Socialist Economic Bulletin

.636ZTory own goal on debt and the deficit pledgesBy Michael Burke

The Tory Party has decided to make public finances a key battleground for the election. Key supporters of austerity such as the FT’s economics editor Chris Giles have echoed that, arguing that the “defining battle of the 2015 general election [is] over borrowing and public spending“.

It is only possible to stake out political ground on the issue of public finances because of the distortions surrounding them. The level of government debt is rising. This is because the government is adding to its annual levels of debt stock with new public sector deficits.

The actual trajectory of government finances, rather than Coalition propaganda, shows that austerity has not led to a significant improvement, certainly nothing like the promise to ‘balance the books’ in this parliament. Government debt and the deficit have both deteriorated under austerity. In addition the data on public finances actually show that the opposite policy works. Investment (albeit in a very distorted form under Osbornomics) leads to economic recovery and improving government finances.

This article will deal solely with debt and a further article will deal with the deficit. There are two main measures of public sector debt used by the Office for National Statistics (ONS). The first is Net Debt. But this is data which includes the costs of the bank bailouts from 2008 and 2009. Therefore the ONS produces a dataset on Net Debt Excluding Public Sector Banks. This is an underlying measure of debt related to the real economy and government fiscal policy.  

These two measures have been moving in opposite directions. This is because the amount of debt incurred in the public sector bailout of the failed private banks has been falling. A large proportion of that debt has been repaid by the banks. The two main measures of public sector debt are shown in Fig. 1 below.

The last year of the New Labour government in 2009 recorded a level of Net Public Sector Debt Excluding Public Sector Banks (‘Net Debt excluding banks’) of £884bn. The same measure of debt has risen to £1,483bn by end 2014, and will certainly be higher before the Coalition leaves office in May.

At the same time the total Net Debt measure has shown a decline from a peak of £2,261bn in 2010 to an estimated £1,795bn at the end of 2014. This is because there has been a repayment of over £1,000bn in the amount borrowed by the public sector to bail out of the banks. The remaining discrepancy between the two main debt measures is the amount still owed by these banks, a total of £308bn.

It is highly questionable whether all of these outstanding debts will be repaid and there were certainly better uses for government funds than bailing out failed bank speculation. Even so, the divergence in these two debt measures should highlight two important facts. First, austerity has not led to an improvement in government finances, the underlying level of debt has surged under the Coalition.

Secondly, even the investment in failed and corrupt banks, whose managers and traders continue to siphon off huge bonuses, has provided a return to government finances. If the bonuses had been curbed and instructions issued to lend to the most productive sectors of the economy then the return could have been substantially higher. In solely the narrow and false framework of government finances austerity fails to deliver improvement whereas even misdirected investment does. Properly directed pubic investment remains the real alternative to austerity.

The data does not support the Tory propaganda on public finances. The debt has soared under austerity. The alternative of state-led investment has been shown to work.

.134ZGreece needs debts cancelled and growthGreece goes to the polls this Sunday (25 January) and the anti-austerity party SYRIZA has been consistently ahead in the opinion polls for a number of months. A SYRIZA win would be a boost for all those opposed to austerity in Europe and beyond. The Greek economy has seen a devastating collapse, brought on by austerity policies as well as the efforts to pay off the debts incurred by bailing the banks and other speculators who lent to Greece. In the Guardian a number of economists have supported the letter below, which outlines some key economic demands on dropping the debt.

Greece needs debts cancelled and growth

As economists, we note that the historical evidence demonstrates the futility and dangers of imposing unsustainable debt and repayment conditions on debtor countries; the negative impact of austerity policies on weakening economies; and the particularly severe effects that flow on to the poorest households.

We therefore urge the troika (EU, European Centra Bank and IMF) to negotiate in good faith with the Greek government so that there is a cancellation of a large part of the debt and new terms of payment which support the rebuilding of a sustainable economy. This settlement should mark the beginning of a new EU-wide policy framework favouring pro-growth rather than deflationary policies (Report, 14 January).

We urge the Greek government to abandon the austerity programme that is crushing economic activity and adopt a more expansive fiscal policy setting, targeting immediate relief from poverty and stimulating further domestic demand; to launch a fully independent investigation into the historic and systemic failure of the Greek public financial management processes (including any evidence of corruption) that led to the accumulation of debt, the disguising of the size and nature of the debt and the inefficient/ineffective use of public funds; and to consider the establishment of a judicial body or alternative mechanism that is independent of government and charged with a future responsibility of investigating corruption from the highest to lowest levels of government.

We urge other national governments to exercise their votes within official sector finance agencies and to pursue other diplomatic activities that will support a cancellation of a large part of the Greek sovereign debt and new terms of payment for the rebuilding of a sustainable Greek national economy.

Malcolm Sawyer Emeritus prof, University of Leeds
Danny Lang Associate prof, University of Paris
Prof Yu Bin Professor and deputy director, Chinese Academy of Social Sciences
Prof Ozlem Onaran University of Greenwich
Prof Mario Seccareccia University of Ottawa
Hugo Radice Life fellow, University of Leeds
John Weeks Professor emeritus, Soas, University of London
Prof Howard Stein University of Michigan, Ann Arbor
Anitra Nelson Associate professor, RMIT University, Melbourne
Prof George Irvin University of London, Soas
Dr John Simister Manchester Metropolitan University
Mogens Ove Madsen Associate professor, Aalborg University
Wang Zhongbao Associate professor, editorial director, World Review of Political Economy
Dr Susan Pashkoff Economist
Andrea Fumagalli University of Pavia
Pat Devine University of Manchester
Professor Ray Kinsella University College Dublin
Alan Freeman Co-director, Geopolitical Economy Research and Education Trust
Eugénia Pires Economist, member, Portuguese Citizens Debt Audit
Dr Jo Michell University of the West of England, Bristol
Michael Burke Economist, Socialist Economic Bulletin
Paul Hudson Formerly Universität Wissemburg-Halle
Dr Alan B Cibils Universidad Nacional de General Sarmiento, Buenos Aires, Argentina
Guglielmo Forges Davanzati Associate prof, University of Salento
Prof Sergio Rossi University of Fribourg
Faruk Ulgen Associate prof, University of Grenoble
Tim Delap Positive Money
Eleni Paliginis Middlesex University
Grazia Ietto-Gillies Emeritus professor, London South Bank University
Professor Radhika Desai University of Manitoba
Michael Roberts Economist, ‘The next recession’
Michael Taft Unite the Union, Ireland region
Dr Andy Denis City University London
Peter Kenyon Chartist
Professor Emeritus Geoffrey Colin Harcourt UNSW Business School

The letter in the Guardian was originally published here.  

.506ZThe causes of the A&E crisisby Michael Burke

The A&E service in British hospitals is in crisis. All health services come under pressure during winter as seasonal flus take their toll and some lead to more complicated conditions. But winter comes round every year and this is not an especially severe one so far. Yet hospitals across the country report increasing pressures and this is focused on accident and emergency services, not normally in the front line of winter demand. A more severe winter could produce a deepening crisis.

NHS England data shows that waiting times for A&E are now the worst in a decade. The Coalition reduced the previous targets for waiting times but even these targets have been missed. Only 92.6% of A&E admissions are being seen in under 4 hours, which means 3 out of every forty patients are waiting longer. Some of these emergency patients are waiting much longer. The data is shown in Figure 1 below.

There is a significant campaign of misinformation underway, with the government attempting to escape responsibility for the crisis. But Dr Clifford Mann President of the College of Emergency Medicine was clear. He told Radio4 listeners that, “elective surgery is profitable. Emergency surgery will always be unprofitable and so hospital trusts have not invested in it.” The structural cause of the crisis is clearly the introduction of market mechanisms and principles into the NHS.

There is also a direct effect from austerity policies, which is the catalyst for the crisis. The government likes to claim that it has ‘ring-fenced’ NHS spending. But this only means that the cash total for the NHS is broadly unchanged. In effect NHS spending is frozen in real terms. But there is inflation in the health service (usually greater than the broader economy because of rising drug and equipment prices). In addition, the population is rising and it is ageing. There is an increased demand in terms of rising prices and rising need. Freezing spending inevitably leads to deteriorating services.

The fact that NHS spending has been frozen in real per capita terms is directly responsible for the immediate crisis.

The fall in NHS spending as a proportion of GDP is shown in the chart from the Office of Budget Responsibility (OBR) below. According to OBR projections the fall is likely to accelerate in future years.

There is no mystery behind the crisis in the NHS. Structurally, the introduction of the market made crises inevitable and austerity has brought it about. Saving the NHS and providing a decent health service means ending austerity and removing the market ‘reforms’.

6992,00.html”>Above $4 a day people can also begin to move beyond basic necessities and establish at least some quality of life. Most important of all average life expectancy at birth has risen by 3 years, from 71 years to 74 years. This is the most fundamental social indicator of all indicating improvement in living conditions and prosperity and is only possible with a combination of increased access to a range of foodstuffs, improved healthcare and housing.

There are a large number of indicators of poverty reduction and social progress which point in the same direction, although some important indicators of the position of women have not improved or have even gone backwards. These are significant omissions which need addressing. But taken as a whole the improvement in the economy, the general well-being of the population and its poorest members have also shown remarkably rapid and dramatic improvement since the beginning of this century.

Source of growth

Many Latin American and Caribbean economies are exporters of basic commodities. Like all commodity producers they benefited from the strong rise in global commodity prices in the early years of this century. The increase in commodities’ prices is illustrated in Fig. 4 below, as the commodities’ research Bureau (CRB) aggregates a basket of many of the key commodities’ prices, which doubled in price over the period.

However the widespread assertion that exports were the sole or even main contributor to regional growth is a misconception. The accurate picture is that the increased export earnings from rising commodities prices were a catalyst for growth in general but that this growth was led by investment. This is shown in Table 1 below which itemises the growth rates for GDP and its components since the beginning of this century.

The leading component of growth was fixed investment. This conforms to economic theory, where the amount of capital deployed and the growth of the workforce and its quality (via training and education) account for the overwhelming bulk of growth. In the most accurate terminology, fixed investment is the accumulation of the productive capacity of any economy. As previously noted, both consumption and living standards improved dramatically over the period. But consumption cannot be an input into growth. If consumption growth exceeds output, it can only be sustained by increased indebtedness which actually leads to lower living standards. The increase in both private and public consumption was only made possible through the sustained increase in fixed investment, which was the strongest component of GDP growth by some distance.

It was only in 2010 and 2011 that exports grew more strongly than GDP. This was a result of global quantitative easing led by the US and the modest recovery in the leading economies which had the effect of driving up global commodities prices even further. But this produced its own negative effect. 2012 was the first year where fixed investment growth lagged GDP growth and the economy has slowed since. As resources are diverted away from investment economic slowdown inevitably follows.

Problems caused by the US

The period 1980 to 2000 was a lost generation for Latin America. The US had overthrown the Allende government in 1973 and held sway over the continent mainly through its alliances with brutal military dictatorships. The revolts against the dictatorships in Nicaragua, El Salvador and Grenada were all blocked or overturned by the US or US-backed forces.

It was this US dominance in the region which paved the way for economic collapse. The US had unilaterally withdrawn from the Bretton Woods currency system in 1971, provoking a global spike in commodities’ prices. It was forced to do so because it was unable to finance both the Viet Nam war and domestic consumption at the prevailing exchange rate. This fall in the US Dollar/rise in commodities’ prices resulted in a huge increase in the Dollar export earnings of the oil producing states, concentrated in the Arab world.

The oil producers, led by Saudi Arabia effectively bailed out the US through a huge inflow of those earnings in the form of ‘petro-Dollars’ into US banks. As well as financing US budget and trade deficits these funds were also used to boost US banks overseas lending, especially in Latin America.

The global downturn of the late 1970s left these borrowers exposed, primarily government borrowers. A full-blown currency, debt and economic crisis was marked by the Mexican government’s debt default in 1982. At US insistence, it was the US banks that were rescued, not the Latin American economies, through the issuance of ‘Brady Bonds, named after the US Treasury Secretary. Debt crises in a host of other countries followed and the resulting debt burden sucked capital from South to North over the following decades and led to economic stagnation and misery.

These gyrations are not solely of historical interest. The role of the US Dollar as the major reserve currency and the denominator for virtually all globally-traded commodities means that significant or abrupt changes in US economic and monetary policy are magnified in commodity-producing and/or debtor economies. Sharp changes in US monetary policy always lead to sharp dislocations in the rest of the world, especially in ‘emerging markets’. As the US is also the world’s largest net debtor economy, it has a constant necessity for inflows of overseas capital. In periods of economic expansion this need increases sharply. Changes in US monetary policy are conditioned by this requirement for capital generated in the rest of the world and so can cause abrupt and hugely dislocating flows of capital in other countries.

This is precisely what has happened in the most recent period. The US Federal Reserve Bank ended its third round of quantitative easing on October 29. This had helped to inflate financial assets included commodities prices from 2010 onwards. Now the US is consciously aiming to drive down key commodities’ prices. The US has agreed with the key oil producer Saudi Arabia that the oil price should fall. On the US side this is an extension of the sanctions against Russia, but it welcomes the collateral damage to countries such as Venezuela, where sanctions are now also threatened.

New challenges

Politics comes before economics. The economic transformation of an entire continent cannot happen randomly. Across the region (with certain exceptions) through decades of upheaval a political leadership has been forged that rejected the dominance of the US and its neoliberal economic policies. The period 2000 to 2002 was marked by the sharp turn of Hugo Chavez’s revolutionary government in Venezuela towards Bolivarian socialism, ending generations of national humiliation. Shortly afterwards the serial humiliations inflicted on Argentina hit a brick wall with its default. Then in 2002 the Lula and the Brazilian Workers’ Party won the Presidential election.

Although they represent different social coalitions their common platform is a desire for economic growth, and the improvement of the living standards of the population, in particular the poorest layers of society. In different ways they draw inspiration from the Cuban revolution and its determined resistance to US rule.

It is important to stress that economic redistribution was an outcome made possible by growth. It was not the driver of it. The principal economic contributor to the economic transformation was the rise in fixed investment. Until 2012 fixed investment was the strongest component of growth and was its leading element. Growing trade, including intra-Latin American trade was a key catalyst for investment-led growth. This in turn allowed the growth of both public and private consumption, which indicates the general rise in living standards.

But the catalyst of rising export revenues has gone into reverse. At the time of writing the CRB Index had fallen to 247, close to levels last seen at the depths of the crisis in 2008. The oil price has fallen below $65/bbl a new 5-year low. This is a direct consequence of changes in US policy. This is in effect a crisis of 2008/2009 proportions for most of the commodity-producing economies, which takes in virtually the entire continent of Latin America and the Caribbean.

The growth of fixed investment has slowed to a crawl, which will prevent any sustainable revival of GDP growth. This is illustrated in Fig.5 below with reference to Brazil, which is by far the largest regional economy and accounts for nearly 40% of the entire continental GDP. This shows Brazilian Gross Fixed Capital Formation (GFCF) as a proportion of GDP, both the total and the specific contribution of the private sector. From 2002 onwards the long-term decline in the investment rate was being reversed. But there has been a renewed decline in 2012 (and other data suggest this has been extended since).

Capital outflow

There is also a new threat in the form of capital outflow. The US is the dominant financial power in the world and the US Dollar the main currency denominator not only for commodities but also for international debt. Yet the US has a structural capital shortage, as shown by its chronic deficits on the balance of payments. In periods where US capital is seeking to expand, it is obliged to suck in capital from the world. The outflow of capital from ‘emerging market economies’ was recently the subject of a strong warning from the Bank for International Settlements (BIS). This is a specific threat to the Latin American economies.

The BIS data show that Latin America and the Caribbean owe BIS-reporting banks (the banks of all the industrialised economies) a net amount US$1.337 trillion. Of this $565 billion is held in foreign currencies, which is virtually all in US Dollars. The overwhelming bulk of this US Dollar debt is owed by both private sector firms and banks based in the region and is owed to Western banks. US Dollar debt owed by governments is a relatively modest $113 billion.
In addition to the challenge posed by falling commodities’ prices and the need to reverse the sharp slowdown in the growth rate of investment, it is the region’s private sector firms which are the Achilles Heel of the economy.

The regional firms and banks are no longer benefitting from the rise in exports and are primarily responsible for the sharp slowdown in investment. They are also the primary source of capital outflow from the domestic economies, and will in many cases be directly responsible for it. They are likely to come under severe pressure as they absorb the effects of lower exports, slowing domestic economies and rising debt-servicing costs. There is no point in minimising the scale of these difficulties. They amount to a new crisis for the entire region and need a new response.

Responding to the new threats

A revival of growth is vital for a return to rising living standards. Three key steps are required, each of them interrelated. Returning to per capita GDP growth depends first on reviving the growth of fixed investment. Secondly it is necessary to soften the blow of falling export prices by increasing trade diversification. This is both a geographical diversification as well as adopting measures to increase the value created in production by increasing the output of finished goods and manufactures, compared to basic commodities. Thirdly a series of strong defensive measures are needed to insulate the region from the US-driven outflow of capital.

The decline in fixed investment is primarily the responsibility of the private sector. Since private sector investment is determined by the anticipation of profits a spontaneous recovery cannot be relied on, especially in the current conditions. Therefore the state sector must increase its own level of investment. It can do so in a number of ways, including directing domestic banks to increase productive investment by cutting back on speculation or other useless activity. It can regulate the level of private sector firms’ investment by legislation and other means (including in the awarding of government contracts). It can also apply windfall or other confiscatory taxes to fund direct government investment. If the private sector resists any of these measures, all necessary steps can be taken to overcome that resistance, including nationalisation.

One of the great successes of the period of expansion has been increasing continental economic co-operation through a variety of regional bodies, including Mercosur/Mercosul and ALBA. This helps to break down colonial patterns of development, where nearly all international trade was formerly geared towards exports of basic goods to the US. The deepening of regional ties through increased trade and infrastructure projects can help to soften the blow of falling commodities’ prices. But it is also important to move higher in the value chain of production and away from basic goods. Over the long-term manufacturing has been in decline as a proportion of GDP across the region. Increasing regional value creation requires both development of the economic capacity and access to hi-tech investment products. Here the two key potential allies are the deepening of ties with China and Russia. The former can provide funding for regional infrastructure and both can provide access to hi-tech investment goods, vital to revival of manufacturing and increasing value-added.

The outflow of capital represents an immediate and significant threat to regional prosperity. National savings need to be protected from US predations. Strong counter-measures are required. These may include restrictions on financial trading, capital controls and taking state ownership and control of the banks where necessary, as they facilitate the highly damaging outflow of capital.

Conclusion

Latin America and the Caribbean have seen a remarkable transformation in the most fundamental of living standards of the population in the first decade of this century. The first condition was the forging of a political leadership capable of coming to power and ending US domination.
Economically they were able to achieve this as the commodity-producing economies of the region benefited from the global rise in commodities prices. But this benefit was used to fund investment, which was the leading component of growth. It was the rise in investment which allowed the rise in living standards.

Now commodities’ prices have gone into reverse. Yet it remains the case that only increased investment can lead to increased prosperity. Therefore new radical measures are required in order to fund investment. Continuing the transformation in distribution will require a transformation in production.

This is centred on the direction of private sector firms and banks operating in the region. They have reduced their level of investment in the face of falling commodities prices and a slowing economy. They are also the primary source of the potentially disastrous capital flight from the region, which is being orchestrated by the US to destabilise its enemies and for its own benefit. Only by directing their levels of investment can growth be resumed. In some cases taking ownership of some of these banks and firms can the governments continue with their policies of economic and social transformation.

.782ZRenewed, increased austerity will only produce a worse resultBy Michael Burke

The scale of cuts set out in George Osborne’s latest Autumn Statement are so large that they are quite unfeasible without a fierce attack on public spending, services, jobs and pay over the next five years. Even in the likelihood that targets are missed the effect will be to deepen austerity and permanently embed it in the economy.

The Office for Budget Responsibility (OBR) forecasts the level of austerity in the next five years will be much worse than the last five. The OBR is extremely poor at economic forecasting as it shares the Treasury’s flawed economic model. It also consistently paints a favourable picture of the outcome of all government policies. Even so its closeness to government means that it is well placed to understand government intentions. It projects further cuts to government current spending equivalent to 4.8% of GDP in the next parliament. This compares to 3.4% of cuts in current spending under the Coalition. This is shown in Fig.1 below. In cash terms the cuts will increase from £35bn so far to another £55bn in the next parliament.

The government claims that certain key items of spending have been ‘ring-fenced’, which in reality means capped. The key capped items are spending on pensions, education and the NHS. As Fig.1 shows this still means education and NHS spending are falling as a proportion of GDP even though the population is both ageing and growing. The real education and health spending per pupil or per patient is falling, hence the rising waiting lists in both areas.

The Institute for Fiscal Studies suggests that the capping of these items means that other items in the budget will be cut by up to 40%. In previous austerity measures the scope for cuts was facilitated because of items of highly beneficial but non-essential services built up over previous decades. But the cuts to youth services, day care for the elderly, closures of public services have all nearly run their course. They have been highly damaging but now essential services are the sole real target for cuts.

The increased austerity totals outlined in the Autumn Statement will be much greater than the austerity to date. Their effects will be magnified because essential services are the main target for the cuts. They cannot be achieved without a ferocious attack on public services, public sector pay, jobs and pensions.

Outlandish assumptions

In addition to cuts in government current spending the OBR projection is that government investment will be cut further. Under the Coalition public sector investment has fallen from 3.2% of GDP to 1.5%. The OBR projects it will now fall to 1.2% of GDP in future years.

SEB has previously shown that business investment follows government spending and investment with a time lag. The false Treasury/OBR framework is that the state is an obstacle to the private sector. So, the OBR projects a sharp rise in business investment over the next 5 years, much faster than the recent period when activity is usually strongest in the recovery period. This is despite the fact that government spending is cut more deeply. The OBR forecasts for business spending are shown in Fig. 2 below and are compared to previous recessions.

This surge in business investment (exceeded only by the unsustainable ‘Lawson boom’ of the 1980s) is projected to arise even though there is simultaneously a forecast profits squeeze. According to the OBR the Gross Operating Surplus of firms will grow by just 4.1% over the next 5 years in nominal terms. After inflation the real terms level of profits will fall. By contrast the Compensation of Employees is projected to rise by 11.1% over the next 5 years. Therefore both the wage bill and the additions to new capital will exceed the growth in the operating surplus. The profit rate will fall as a result.

These are simply outlandish forecasts. As firms invest in anticipation of increased profits the OBR forecasts are wholly unfeasible. This rise in business investment is central to the OBR’s projection of moderate but sustained growth, along with increasing household debt. Even so, its forecasts show a significant slowdown from current growth rates. The 3% growth in GDP this year is the best of the recovery even on the OBR’s rose-tinted view. In reality cuts on the scale envisaged would risk a much deeper slowdown or even recession.

Political impact

Even if the government/OBR forecasts for the scale of the cuts prove to be unworkable they amount to a plan for permanent austerity, of ever deeper cuts. They are also a Tory trap for Labour, which has said it will also aim to balance the budget without challenging the framework that it is the investment strike and weak growth that causes the deficit.

Prior to the 1997 election New Labour signed up to Tory spending plans in the first two years. Politically the effect was that New Labour immediately lost 1.5 million votes in that post-election period, a third of the total votes lost over 13 years in office which ended in defeat in 2010.

Currently a Labour-led government is in no position to lose 1.5 million votes after May 2015. But the economic situation is fundamentally different to the position at the turn of this century. Increased government spending cushioned British growth from the general downturn in the industrialised economies in 2000. As SEB has previously shown, this reversal on spending was very partial. But with the tailwind of global recovery after 2000 economic crisis was averted. It was the stagnation of living standards which caused the attrition of a further 3 million votes for new Labour over the next decade.

This situation is very different. With a commitment to balance the budget by cuts, there is no scope to increase spending in the middle of the next parliament. The global economy is unlikely to provide as much support as most forecasts anticipate a slowdown. Crucially, living standards are not stagnating but declining for the overwhelming majority of the population. Without reversing policy abruptly this fall will in living standards will continue. Renewed austerity will accelerate the decline. The economic and political consequences are easy to foretell. If pointers are needed the political and economic fortunes of the current Socialist government in France can provide them.

.388ZNew Labour spent less than Thatcher. That was part of the problemBy Michael Burke

In all the commentary related to Gordon Brown’s decision to step down as MP there is one central myth that has been retold almost without any challenge. This is the idea that his excessive public spending was responsible for the economic crisis and/or the surge in the deficit on the public finances.

It is important to debunk this myth not primarily for reasons of establishing the historical record. The more important task is to puncture the myth that the crisis was caused by the public sector because this is used to justify the continuation of austerity measures and prevents any discussion of the real causes of the crisis or its remedies. The actual cause of the crisis was an investment strike by the private sector, which has not been broken.

The record

The actual position is that New Labour cut government spending dramatically. It did the same to tax revenues. It was the crisis which reversed that as the private sector investment strike both caused unemployment to rise and so pushed up government spending and lowered tax revenues (income tax, VAT, corporate taxes, and so on). But even then, government spending rose to only the same level as under Thatcher.

The trends in public sector revenues and expenditures as a proportion of GDP are shown in Fig.1 below.

Any deficits under New Labour prior to the crisis are therefore attributable to the very low level of tax revenues that were gathered.

The detailed comparative record is set out in Table 1 below (based on UK Treasury data, which is now presented by the Office for Budget Responsibility).

The low-point for spending in this period examined was under Blair. It equalled the low-point in spending recorded by the Tory austerity government of the 1950s.

Uninterrupted decline

It is evident that under New Labour there was room both to increase taxation and spending. Fig.2 below shows the level of government investment as a proportion of GDP. OBR forecasts for future years are included.

In the mid-1970s the right wing leadership of the Labour Party led by Callaghan and Healey manufactured an entirely fake crisis of government borrowing with the connivance of the IMF. The purpose was to launch an attack on public spending and government investment. This became explicit policy (justified with all sorts of monetarist nonsense) under Thatcher. There has been no decisive break from this policy framework in the period since.

This policy has been disastrous. British growth was regarded as relatively very weak in the post-World War II period up to the mid-1970s. The process of cutting public spending, cutting public investment, deregulation and privatisation actually lowered growth considerably. In the years between 1948 and 1981 the economy grew by 147%. Despite the boon of North Sea oil, GDP grew by just 110% in the following 32 years.

Key to this decline was the decision to slash public investment. It is driven by the belief that, if the state’s role in the economy is reduced the private sector will take its place, and in a more efficient manner. New Labour extended this policy. The result was that private sector freedom did not lead to increased investment but to increased speculation in areas such as housing. The whole history of this policy has led to the current crisis.

The Tory-led Coalition has continued this policy in a very aggressive way. Public spending has been cut and public investment has been slashed. As previously this will not lead to increased investment or prosperity. Instead, as already noted, financial bubbles and crashes are what happen when the private sector is in charge.

pm Saturday, November 29th