Both of these policy planks have come under attack. It is widely argued that McDonnell’s rule is the same as Gordon Brown’s ‘Golden Rule’. Sometimes this is said as a result of a genuine misunderstanding. It also argued that the commitment to balance current spending with tax revenues means a commitment to maintain austerity. Both of these arguments are false.

The claim that John McDonnell is rehashing Ed Balls, made by commentators such as John Rentoul, is pure bullshit confirming that they do not understand basic economics, and the difference between investment and consumption. The difference between John McDonnell and Gordon Brown is that McDonnell is in favour of a massive increase in public sector investment. Brown slashed it to record lows. He only increased it later in response to the crisis.

In the 1960s and early 1970s public sector net investment had frequently exceeded 6% of GDP. Thatcher cut that to a low-point of 0.7%. But Blair and Brown kept it at 0.6% of GDP for 3 years at the beginning of their time in office. Later, Brown did increase public sector investment in response to the crisis which was crucial to economic recovery. But that was after a crisis in which chronically low levels of investment and high levels of speculation played a decisive role.

Brown’s was an entirely wrong economic policy – the reverse of what is required. It is government current spending which should be allowed rise temporarily in response to crisis, while investment should be maintained at persistently high levels. This is what John McDonnell proposes, and Gordon Brown did the exact opposite.

The separate argument that a commitment to balance current spending over the cycle is to adopt austerity is foolish and muddle-headed. The budget is comprised of two elements, outlays and revenues. A commitment to bring these two into balance says nothing about cutting spending, simply that taxes must match that current spending. 

The most effective way to increase tax revenues and to lower current spending is to grow the economy. SEB has previously referred to UK Treasury research which shows that government finances improve by 75 pence for every £1 increase in GDP. The excellent research is unjustly overlooked because it shows the very high sensitivity of government finances to changes in output. 

By implication it also shows the fundamental relationship between government investment and the provision of public services and social protection that are the key to a decent society. If the output multipliers from a change in output are generally about 1.5 or more and the sensitivity of government finances is 0.75, it possible to calculate the immediate effect on government finances from every £1 increase in investment as follows:

Therefore there is an immediate positive return to government finances of 12.5% from every £1 invested. A 12.5% return is a very large multiple of current government borrowing costs as the yield on long-term gilts (UK government bonds) is around 1.5% (and the yield on inflation-proofed or index-linked gilts is negative).

If done on a sufficient scale, from this return it is possible to commit further investment, improve public sector services and improve government finances. The new investment asset (housing, super-fast broadband, renewable energy production and so on) will also yield a return over the long-term either directly or indirectly.

Therefore there should be no fear of scary headlines of the type that ‘McDonnell plans to borrow billions’. State investment is correct under current circumstances, and state investment is supported by the leading economic commentators such as Martin Wolf. It clearly correctly distinguishes Labour from the Tories and voters will increasingly grasp that such investment is crucial. 

Borrowing for investment, not for consumption, is also key to rebalancing the economy. This means increasing the role and weight of the productive sectors of the economy and thereby producing a reduction in the role of speculative finance. It is logically impossible to persistently borrow for consumption and to reduce the weight of the finance sector in the British economy. As consumption does not lead to growth the only thing that will grow is government debt and the interest on it, which is the mainstay of speculative finance. This is why debt as a proportion of GDP has ballooned under Osborne from 65.2% of GDP to 83.7% of GDP even when interest rates are ultra-low.

It is evidently wrong to suggest that John McDonnell’s Fiscal Credibility Rule is either a rehash of Gordon Brown’s Golden Rule or a commitment to austerity. It is a recognition that investment leads growth while consumption cannot, and that very large government investment is required because of private sector failure. It codifies that understanding for government finances. As a result it can restore much-needed credibility to Labour’s economic policies.

.386ZLabour right-wing still in the austerity dead end

But Osborne’s argument that more austerity is required because there is a slowdown is as false as his other claims. It should be noted that Osborne’s austerity approach goes completely unchallenged in the so-called alternative budget. The effects of Osborne’s first bout of austerity should be well-known to readers of SEB:

· Average living standards (per capita GDP) stagnated
· Real wages fell
· Public services are in crisis as jobs were cut
· The public sector deficit was not eliminated, and actually rose in 2012 as the economy slowed to a crawl
 · Productivity actually fell, which had only previously occurred in the early years of World War I and in the Great Depression

In economic terms, renewed austerity is equivalent to applying leeches to the patient when the previous quack remedy has failed. As the effects of austerity fall mainly on ordinary workers and the poor, the social effects are enormously damaging. 

It is clear that what is actually required is a strategy for investment-led growth. This will address the economic crisis directly and so will correct the deficit in government finances in the process. Fortunately, this is possible with the new economic framework outlined by Jeremy Corbyn and John McDonnell .

In contrast to the note from Rachel Reeves the new leadership of the Labour Party has identified the deficit of investment as central to the economic malaise facing Britain. In the US they talk of ‘secular stagnation’ or tepid growth because investment has only expanded by 10% in the years 2007 to 2014, according to World Bank data. In Britain investment has increased by just 7.8% in those 8 years. This little more than half the world rate of investment growth (14.2%) which is itself weak by historical standards.

The policy of asking and bribing the private sector to invest, a policy shared by Osborne and the Labour right, has failed spectacularly at Hinkley and elsewhere. Fewer homes are being built despite soaring prices, flood defences have been allowed to deteriorate and the rail network is truncated and overloaded, there is a looming energy capacity crisis while investment in renewable energy has been cut, and so on.

Labour’s new leadership argues that the public sector should increase its level of investment, in order to address this deficit and to spur growth. Relying on the private sector to lead has been tried and failed. In addition, unlike the hopes or pious wishes of both Osborne and Reeves, they have identified the means to achieve this increase in public sector investment, principally through the establishment of a National Investment Bank. This can borrow cheaply in the financial markets with the implicit guarantee of the UK Treasury. It can also ensure that the returns on the investment accrue to the public sector and that the investment stream is maintained even if private sector profitability is insufficient, or deteriorates.

It should be noted that this authentic version of a National investment bank has almost nothing in common with Osborne’s sop of a Green Investment Bank or Nick Trott’s version produced under Ed Miliband, which was aimed at providing loans to small firms where the commercial banks have refused. As small firms are not engaged in large scale housing programmes, or construction of rail networks, or the huge investment needed in renewables, this would be rather pointless to address an investment crisis. 

Ending austerity

The word ‘austerity’ does not appear in the alternative Budget from Rachel Reeves. This is for the very good reason that the Labour right believes it is inevitable, and has only ever argued for slower or shallower cuts at most.

By contrast Corbyn and McDonnell have outlined the economic policy framework which can end austerity by investing for growth. The clear distinction in borrowing only for investment and balancing current spending over the business cycle is the correct framework as it is the only one which is sustainable because it maximises the government impact on growth and living standards, and the returns to government from that investment.

It is also a strong base from which to attack Osborne, who rules out even borrowing for investment (although in reality he has doubled the level of government debt by borrowing to cover current spending, which is clearly unsustainable). Osborne’s policy, to save first and only invest when there are sufficient accumulated funds, belongs to a pre-banking, pre-financial era. It is as stupid as it is primitive. 

The Corbyn/McDonnell framework also stands in sharp contrast to the accumulated confusions of ‘keynesians’ (who have little to do with the views of Keynes) who believe governments can perpetually borrow for consumption, rather than as a temporary measure to avert crisis. As this entails debt and interest on it without raising the level of output, so it becomes a drain on the economy and slows growth.

Osborne and Reeves share the view that the private sector should be left to determine the level of investment in the economy and consequently to maintain or extend its near-monopoly on the ownership of the means of production. They maintain this even when the private sector is manifestly failing to deliver adequate investment. Of course, the ‘keynesians’ are opposed to austerity and its effects (unlike Osborne and Reeves) but they lack a credible framework to achieve an alternative because they refuse to clearly distinguish between the economic consequences of borrowing for consumption and borrowing for investment.

Corbyn and McDonnell do have the framework to achieve that and a mechanism to do so. Not only are they committed to ending austerity but their plan to increase public sector investment via the National Investment Bank means the public sector can borrow sufficient funds for the scale of investment and direct it towards the sectors required. 

The consequent increase in growth will allow them to halt all austerity policies and to roll them back. Government revenues will rise with increased economic activity and government outlays will fall as decent well-paid jobs are created. This is a deficit-reduction programme based not on cuts but on growth, and a commitment to both social welfare and rebuilding public services in the transition to a stronger growth economy and beyond. Because it is theoretically grounded, this is a genuine, practical anti-austerity policy.

.127ZThe giant consequences of China’s 6.5%-7.0% growth target
By John Ross
The following analysis of China’s decision to adopt a growth rate target of ‘at least 6.5%’ for its new 13th Five Year Plan for 2016-2020 originally appeared at China.org.cn.

The economy tops the agenda at this year’s National People’s Congress (NPC) with a focus on both prospects for 2016 and the 13th Five Year Plan for 2016-2020. Discussion on both was framed by two major events. On March 4, Chinese President Xi Jinping made key statements on China’s long term economic strategy while attending a panel discussion at the annual meeting of the Chinese People’s Political Consultative Conference (CPPCC). On March 5, Premier Li Keqiang delivered the government’s work report to the NPC focusing on medium to short term targets. The relation between the two was clear.
At the CPPCC, Xi Jinping reiterated that China’s fundamental economic structure would continue to be based on “diverse” forms of ownership which would develop side by side with a state sector that would play the “dominant” role – a firm restatement of China’s fundamental economic strategy since reform was launched in 1978. This economic structure generated in 1978-2015 an average annual GDP growth of 9.6 percent – the fastest sustained expansion by a major economy in history.
Xi Jinping’s emphasis may be placed in the context of two statements he made in November. At a politburo study session China’s president emphasized that a Marxist political economy would continue to guide China’s economic policy. Following a meeting of the Communist Party of China’s Central Committee, the president stated that economic growth during the 13th Five Year Plan period must average “at least 6.5 percent.”
Premier Li Keqiang’s work report to the NPC outlined medium to short term projections within these fundamental parameters. As the international media focused attention on 2016’s growth target of 6.5-7.0 percent, and the Five Year Plan’s minimum annual 6.5 percent, these will be analyzed first.
Qualitatively, China’s target is to achieve a “moderately prosperous” society by 2020. This translates into the Five Year Plan’s arithmetic.
To achieve “moderate prosperity,” the previous 12th Five Year Plan set the goal of doubling GDP for 2010-2020 – requiring a 7.2 percent annual average growth over the decade. However, in 2010-15 growth was faster than the targeted rate – averaging 7.8 percent. To complete the goal by 2020 now requires 6.5 percent growth. This constitutes the basis of the “at least 6.5 percent” target during the 13th Five Year Plan reiterated in Li Keqiang’s government report. The 2016 growth target is to meet or exceed the annual rate required to achieve “moderate prosperity” by 2020.
Both the Five Year Plan and 2016 targets are aimed at achieving their goals without economic overheating. In 2016, inflation is forecasted at 3 percent, accompanied by a budget deficit of 3 percent of GDP – modest by current international standards. Environmental protection is emphasized with energy consumption per unit of GDP targeted to fall by 3.4 percent in 2016. The Five Year Plan, for the first time, incorporates a total cap on annual energy consumption – an equivalent of 5 billion metric tons of coal by 2020. To sustain technological innovation, R&D expenditure will rise from 2.0 percent of GDP in 2015 to 2.5 percent by 2020.
Socially, strong emphasis was given to poverty reduction, with central government funds being increased by 43 percent in 2016. Over the course of the Five Year Plan, all of China’s 70 million people remaining in poverty will be lifted out of it, with 2016’s goal being 10 million. Life expectancy, the most sensitive overall indicator of social well-being, is projected to rise by a further year during the Plan.
Achieving these goals will have truly dramatic consequences for China, constituting an enormous increase in human wellbeing. But to understand the world changing consequences of China achieving these goals, and therefore the scale of challenges faced, it is necessary to translate these figures into international standards.
China in 1949 was one of the world’s least developed and poorest countries and has already transformed the world by achievements in poverty reduction. From 1981 to the latest World Bank data, 728 million people in China were lifted out of internationally defined poverty – the whole of the rest of the world achieved only 152 million. Now, after 37 years of rapid growth, China is about to transform the world towards the top range of international income levels.
“Moderately prosperous” is a specifically Chinese target, but the World Bank establishes an international criterion for a “high income” economy – per capita GDP of $12,736 in 2016. While exchange rates would affect the exact figure, China achieving the 13th Five Year Plan’s growth and inflation targets would bring it to the threshold of or exceeding World Bank criteria for a “high income” economy.
But in the latest World Bank data, the combined population of all high income economies is 1.368 billion, while China’s population is 1.364 billion. China entering the ranks of high income economies would, in a single step, double the number of people living in these countries.
Chinese people achieving “moderate prosperity” would transform the global economic situation. It would also transform China’s position in the world, being reflected in corresponding changes in China’s defence spending and foreign policy weight. But as a consequence, rather than concentrating on the enormous step forward for humanity that China’s “moderate prosperity” would constitute, some forces are attempting to block China’s rise – even if this means China’s people, one fifth of humanity, would not achieve prosperity.
The most powerful such forces are U.S. neo-cons whose goal, in the words of a recent study for the U.S. Council on Foreign Relations on “Revising U.S. Grand Strategy Towards China,” was, “preserving U.S. primacy in the global system ought to remain the central objective of U.S. grand strategy in the twenty-first century.” To practically achieve this, it called for “new trade arrangements in Asia that exclude China.” Parallel anti-China propaganda campaign attempts are seen as otherwise inexplicable attempts to portray China as facing a “hard landing” when China’s growth rate is almost three times that of the U.S. with China adding more to the world’s GDP each year than the U.S.
The fact China has set a growth rate goal of 6.5 percent and above for the next five years has a far greater significance than in domestic terms alone. It is the most important economic target on the planet.John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0