Socialist Economic Bulletin

Socialist Economic Bulletin

Staring in to the future by looking at Japan’s past

June 1, 2016 Uncategorized

Staring in to the future by looking at Japan’s past
By Michael Burke

The G7 meeting in Tokyo ended inconclusively, with no agreement on how to lift the advanced industrialised economies out of stagnation. The venue was appropriate. It used to be commonplace to talk of a Japanese ‘lost decade’ yet the recession that generally began in the G7 and elsewhere in 2008 is now 8 years old. Without any programme to end the crisis, Western governments are following the Japanese path, with a repeat too of the failed policies of successive Japanese governments.

In reality is there has now been a lost generation in Japan. The Japanese economy has effectively stagnated for 25 years. Since the stock market and property bubbles burst in 1989, Japan’s real GDP growth has on average been well under 1% per annum. In nominal terms the economy is substantially smaller now than it was in 1997 as deflation has also taken hold of the economy, that is persistent falls in the price level.

The source of the Japanese crisis is the slump in investment. In 1990 the proportion of GDP devoted to investment (Gross Fixed Capital Formation) was 29.7%. By 2014 it had fallen to 20.3%. While GDP as a whole has crawled along since the bubbles burst, investment has fallen outright, as shown in Fig.1 below.

Fig.1 Japan Real GDP and GFCF

Yet bizarrely this has not prevented the growth of a cottage industry devoted to claims that the Japanese crisis is based on over-investment (pdf). Even more extreme is the notion that it is excessive investment by the Japanese public sector which has caused the crisis, or at least has been useless in counter-acting it. This reaches ludicrous proportions with anecdotal evidence about ‘bridges to nowhere’ substituting for economic analysis. This propaganda against public sector investment obscures a central fact- that Japan’s public sector investment, like investment as a whole, has been cut and is contributory factor in the investment-led downturn (Fig.2).

Fig.2 Japan Government GFCF as Proportion of GDP
Yet there has been no shortage of ‘stimulus packages’ by successive right-wing Japanese governments, including by the current one under Abe. One estimate is that these combined stimulus packages during the crisis amount to Yen75 trillion, well over 15% of current GDP.

However, these packages typically took the form of a stimulus to consumption. Where there was any focus on increasing investment this took the form of incentives, subsidies and outright bribes to the private sector, especially to the construction sector which is one of the main funders of the LDP and in whose interests it serves. As noted above, government investment was cut. But the private sector does not consider that increasing investment is in its own interests, which would be to increase profits.

Subsequently, these packages have been supplemented by a series of apparently ground-breaking policies including money-creation, inflation-targeting, deregulation, and currency devaluation. None of this has led a to a revival of investment. Therefore the crisis is unabated.

Could it happen here?

The Western advanced industrialised economies have nearly had a lost decade of their own, from 2008 to 2015. In all cases their growth has been weaker than the initial period of Japan’s lost decade from 1990 onwards which did not begin with outright recession. This is shown in Table 1 below.

Table 1 Selected Economies Real GDP Growth 2008 to 2015, % (national currency basis)
Source: OECD, author’s calculations
The Japanese economy did not first contract until 1998. Instead, the burst bubbles led to a sharp deceleration in the growth of GDP. The investment decline began much earlier, in 1992. For a time, the Japanese economy was able to continue growing by drawing on the fruits of previous high levels of investment.
 
The Western advanced industrialised economies, primarily the US and EU (as well as the UK) had no such luxury. They each had relatively low levels of investment before the financial crash. Compared to Japan’s investment/GDP rate of 29.7% prior to its crash, the US rate was much lower. US investment as a proportion of GDP peaked at 22.5% in 2005. For the EU (28 countries) the same peak was reached later, in 2007, confirming that the US was the source of the global Great Recession. The UK is a long-term low-investment economy and its investment rate peaked at 18.3% of GDP in 2007. 

It should be noted that in all cases the fall in investment preceded the decline in GDP, often by some years. Falling investment in all cases was therefore the main factor driving recession, led by the fall in US investment.

There is no indication to date that the industrialised economies either individually or as a group are correcting this main force driving the Great Recession and the subsequent Great Stagnation. On the contrary, in all cases the proportion of GDP devoted to investment has failed to recovery its pre-recession peak (Fig.3). Even this picture may be flattering as indications around the turn of this year were that investment is once more weakening.

 
Fig.3 Investment as Proportion of GDP in the Advanced Industrialised Countries
The G7 is considering many of the same failed options as Japan, or has already implemented some of them. It is a myth that Japan has tried increased public investment and failed. Factually, the opposite is the case. Japan cut public investment in the crisis, which deepened it. In order to get itself out of crisis the G7 would need to do the opposite by increasing public investment.

US productivity declines

May 26, 2016 Uncategorized

US productivity declines
By Michael Burke

US productivity is set to decline for the first time in three decades, according to forecasts from the influential business research organisation the Conference Board. The level of productivity, which is the amount produced per hour of labour, is decisive for living standards. It is extremely difficult to increase the living standards of the mass of the population without increasing productivity, and impossible to do so on a sustained basis. The Conference Board is forecasting US productivity will decline in 2016.

The Financial Times quotes Bart van Ark, the Conference Board’s chief economist saying, “Last year it looked like we were entering into a productivity crisis: now we are right in it”. Fig.1 is the Conference Board chart reproduced from the FT. Rising productivity has been a feature of the US economy since the crisis of the early 1980s.

Fig. 1 Conference Board changes in US productivity -via FT
 

But the chart also shows US productivity growth has been exceptionally weak in the recovery phase since the 2008 crisis. This weakness or outright falls in productivity is a generalised feature of the advanced industrialised economies since the crisis.

The cause is easily identified. Weak productivity growth is associated with weak investment growth. Outright falls in productivity have followed declines in investment. This is the pattern evident in the US economy. Fig.2 below shows Federal Reserve Board of St Louis data on the level of real investment (Gross Fixed Capital Formation) in the US economy, which is falling.

 
Fig.2 Level of real Investment (Gross Fixed Capital Formation) in US
 
The level of productivity is expected to fall after the level of investment has already fallen. In effect, more workers will be attempting to produce goods and services with fewer machines to hand. As a result the level of that output per hour worked will decline. It is possible, for a period, to make the existing level of productive capacity work harder. But this simply accelerates the deterioration and dilapidation of that capital stock (its ‘wear and tear’) so the rate of consumption of capital exceeds the rate of investment. Net investment falls and with it the productive capacity of the economy as a whole.

Two further points are worth noting. First, the level of investment in the US economy never recovered its pre-recession peak and is now turning lower. The economic outlook is deteriorating as a result, not improving as the policy makers of the Federal Reserve Board seem to believe. 

Secondly, the chart clearly demonstrates that this was an investment-led downturn in the US economy. As the US led the whole world into crisis, therefore it is reasonable to state that the Great Recession was caused by the US investment decline. In the chart above the shaded area represents the period of the recession itself. Evidently investment declined long before the recession began. In fact, it was two years later that recession began, as investment peaked in the 1st quarter of 2006. As the financial crisis of 2007-2008 also followed the investment decline, the millions of words written in support of the idea that it was the financial crisis which caused the recession are factually wrong. It was the fall in investment which caused both the financial crisis and the recession.

Turning to the UK economy, a cottage industry has grown up attempting to obscure the fundamental forces driving the decline in productivity here. SEB has shown that it is the decline in investment, leading to a decline in the net capital stock which has caused the crisis of productivity here, and that all other explanations are spurious. In the words of the FT report, the UK may simply be the ‘canary in the coalmine’, its productivity decline a harbinger of what may happen to the Western economies generally.

The State of the Economy

May 24, 2016 Uncategorized

The State of the Economy By Michael Burke

800 people packed into a recent ‘State of the Economy’ conference hosted by Shadow Chancellor John McDonnell to discuss economic trends and economic policy. This was in addition to the series of lectures that John McDonnell is hosting, with workshops at the conference allowing a more wide-ranging discussion and debate. In addition to important speeches by McDonnell himself and Jeremy Corbyn, there was a very valuable contribution from Ha Joon Chang, along the lines of his recent article in the Guardian.

SEB hopes to post videos and other material from the conference as they becomes available. Here is John McDonnell’s speech that opened the conference (video).

The piece below is based on a Powerpoint presentation at one of the workshops by the present author.

***

The UK economy remains in crisis, in contrast to the assertions of George Osborne and the supporters of austerity. The chart below compares the current slump to the Great Depression in this country and to the slump that followed the onslaught of Thatcherism (Fig.1).

Fig.1 Depressions Compared
At the end of the 1st quarter in 2016 the current crisis was 8 years old, approaching a ‘lost decade’. As the chart shows the current crisis is much worse than either the Great Depression or under Thatcher. SEB previously suggested that this slump would be “twice as bad as Thatcher”, and this judgement has proved correct.

There is no suggestion that the course of this slump will necessarily follow the earlier periods. Major events or external factors intervened. The Great Depression ended with rearmament for World War II. The Thatcher experiment was boosted by the huge windfall from North Sea oil, although the Tories created another recession after the consumption splurge of the ‘Lawson Boom.’

There can be no crystal ball about the trajectory of the economy, but it is possible to identify the key internal dynamics which determine growth. This slump and its predecessors were all led by a crisis of investment. At the same time, it is impossible for an economy to grow sustainably over the medium-term if it has a low and/or falling level of investment. This characterises the current crisis in the economy (Fig.2).

 
Fig.2 Change in GDP and its components since the crisis began
 
The economy overall remains close to stagnation, so that average living standards cannot rise. But the modest increase in GDP since the crisis is almost entirely driven by rising consumption. The combined increase in household and government consumption amounts to £84.3bn. But the rise in investment is just £5.8bn. Since the crisis the proportion of investment has amounted to just 5% of GDP. As this is below the rate of capital consumption (capital used up in production, or which dilapidates), the stock of capital in the British economy is falling. As a result the capacity for future increases in output is declining. At the same time, an inevitable consequence of growth which relies almost entirely on consumption while net investment falls is a rising trade deficit. The trade gap has widened once more to record levels even during a period of stagnation.

The key factor in this investment-led crisis is the weakness of business investment (Fig.3). There has been no recovery at all in business investment and it remains below its pre-crisis level, even though both GDP and consumption have recovered. As the chart shows, the fall in business investment preceded the decline in GDP and led the whole downturn. Business investment as a proportion of GDP has declined markedly over the period and is now falling once more in outright terms. ‘Demand’, by which is meant consumption, has not led growth.

 
Fig.3 Weakness of UK Business Investment
Source: ONS
Over time, Britain and the other advanced industrialised economies have increasingly adopted the US model of economic growth, particularly from the 1980s onwards (Fig.4). This is a model based on rising consumption as a proportion of GDP and consequently a declining proportion of GDP directed towards investment.

However, the consequence of this is plain. As consumption has risen as a proportion of GDP, the growth rate of consumption has slowed sharply. This apparent paradox relates to the sources of growth. Investment is a key input into economic growth while consumption is not. So, as consumption claims an ever-greater share of GDP and investment a diminishing share, the growth rate of the whole economy slows. Consumption then slows with it.

By contrast economies with a high and/or rising proportion of GDP directed to investment will produce higher rates of GDP growth and consumption can grow more rapidly. But this is not the US or Western model.

 
Fig.4 US Consumption share in GDP and consumption growth
 
The same trends are evident in the British economy (Fig 5.). The proportion of consumption and the growth rate of consumption in the UK are inversely correlated. As the proportion of consumption in the economy rises, the growth rate of consumption falls, and vice versa.

The US-led Western model of growth can be summarised as ‘shop till you drop’ and consumers frequently do. Slow growth economies produce flat or falling real incomes and consumption is

increasingly financed by debt, until the point at which the debt becomes unsustainable.

 
Fig.5 UK Consumption share in GDP and consumption growth
 
This fundamental economic context demonstrates why the fiscal framework set out by John McDonnell is correct. The commitment to borrow only for investment provides the optimal basis for sustainably higher rates of growth. The claims that this is austerity-lite or similar to failed Labour policies of the past are misplaced or disingenuous.

The crucial difference lies less in the specific fiscal rules than in the economic context. The entire theme of the State of the Economy conference was the need to substantially increase investment. Previous governments cut investment and adopted Tory spending plans. In those circumstances, it is only possible to balance the current spending budget by applying a brake to it. The level of government spending as a proportion of GDP was on average lower in the New Labour years than under Thatcher.

By contrast, if investment is increased the economy will grow more rapidly and consequently tax revenues will grow more rapidly. It is also likely that social welfare payments will fall as more people are in better-paid work. Both of these revenue and expenditure headings are in the Government current spending account. Increased investment will cut the current spending deficit.

The scale of problem requires this break from past economic orthodoxy in Britain. The depth of the crisis means that traditional ‘demand management’ and muddling through will not work. It may even be that ‘People’s Quantitative Easing’, that is money creation for investment purposes, is necessary.

The general rule is that the greater the increase in investment the faster the economy can sustainably grow and the more rapidly the deficit on current spending will decline, which is the basis for Labour’s economic plans. There is no sign that anything else is likely to rescue the British economy.

Slowdown is made in Downing Street

May 12, 2016 Uncategorized

Slowdown is made in Downing StreetBy Michael Burke

It is now customary for George Osborne to blame all the ills of the British economy either on overseas economic weakness or more recently the ‘uncertainty’ over the Brexit debate. This is nonsense. The renewed economic stagnation is directly related to the policies the Tories have pursued.

The three most widely discussed symptoms of the renewed stagnation are the decline in retail sales, the widening of the trade gap and the fall in production. Of these the fall in production is the most important.  

This point may require explanation, primarily because the strength of the neoliberal counter-revolution in economics has tended to drag all other schools of thought in its direction. As a result, there is widespread confusion on these matters as if to suggest that consumption, or wages, or some other factor can lead the economy.

Marx argued (in Grundrisse and elsewhere) that,

“The conclusion we reach is not that production, distribution, exchange and consumption are identical, but that they all form the members of a totality, distinctions within a unity. Production predominates not only over itself…..but over the other moments as well. The process always returns to production to begin anew. That exchange and consumption cannot be predominant is self-evident.”

It is self-evident that exchange and consumption cannot be predominant for the simple reason that it is impossible to exchange or consume a good or service before it has been produced. It is sometimes suggested that this is only true of pre-monetary economies. An individual or a whole economy can borrow so that the level of consumption rises beyond their share of what has been distributed to them after production. Very true. But since the money borrowed has to be paid back plus interest, the borrowing amounts to a claim on future production.

Production-trade-retail sales

This fundamental point applies to analysis of the current state of the British economy. Production and manufacturing are both in recession, that is at least two consecutive quarters of declines. The trade gap has widened to record levels. But retail sales have only just begun to falter by recording falls in February and March.

Osborne and others want to claim this is a result of Brexit ‘uncertainty’. But if British-based companies were cutting back on investment this would be reflected in lower import demand for investment goods. If British consumers’ greater uncertainty led to lower consumption, then this should be reflected in lower imports of consumer goods. In both cases the trade gap would narrow.  

At the same time, there has been no crisis of ‘demand’ in the British economy, if by that is meant under-consumption. Retail sales have been far stronger than either production or exports since the recession. This is shown in Fig.1 below.

Fig. 1 Consumer demand versus output
  

Retail sales, which are primarily the key discretionary part of household consumption, have risen modestly since the beginning of the recession, up 6.5%. But output is now in its third recession in 8 years and has fallen back towards levels last seen in the depth of the Great Recession itself. It has fallen by 10%. Quite logically, if production in Britain is falling but consumption is rising, then the trade gap must grow.

To be clear, there is the same broad pattern when total consumption is taken into account, that is household discretionary and non-discretionary consumption plus government consumption. Like the rest of the economy Government has increased consumption and cut investment. The totals for consumption and investment are shown in Fig.2 below.

Fig. 2 UK Consumption and Investment
 
It is not the case there is no growth in consumption in the British economy. It is growing at a modest pace. But investment is effectively unchanged over 8 years, up by just 2%. This is the crucial weakness of the British economy, which is an extreme case of the general malaise afflicting the advanced industrialised economies.

This in turn accounts for the widening trade gap. Producers based in Britain are losing market share globally and domestically. As the world economy is not far from stagnation this leads to falling output. In addition, as the growth of consumption in Britain is greater than most competitor economies, which Osborne claims as a sign of success, this leads to the growth of imports outstripping the growth of exports by some distance. This cannot be solved by devaluation. This has already been tried and failed. The pound is still 16% lower against a basket of major currencies than it was prior to the recession.

It is investment which is the source of the falling levels out output and the widening trade gap. In addition, household income growth has been weak and real wage growth almost non-existent over a prolonged period. Therefore the rise in consumption has been achieved by a rundown of savings/increase in borrowing by households. The household savings ratio has fallen to a new all-time low of 3.8% (Fig.3 below).

 
Fig. 3 Household savings ratio
 
Of course, wages cannot sustainably rise if production is falling. The squeeze on profits if businesses cannot force down wages means profits are cut and output cuts follow. This is what has happened in the steel industry, for example. Rising wages requires rising output. That can only be sustained by increasing investment.

Osbornomics and its followers

There have been two distinct phases to the Tory offensive. The first was to cut government spending, both current spending on services and capital investment. But, as both of these cause economic downturn, then government spending on social security (or other items like working tax credits) tends to rise. This is widely understood as austerity.

The second phase was purely for electoral advantage and began in earnest in the March 2013 Budget. This promoted private consumption, most obviously with policies such as ‘Help to Buy’ and other schemes. This was combined with a halt to new cuts in current spending while continuing to cut public investment. 

It is this sequence of policies combined which has brought about the current crisis. The austerity policy led to a renewed downturn in the economy and a widening public sector deficit. The austerity mark II policy led to an unsustainable rise in consumption. It also led to inflation of asset prices, especially the damaging rise in house prices. In textbook fashion, ‘demand’ for housing was increased with extra funds, without any increase in supply, that is investment in new housing.

All of those, however well-meaning who now argue for further measures to boost ‘demand’ (meaning consumption) would simply repeat Osborne’s highly damaging policy in a new form. This is the case with Adair Turner’s call for monetary financing to boost nominal demand, known as ‘helicopter money’ (pdf).

There is nothing intrinsically wrong with money creation. It is especially useful in extreme cases where the economy is slowing sharply and/or there is a risk of sustained deflation; prolonged falls in the price level. But we have already shown that the British economy is not suffering a deficiency of ‘demand’. It is once more in crisis because there is still a slump in investment.

If instead monetary measures are used primarily to boost consumption there will be a re-run in some new form of Osbornomics. This relates to a fundamental economic law. The greater proportion of output devoted to investment the higher the growth rate of the economy (and ultimately the sustainable rise in the level of consumption). The greater proportion of output devoted to consumption the slower the growth rate of the economy (and the same negative consequences for the level of consumption). You can’t shop your way to prosperity, as British consumers can once more testify.   

Monetary and fiscal measures should be aimed boosting investment. This would raise output and produce high-skill, high-wage jobs. This is in fact exactly what Jeremy Corbyn and John McDonnell have proposed. It is the sustainable way of out of renewed crisis.

RIP ‘All in it together’, buried in Panama

April 19, 2016 Uncategorized

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.

Table 1. Bank Liabilities in selected centres, US$ billions
 

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.

Budget shows women bearing the heaviest burden of austerity

April 4, 2016 Uncategorized

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.

Fig.1 Cumulative impact of tax/benefit and spending cuts by income decile (2010-20)
Graph from: A cumulative gender impact assessment of ten years
of austerity policies, published by Women’s Budget Group

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 steel

March 30, 2016 Uncategorized

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.

Building an economy that works for all

March 23, 2016 Uncategorized

.896ZBuilding an economy that works for all

By Ken Livingstone
The following article, setting out why Tory economic policy is failing and the Labour framework set out by Jeremy Corbyn and John McDonnell is necessary, was first published by the Morning Star.
* * * 
Jeremy Corbyn was right to say last week that the Budget the Chancellor delivered was “actually a culmination of six years of failure” and that “this is a recovery built on sand.”
Almost all the growth in our wealth in recent years has gone to the richest 1 per cent, while working-class and middle-class families have seen real incomes cut by 9 per cent since the banking crisis.
Yet in much of the media, we are still subjected to the big lie — repeated again by George Osborne this week — that we are in this mess because the last Labour government spent and borrowed too much.

The truth is that in the 36 years since Thatcher came to power there were only two years in which the Tories produced a balanced budget, and three years in which Labour did. All governments have borrowed to fund their revenue spending, but there has not been enough investment in infrastructure and rebalancing our economy.

The Tories constantly say Thatcher’s economic strategy “saved Britain” and claim that Osborne’s austerity is now building on this legacy. But when Thatcher died The Economist, which devoted six pages to her record, did not mention growth in the economy or investment.

We were told that breaking the power of the unions, cutting taxes for the wealthiest and big corporations and deregulating the banks would unleash a wave of investment and growth. But in the 30 years following Thatcher’s election the British economy only grew at two-thirds of the rate it did in the 30 years before Thatcher came to power.

And while the Tories say manufacturing was past its sell-by date and did nothing to invest in it, Germany did and one-fifth of its economy is still manufacturing, whereas ours is now less than 10 per cent. That matters because more than half of all our exports come from this sector, which is why we now have the biggest trade deficit in our history.

Now the ideologically driven austerity of Thatcher’s heirs, confirmed again in the Budget last week, threatens even our fragile economic recovery.

As John McDonnell put it, “productivity growth, the essential ingredient in delivering rising living standards, has stagnated,” while “the gap between the UK’s productivity and those of the Germany, the US and France is the widest it has been for a generation.”

The scale of these problems requires leadership from people who can think outside the box and present a clear, radical alterative. Jeremy, John and the talented team that has been put together have shown in their response to the Budget this week that they are up to this challenge, and have put the issue of investment in our economy centre stage.

What holds back Britain’s economy is a lack of investment, both public and private, which is now running at its lowest level since WWII.

Nearly all economists now agree that investment is not just the most important factor in economic growth, but outweighs all others put together. This is why, when Cameron and Osborne took power and slashed the last Labour government’s investment spending, it pushed our economy back into recession.

In contrast, Labour’s economic plan for a big expansion of investment in transport, housing and upgrading our broadband system is crucial in turning the British economy around.

Given the very low level of interest rates this is the best time to borrow in order to invest. When I persuaded the last Labour government to put £5 billion into building Crossrail, ministers knew that the growth generated by the project would give them between £10bn and £15bn more in tax.

Another big Tory lie repeated ad nauseum is that Labour will increase our taxes, but we don’t need to do that as long as everyone pays their fair share.

The scandal of Google, Starbucks and Amazon is just the tip of the iceberg. Tax avoidance and evasion, mainly by international corporations, could be the equivalent of a quarter of the government’s Budget. Experts believe that tax avoidance and evasion equals 10 per cent of our annual GDP, at least £120bn and perhaps as much as £150bn.

Jeremy has made it clear he will crack down on the tax dodgers, and that can help provide the money we need for the healthcare and education we all have the right to expect.

Britain is the fifth largest economy in the world and the idea that we can’t make the changes necessary to give all our people the chance to succeed is rubbish.

The Labour leadership’s clear position on the economy can win the 2020 general election for Labour. Jeremy and John’s ability to speak clearly and provide a real alternative to cuts and austerity is what’s needed now because they are offering hope for a better future to a generation that has had no hope. Let’s make it happen.

Ken Livingstone is re-running for the Labour Party’s National Executive Committee as part of the Centre-Left Grassroots Alliance (CLGA) ticket. Nominations are now open and each constituency party can nominate up to six candidates. You can follow his campaign at facebook.com/Ken4LabourNEC and @Ken4LabourNEC, and find out more information about the CLGA at grassrootslabour.net.

This article was first published by the Morning Star, where it can read here.

Osborne slashes investment and growth. Labour would increase it

March 17, 2016 Uncategorized

.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.

Fig. 1 UK Current Spending and Net Investment
  

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.