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Debt deals ravage Ireland and Greece’s economies – Portugal’s package to have the same result?By John Ross

The full scale of the economic declines in Ireland and Greece, under the impact of the debt agreements and consequent contractionary fiscal policies agreed by their governments, is shown in Figure 1 below. This illustrates the change in GDP, since the peak of the previous business cycle, in the so called ‘PIGS’ economies (Portugal, Ireland, Greece, Spain) compared to Germany and France.

GDP in Greece has fallen by 8.9% since its peak. In Ireland the decline is 14.6%. Both countries saw GDP in the 4th quarter of 2010 fall to its lowest level in the recession – i.e. no recovery had begun. In contrast GDP in Germany is 1.4% below its peak and in France 1.6% below – in both economies recovery has been taking place for seven quarters, since the 1st quarter of 2009.

Figure 1

Considering Portugal, the latest country to apply for an EU economic package, it is clear that to date its economy has more closely followed the performance of France and Germany than Greece or Ireland.

Portugal has also outperformed Spain. In the 4th quarter of 2010 Portugal’s GDP was 2.0% below its peak level compared to Spain’s decline of 4.3%.

Furthermore until the 4th quarter of 2010 Portugal’s GDP had been recovering.

Based on the experience of Ireland and Greece, and basic economic analysis. the imposition of a fiscally contractionary debt agreement on Portugal, after its request for an agreement with the EU, will lead to sharp economic decline.

The deep economic contraction in Greece and Ireland has already made it more difficult for them to repay their debts according to the terms agreed. The problem in both economies is not liquidity but their balance sheets. The debt to GDP ratio in Greece, for example, is 140% of GDP. In Ireland exposure to bank bail outs is several times GDP.

The rationale for the loans organised by the EU for Ireland and Greece would be that their economies would grow and therefore make possible repayment of the loans at a future date. In fact the severe economic decline resulting from the contractionary fiscal policies makes this implausible. Figure 1 therefore also indicates the likely consequences if such policy spreads to Portugal.

The depth of the recessions in Ireland and Greece therefore confirms that the EU package to be developed for Portugal is likely to contribute to worsening the consequences of the EU debt situation rather than alleviating it.

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This article originally appeared on the blog Key Trends in Globalisation.T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

The attack on the NHS

By Michael Burke

The first major domestic political initiative by the Tory-led Coalition since the TUC’s March 27 demonstration has to been to call a pause in the implementation of its plans for the NHS. The government’s unpopularity is likely to deepen over the next period as the combination of spending cuts and tax increases in the Financial Year (FY) just ended amounts to £9.4bn compared to £41bn in the FY just begun. The TUC-led manifestation of opposition to the governments cuts agenda has prompted the government rethink. How thorough a ‘reorientation’ that becomes will in part be a function of the degree of continued mobilisation against the cuts. But it is clear campaigning and demonstrating does have an effect.

The attack on the NHS is on two fronts. First, despite assertions that the NHS is ‘safe in our hands’ and that spending on it was being ‘ring-fenced’, it is now widely understood that real cuts are taking place, even if government speakers insist on calling them £20bn of ‘efficiency savings’. Secondly, the fundamental character of the HNS is being altered, with the Tories seeking the maximum possible role for the private sector. This scope of that role is only circumscribed by the political situation – and this is what they have now paused to reassess.

NHS Cuts

In assessing the degree of cuts to the NHS budget in real terms three factors need to be taken into account:

• Government data are presented in nominal (cash) terms, not real terms
• Therefore the level of inflation needs to be included in calculations – and this is usually greater in medical equipment, drugs, etc., than in economy-wide inflation
• The population is both growing and ageing, which means that real medical spending would have to increase simply in order to keep with the natural rise in demand

With those factors in mind, it is clear that government cuts are deep in real terms. From the Comprehensive Spending Review of October 2010 to the ‘Resource Departmental Expenditure Limits are shown in Table 1 below (Table A.9, p.85).

Table 1

To take the current FY, spending is set to rise by 2.0% compared to the spending in FY 2010/11, even though RPI inflation is currently running at 5.5%. In fact, the total level of spending on the same measure under the last Labour government in the FY 2009/10 was £103bn (Treasury, Budget 2010, Table 2.2, p.43). By the end of the current FY this government will have been in office for just under two years. Over that time spending on the NHS will have risen from £103bn to just £105.9bn, or 2.8%. According to the Office of Budget Responsibility, RPI inflation will have risen by a cumulative 10% over the same period (OBR, Economic and Fiscal Outlook, March 2011, Table 4.3, p.95). This represents a decline in real spending of 7.2% in just two years.

This continues so that over five years nominal NHS spending is projected to rise from £103bn to £114.4bn, or fractionally over 11%. At the same time, the OBR projects that inflation will have risen by 22%, representing a real decline of 11%.

According to the OECD health spending tends to increase internationally by around 1.5% per year over the long run, because of growing and ageing populations as well as the higher inflation rate of medical processes. If that long-run international pattern applies to Britain overt the 5-year period, the additional real spending required would increase by 7.7%.

The Tory-led cuts to the NHS are therefore nearly 19% in real terms compared to normal trends over the lifetime of this Parliament.

NHS Restructuring

The cuts in real spending on health will have disastrous outcomes. They will also be difficult to achieve because cutting spending on preventive treatments and minor procedures will tend to have the effect of significantly increasing the health bill on major procedures. As a result, health outcomes will actually deteriorate more rapidly than the headline data suggest. By definition, the most vulnerable will suffer as a result.

Much more than the real cuts in spending, which are not fully appreciated, the government has drawn fire for its plans to restructure the health service. It is intended that the Primary Care Trusts (PCTs) will be abolished and replaced with consortia of GPs to commission medical services, with much talk of local devolution of decision-making. As elsewhere the reactionary utopia of patients (or students) becoming ‘customers’ who choose their service-provider gives way to the reality that it is the professional entity which does the choosing (GPs, school governors, etc).

PCTs themselves are a New Labour half-way house, designed to continually introduce private sector providers among the rosters of legitimate ‘NHS’ service providers – indeed they were obliged to do so. But this piecemeal privatisation of health services- while maintaining the NHS brand – is insufficient for the Tory-led government. It intends a wholesale transfer of provision to the private sector, and a variety of mechanisms may be deployed.

These include insisting the GP consortia allocate to the lowest bidder, or rewarding them financially for doing so. The option of removing the NHS from British and EU competition law is also considered, which allows ‘social providers’ to be excluded from lowest-bidder regulations. Any of these would have the effect of allowing the private sector firms to provide services in only the most routine and simple procedures- but remove the equivalent funds from the NHS which would increasingly struggle to cope with more complex, difficult procedures or chronic conditions. The costs of the public sector would rise and be increasingly unable to cope against a backdrop of continuous and deep real cuts. The private sector could increasingly win a greater proportion of formerly NHS provision, leaving it to wither.

The Inefficient Private Sector

Figure 1 below is taken from the OECD’s ‘Health At A Glance’ 2010. It shows the per capita health spending for the OECD countries in comparable US$ Purchasing Power Parity terms.

Figure 1

Health spending in Britain is already way below the average of its peer group in the richest OECD economies. Tory cuts will take it to below the OECD average as a whole.

The chart also shows that in general, as the proportion of private spending on healthcare rises, so does the overall cost. The US has the highest proportion of private provision and its total healthcare costs are off the chart – even although 45 million Americans have no healthcare insurance, compared to the universal system for the NHS. For 2007 (latest data) the US spent 16% of GDP on healthcare, whereas Britain spent 8.4% (OECD, 2009). Yet there is the same ratio of health workers in the workforce and life expectancy at birth is higher in Britain.

The private sector is more inefficient than the public sector in the provision of health care. At every level of input, a private system requires an additional level of profit to be extracted. Because the government has cut first and begun privatisation second, one of the effects is the PCTs are currently abandoning private firms – because they are more costly than the NHS! The government intends to investigate this breach of the right to profit.

The aim of government policy is not better healthcare, or even more efficient, less costly healthcare. It is to boost the profits of the private sector by displacing the more efficient public sector.

Campaigners to preserve the NHS and make it more responsive to the needs of patients have already caused a pause in the programme. They should know that maintaining their campaigns can force either a more profound rethink, or hugely increase the political price paid by this government for this policy.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com1

How the Tories sabotaged the economic upturnBy Michael Burke

The latest economic data confirms the contraction in Britain’s 4^th quarter GDP with only a marginal upward revision to a fall of 0.5% compared to the 0.6% previously reported. Even according to statisticians from the Office for National Statistics (ONS) the severe weather effect at the end of the year only depressed activity by 0.5% and without it the outturn would still have been zero. This follows four quarters of modest recovery with positive growth, which had seen GDP expand by 2.5%.

Therefore, while snow was responsible for the outright economic contraction at the end of last year, another factor must have been responsible for the downward shift from 2.5% to zero growth.

The Role of Investment

The slump in economic growth is dominated by the collapse in investment. In the course of the recession, GDP contracted by £88.6bn. The one year long recovery clawed back £32bn of that lost output, to leave it £56.6bn below its previous peak. The renewed contraction in the 4^th quarter of 2010 of £6.2bn means that output is now £62.8bn, or still 70% of the total fall, below its peak level.The role of fixed investment (Gross Fixed Capital Formation, or GFCF) has been decisive in the decline. Within the recession, the decline in GFCF accounted for £43.6bn or nearly half of the total decline in GDP. But taking the recession and recovery together the decline in GFCF accounts for £31.5bn, or 56% of the total in lost output. The decline in investment has once more led the way, accounting for over 60% of the contraction in the 4^th quarter,£3.8bn of £6.2bn. For the whole period from the recession to date and including the 4^th quarter contraction, the slump in investment accounts for £35.4bn of a total in lost output of £62.8bn – that is, 56% of the total decline.

The Role of Government & Private Sector

Investment has two sources, the government and the private sector. Although ONS does not present the data in this way it is possible to construct the differing effects of these two sources on the trends in investment (Table F of the ONS release).

In the course of the recession the Labour government attempted to offset its effects by increasing its own investment. According to the Office for Budget Responsibility (OBR) in 2009, government investment rose by 16.9% while business investment fell by 18.9%. There was also a follow-through in 2010 as Labour was in office until May, some contracts take time to complete etc. The OBR estimated a 4.4% increase in government investment in 2010.¹

Turning to the ONS data allows a more precise calculation of the role of the two sectors on investment. Here government investment indicates the general government GFCF as well as that of public corporations, while the private sector GFCF comprises business investment along with private sector investment in dwellings and existing buildings.

Government investment rose by £9.9bn during the recession. It rose further until Labour left office, to £11.2bn. Under the Tory-led coalition it has since fallen by £4.2bn.

If GFCF has been falling total and the government component has been rising, it follows that the private sector is entirely responsible for the fall in investment – and that this fall is greater than the decline in investment as a whole. In the recession, the fall in private sector investment was £52.9bn. This is 60% of the entire fall in GDP in the recession. Because private sector investment has grown even more slowly than GDP during the recovery, it has acted as a further drag on growth. From the pre-recession peak to the end of the recovery phase in the 3^rd quarter of 2010 private sector investment fell by £39.7bn, or over 70% of the total decline in output. Investment fell by £3.8bn again in the 4^th quarter, which is once more the bulk of the decline in total output during the quarter, which amounted to £6.2bn. Private sector investment fell by £2.1bn in the 4^th quarter, so that it now stands £41.8bn below the pre-recession peak. The decline in private investment is responsible for exactly two-thirds of the total loss of output.

The dominant characteristic of the current slump is therefore a private sector ‘investment strike’, which accounts for two-thirds of lost output. The Labour government attempted to counterbalance this strike by a moderate increase in its own investment. Not only did this offset some of the worst effects of the recession, but it finally encouraged the private sector to briefly increase its own investment. In the three quarters from the end of 2009 to the 3^rd quarter of 2010, private sector investment rose by £16.6bn, and was itself responsible for two-thirds of the recovery during those 3 quarters. The private sector was encouraged to increase its own investment in response to the persistent rise in government investment.

SEB has previously shown in a more detailed analysis of construction investment how the public sector led the way for the much larger increases in private sector investment. Conversely, a recent survey for the Institute for Chartered Accountants in England and Wales (ICAEW) shows that 45% of all firms expect their turnover to fall as a result of government spending cuts – up from 21% who already report falling turnover. The detail of the survey is set out in the Table below.

While economic ideologues talk about ‘Expansionary Fiscal Contraction’ or the ‘private sector taking up the slack’, it has been left to accountants to show how the relationship between the public and private sectors actually works. It is clear that the cuts will have a negative impact on the prospects of the private sector. But the survey also shows the dynamic effect of reduced public sector inputs on the output of the different parts of the private sector, as a ‘ripple effect’ with first those firms supplying directly to government being hit first, then those firms who only indirectly supply to government (is whose own customers are direct suppliers to government), and finally but increasingly those firms who have no obvious relationship to government at all but whose business will suffer from the general economic downtrend, including consumer demand and demand for business services.

The Consequences of ‘Austerity’ Policy

The role of government has been decisive in determining the trends in the economy. In the course of the recession and subsequent recovery, total government spending, including its contribution to GFCF rose by £18.1bn, and so was directly responsible for more than half the recovery of £32bn. As already shown, it was also responsible for inducing the brief recovery in private sector investment which itself accounted for two-thirds of the recovery during its 3 quarters of expansion.

Reversing the rise in government investment has produced a renewed downturn in economic activity. But it should be pointed out that the government will find it much more difficult to reverse the upward trends in its own current spending. As governments in Athens, Lisbon and Dublin are demonstrating, cuts to welfare entitlements will not reduce welfare spending if the numbers on welfare are rising at a greater rate than entitlements are being slashed.

In relation to unemployment, the same ICAEW survey cited above shows that 47% of the private sector have already reduced the number of permanent staff because of the impact on their businesses caused by the cuts, and 36% have reduced the numbers of temporary or contract staff (which is also leading to a growing casualisation of work for those in work).

The current economic downturn was deeper than the recession under Major in the early 1990s or the Thatcher recession of the early 1980s. Output fell by 6.4% in 2008/09, while it fell by only 2.5% in 1990/91 and 4.6% in 1980/81. The recovery has also been slower now, as Figure 1 below shows.

However, the outcomes of the different recessions in terms of unemployment have been markedly different. From Table 2 below it can be seen that, although the most recent downturn was much more severe than either the Thatcher or Major recessions, the fall in employment was markedly less. This is despite the fact that, as already noted, the recovery is also weaker.

One chilling statistic within these comparative data is that at Thatcher’s election in 1979 total employment in the British economy stood at 24,716,000 jobs and that level was not regained until the 1^st quarter of 1998, during Labour’s first term.

These comparisons are relevant because employment is falling once more due to the coalition’s growth-damaging policies. The numbers in employment have been falling since August 2010, and this trend is likely to accelerate in both the public and private sectors under the impact of government policy.

Given the link between growth and government finances, which are highly sensitive to taxation receipts, it s no surprise that a similar pattern is evident in relation to the public sector deficit. While Labour’s increased spending was producing a moderate recovery, the public sector deficit fell. The Treasury had projected the public sector deficit as high as £178bn in the financial year (FY) about to end. However, up to January of this year the 12-month rolling total for the deficit had fallen to £141bn, and it had been falling for exactly one year on this measure. This positive trend was reversed in February this year, mirroring the renewed deterioration in the economy, with a small time lag. In February the 12-month rolling total for the deficit rose to £143.3bn. The OBR now forecasts it will be £145.9bn in the current FY.

In a damning indictment of government policy the OBR is also now forecasting significantly higher deficits in subsequent years (Table 4.27) than it did in either the June 2010 Budget or following the Comprehensive Spending Review in November. Compared to June, when the economy was undergoing a government investment-led recovery, the OBR is now forecasting cumulatively worse public sector deficits over the period to 2015/16. Of this, the overwhelming majority of the projected worse outcome is due to the lower growth the OBR is now forecasting (Table 4.25).

The failures of the Tory-led Coalition

It is mistake to view these economic changes, lower growth, lower employment and higher borrowing as anything other than the natural consequences of the policy which has been adopted. Many of the collective authors of these policies have read Keynes, some of them have even read Marx too. They are surely all aware of what happened when the same policies were pursued under the cloak of monetarism and the ‘disciplins of the Exchange Rate Mechanism’ at an overvalued exchange rate in the 1980s and 1990s.

But ‘lowering the public sector deficit’ now is no more the real goal of government policy than controlling the supply of money was under Thatcher. The deficit is rising once more, and is projected to increase compared to previous projections. A government solely committed to this end would change policy.

Nor is this an ‘ideological’ government in the sense that an adherence to a smaller state overrides all other objectives. Actual, rather than budgeted military spending is suddenly increasing as the projection of state power over the oilfields of Libya is now very important.

To grasp the dynamic of government policy it is necessary to understand what this policy is actually achieving. In a capitalist economy this means addressing what is happening to the shares of capital and to labour. Close proxies for these are provided in the ONS’s accounts by ‘the ‘Gross Operating Surplus’ (GoS) of firms and the ‘Compensation of Employees’ (CoE) – which are respectively broadly akin to profit and wages (although there are some important differences).

In recessions, profits fall faster than wages. For example a firm sells widgets for £3 million and pays £1.8m in wages. Its gross profits, before any taxes are levied, are £1.2mn. But suppose demand contracts by 5%. Total sales have declined to £2.85m. If wages are unchanged, the widget makers’ profits have fallen to £1.05mn. In this case a 5% decline in the economy has led to a 12.5% fall in profits. From this dynamic comes the push to drive up profits via lowering wages, cutting workers, removing regulations on business and lowering their taxes. Businesses have enacted the first of these two policies and the government has enacted the second two. There is also the government hope that lower wages in the public sector combined with lower benefits will push wages lower in the private sector. Mainstream economists have a name for this, the ‘demonstration effect’.

Taking only the data for the 4^th quarter of 2010 compared to the previous year, the compensation of employees rose by 2.1% while the profits (GoS) of private on-financial corporations rose by 12.7%. In addition, ‘other income’, the income of the professionally self-employed and rental income on property rose by 9.9%. Only the profits of the private financial corporations fell, by 28.1%, which is why they insist they must be bailed out by taxpayers. Given that inflation rose by 2.7% in the year, this means that real wages fell 0.6% over the period, while ‘other income’ rose by 7.2% and non-financial profits rose by 10%.

This then is the real ‘achievement’ of the Tory-led coalition. Since the low-point of the recession, just 40% of the increase in value created has accrued to labour while 60% has accrued to capital. But it still leaves the renewed growth in capital below its pre-recession levels so there will be more to come.

But, so far as the Tory-led coalition is concerned, it is doing the right thing ‘sticking to Plan A’. Plan A is the restoration of profits by transferring incomes from labour to capital. However, we shall see in the immediate period ahead whether even this goal can be met. The downturn in the economy at the end of last year was the result of £9.4bn in spending cuts and tax increases. This FY that total will rise to £41bn. Unemployment and the deficit will certainly rise as a result. It is not clear that either GDP or even profits will grow.

Britain in 2011 will provide a testing ground for what is the real goal of a reactionary economic policy – to drive up profits while cutting living standards. If not then, given the character of the government, even more cuts, lower wages, lower services, lower benefits, greater deregulation and privatisations will be the policy.

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1. OBR, Economic and fiscal outlook 2011, Table 1.1

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

.600ZOsborne’s Budget Is An Admission of Policy Failure

Michael Burke

Adopting a ‘Budget for Growth’ now is really a tacit admission of failure by the Tory-led coalition. The economy was already growing when they took office. Because of that, two key indicators were falling- unemployment and the deficit.

Now, there is renewed economic weakness. The ‘independent’ Office for Budget Responsibility has continued to cut its forecasts for growth as a result of government policy. In its June 2010 forecasts the OBR projected 2.3% growth this year. That was cut to 2.2% in November and has now been cut again – to just 1.7%. The trend is down because of government economic policy- nothing else; the world economy is performing at least as strongly as the OBR forecast. Despite George Osborne’s claims in the Commons, future British economic growth has also been downgraded, from 2.8% in 2012 to 2.6% and now just 2.5%. This is exceptionally weak growth coming out of a severe recession.

Because of government spending cuts the economy was sent into a tail-spin in final quarter of 2010. This resumed contraction in the economy has inevitably also led to a reversal of the favourable trends in those two indicators. Unemployment is rising once more and the latest data on public finances shows that the year-long downtrend in the deficit has gone into reverse.

Unemployment & the Deficit

The OBR’s forecasts for unemployment have also risen, so unemployment in 2011 and 2012 was originally 8% and 7.6%. Now these have risen to 8.2% and 8.1%. Similarly, deficit forecasts have also risen under the impact of slower growth. Initially OBR had projected a public sector net borrowing requirement of 7.5% and 5.5% of GDP in the next Financial Year (FY) and in FY2011/12. Now these have risen to 7.9% and 6.2%.

This gives the lie to the central claim of government policy – that all these cuts are necessary to reduce the public sector deficit. Their policies have led to a renewed widening of the deficit.

Forecasts

None of this is to say that the OBR is a truly independent body, as it uses the Treasury economic model or to endorse its forecasts. In fact, its forecasting record is poor. First it underestimated the growth of the economy arising from the increase in government spending under Labour, and pushed up its growth forecast by 0.6% for 2010 in November. Then, repeating the same error, it underestimated the negative impact on growth arising the Tory-led coalition’s cuts, and slashed its estimate of 2010 growth back to 1.3%.

Even now, the OBR is on the optimistic side of growth projections. As David Blanchflower has pointed out the OECD forecasts lower growth than the OBR’s 1.7% and 2.5% in 2012, projection instead 1.5% an 2%, as does the CBI (1.8% and 2.3%) while the consensus among private forecasters is 1.8% and 2.1%. Yet the OBR’s forecasts would still make this the weakest recovery from recession since the 1930s.

Budget Measures

The Budget does nothing to alter the negative economic effects of government policy. Osborne described it as ‘fiscally neutral’, that is will have no net impact on the level of government spending or revenue on the economy . This means going ahead with plans for massive spending cuts and tax increases beginning in April that were announced last June and last October in the Budget and the Comprehensive Spending Review.

The downturn was caused by the government’s decision to withdraw £9.4bn from the economy in the financial year just about to end. But its plans to withdraw a further £41bn from the economy this year through spending cuts and tax increases on middle income earners and the poor are unchanged.

This is equivalent to 2.7% of GDP, and requires heroic assumptions about the willingness of the private sector to make up that shortfall. In fact, as the recent survey from the Institute for Chartered Accountants in England and Wales makes clear, the private sector is struggling under the weight of government cuts, with nearly half of firms (47%) reporting lay-offs as a result.

• Taxation. The government is cutting corporation taxes and other taxes on businesses. It seems to believe low taxes necessarily attract businesses. That is incorrect, and can in fact store up serious imbalances in the economy. Iceland and Ireland have the lowest taxes in the OECD – and are not an advert for low taxes! Germany has the highest corporate tax rate in the EU – and Europe’s most successful economy. But what the tax cuts do show is that we aren’t all in this together – tax cuts for the wealthy while the poor and middle incomes are clobbered. It also means tax revenues are lowered.
• Deregulation. The likelihood is we will only see the full economic picture as supplementary Budget docs are released, but lightening anti-money laundering rules is not a good start. Enterprise Zones were tried and failed under Mrs Thatcher- they simply tend to shift jobs from one location to another at significant cost to the Treasury.
• Education The Chancellor trumpeted support for university technical colleges and apprenticeship schemes. But this is the government which has trebled higher education fees and abolished EMA which will be hugely damaging to the requirement to create a highly educated workforce.
• Pensions. But the elderly will also suffer. Osborne announced his intention to continuously push the retirement age higher, meaning that some young people yet to enter the workforce may never achieve a decent retirement, especially as pension contributions are set to rise by 3% and there is the threat to implement the Hutton Review into pensions, meaning lower pensions, higher contributions and many pushed out of public sector schemes altogether.
• Tax Avoidance. Osborne introduced measures he said would yield £1bn in closing tax loopholes and avoidance of a total of £14bn, yet the HMRC has previously said the total ‘tax gap’ of uncollected taxes was £42bn in the last FY . But even this miserably small effort is a tribute to the campaigning efforts of those in ukuncut and false economy who have done been highlighting Britain’s biggest tax dodgers and campaigning against them.
• Fuel stabiliser. Taxes have been increased on oil & gas companies to pay for a cut in the fuel duty stabiliser and fuel duty. But the Tory-led coalition’s increase in VAT raised the price of fuel at the petrol pump by a far greater amount than these cuts, a 3p rise versus a 1p cut. This is a typical Tory con, well practised by Tory Mayor Boris Johnson in London where a freeze in the Council Tax is more than offset by soaring fares.
• Raising the Personal Allowance. Raising the personal allowance before income tax paid to £8,015 per annum is billed as a measure to benefit the poor. But this is untrue. The very poorest, including students, the retired, the unemployed and many part-time workers don’t earn enough to get caught in the tax threshold. The real beneficiaries are much higher earners, who enjoy the full benefit of the allowance until they reach the higher earnings’ tax rate.
• Green Investment Bank (GIB). It’s welcome that that the funding for the GIB is being increased to £3bn – after the widespread criticism that the original £1bn was pathetically small. But even the new amount is wholly inadequate to the pressing task of carbon-emission reduction and will not be lending to any projects before 2015. It is as if Osborne is determined that no government investment at all take place which might soften the blows he is inflicting on middle-income earners and the poor.

Alternative

The alternative should be clear, and it cannot be slower, shallower, more anguished cuts that many on the Labour front benches still favour. In fact the thankfully unimplemented March 2010 Budget authored by Alistair Darling and Peter Mandelson would have imposed £26bn in spending cuts and tax increases this year, compared to Osborne’s £41bn – somewhat shallower but nearly treble the fiscal tightening seen to date. If Labour is frightened by the reaction in the financial markets to a pro-growth economic policy, it shouldn’t be. As elsewhere, it is this government’s economically damaging policies which have led Moody’s ratings’ agency to question the sovereign credit rating.

The key to economic recovery remains government investment. Business investment fell by 18.8% in 2009 and accounts for three-quarters of the entire decline in GDP. By contrast, government investment rose by 14.1%, while current spending rising by 1%. It was this that laid the basis for the modest economic recovery in late 2009 through 2010, which led to falling unemployment and a falling deficit. This government has hit the brakes hard on investment in 2010 and now is in reverse, with a 12% fall in government investment planned for this year. Inevitably, this is already producing a renewed rise in unemployment and a renewed rise in the public sector deficit.

Low corporate taxes, deregulation and lower public spending are not even designed to restore economic growth and reduce the deficit. As the Wall Street Journal helpfully points out, their true purpose is the reduction in wages in both the private and public sectors, leading to higher profits . A policy based on restarting growth, reducing unemployment and actually reducing the deficit has to begin with the opposite policy to Osborne – that is it has to support investment, not cuts.

.765ZThe Hutton Report Is An Attack On All WorkersBy Michael Burke

Millions of workers will have to work longer, make higher pensions contributions and receive lower pensions in retirement, if the recommendations of the Hutton Report are adopted. That the Tory-led coalition is able to turn to a Blairite Labour former minister to build a consensus for this attack is itself a scandal. But the scandal deepens once the report is examined.

It calls for pensions to be related to career-average earnings (dubbed CARE in the Report), rather than final salaries, for increased pension employees’ contributions, for an increase in the retirement age and lower pension entitlements. In addition, it is recommended that a large swathe of private sector workers (both ‘outsourced’ and contract workers) be removed from the Local Government Pension Scheme altogether, despite the fact that these entitlements, like the others have formed part of work contracts.

But not a single of one of these proposals is costed or specified in detailed terms. Instead, the bulk of the 215-page report is devoted to a lengthy argument on the supposed superiority of CARE-based pension over final salary ones. There is no justification for stating this without specifying the level of pensions and the contributions to support them – which is not done.

Instead, the thrust of the Report is aimed at boosting the case for severely reduced pensions, without ever making the case for this. Instead, talk of ‘unprecedented’ rises in longevity since World War II is designed to create an air of crisis. In fact, to take a comparison, life expectancy at birth rose by approximately 30 years in Britain between 1800 and 1840, and has risen by approximately 8 years since WWII. The improvement in longevity, in short, is clearing slowing, if not reaching a plateau but throughout the entire previous historical period pension entitlements were being established or were increasing and not being cut and falling.

This adoption of a scare tactic is fatally undermined by the second chart reproduced in the Hutton Report itself. It shows that the proportion of GDP devoted to public sector pension schemes will fall dramatically in coming years on current policy settings, that is without any of Hutton’s ‘reforms’. The chart is shown below.

Chart 1

The chart is from a commissioned report from the Government Actuary’s Department. This shows that the proportion of GDP devoted to public sector pensions will peak at just 1.9% in the current Financial Year (FY) 2010/11 (ending in April this year) and that it will fall to just 1.4% in FY 2059/60. The fan chart shows a distribution of outcomes by likelihood based on assumption about the growth in productivity, the public sector workforce and longevity. But even in the highest-case scenario, the pensions payout is just over 1.5%, much lower than currently, and in the lowest-case it is a little over 1.2% of GDP.

There is therefore no substance to the claim of a public sector pensions crisis. Assertions that there is a crisis are a fallacy, which are designed to create an atmosphere where cuts to pensions are acceptable.

The Cost of Pensions

Using the Hutton data, the outlay on public sector pensions amounted to under £27bn in the current FY. This is less than the payout on private sector pensions. In the boom years of FY 2007/08, that is before the recession, this private sector pensions payout was £35bn, which was lower than all the combined subsidies offered by the government towards private sector pension, which amounted to £37.6bn Therefore, the entire payout from private sector pensions in that year did not arise from the returns on investment, still less their efficient identification by pension fund managers. Instead, it came directly from taxpayers, with over five million of them in the public sector, and a greater number in the private sector with little or no pension provision themselves. It is the private, not the public sector pension provision which is crisis and in need of subsidy.

This is not an argument against the benefits received by pensioners in the private sector. But, noting the inherent inefficiency of private sector pensions, there is a clear case for bringing them into the public sector, to achieve a more efficient return.

The Hutton Report also shows the annual payout for public sector pensions. This is show in the chart below.

Chart 2

Hutton focuses on the unfairness of the pensions payout, which is undeniable. Higher earners receive a higher proportionate payout than the low-paid, although Hutton’s CARE option is not sure to redress that. But he neglects entirely a glaring point from the data, that a public sector worker has to be in retirement much longer than in public sector employment simply to get their own contributions back. For the higher paid this is 2.5 years longer in retirement and for the low paid this is 3 years in retirement for every year in work. As many public sector workers (teachers health workers, civil servants, social workers, etc.) can spend a working lifetime in public service, many will never even receive their contributions made. Even any moderate increase in contributions will ensure that this applies to the overwhelming majority of public sector workers- they are not a cost to the State, but are subsidising it.

Finally, the ‘cost’ of public sector pensions is a fraction of other items of spending, for example the military budget. This is currently 2.6% of GDP, but as leading economist have noted, this stated total is only a proportion of the hidden costs of British military spending. However, while British military spending produces only destruction and mayhem overseas, and fat bonanzas for corrupt arms’ manufacturers , spending on pensions produces economic well-being, increased demand and smoothed incomes over a lifetime, all of which contribute to the economy. These in turn provide sizeable returns to government as output, demand and profits are all boosted, which all in turn boost tax revenues and lower outlays in areas such as healthcare.

This economic and fiscal benefit of public sector pensions is entirely ignored by Hutton. But it should not be ignored by anyone who wants an economy to grow by placing the wellbeing of its citizens at its core.

T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com1

.490ZyesAt the General Election in 2015 will the Tories get 29.6% or 34.6% of the vote? Implications for LabourBy John Ross

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

.051ZStructural deficit denial?

By George Irvin

The following article explains what is a ‘structural budget deficit’ and how this concept is misused by those attempting to justify Tory cuts.

* * *

In a recent Guardian piece, George Osborne accused Labour of a ‘reality deficit’ in attacking his deficit reduction plan, since they themselves proposed much the same.[1] Indeed, the notion that Britain must close the ‘structural’ budget gap by some combination of cuts in government spending and tax increases was accepted by Alistair Darling and not merely by Osborne. What’s wrong with Osborne’s argument?

A ‘structural’ deficit is defined as one not associated with recession. The view that the budget gap is mainly structural – as opposed to cyclical – has allowed Mr Osborne to argue that it was Labour’s spending, not the recession, which ‘caused’ the budget gap. In the words of Robert Chote, then Director of the Institute of Fiscal Studies (IFS) and main author of their 2009 Green Budget:

Labour entered the current crisis with one of the largest structural budget deficits in the industrial world and a bigger debt than most OECD countries, having done less to reduce debt and – in particular – borrowing than most since 1997.[2]

It should be added that the IFS, though often characterised in the media as one of Britain’s most influential independent think tanks, played a key role in promoting the notion that Britain’s structural deficit had grown far too large. The Office of Budget Responsibility (OBR), initially under Alan Budd but currently under Chote, has peddled the same argument.[3] But the most pessimistic view of all has come from the Treasury, which has argued that the structural deficit accounts for as much as two-thirds of the total deficit.[^4]

What is the difference between the so-called ‘cyclical’ and ‘structural’ components of the deficit? During a downswing in the business cycle, tax receipts fall and social spending on items such as unemployment benefit increases, thus giving rise to the so-called cyclical component of the deficit. This component is self-liquidating since the opposite happens during the business cycle upswing. So the budget should balance over the cycle as a whole unless -and this is the crux of the matter – there is a further ‘structural deficit’; ie, a gap between current receipts and revenue which remains even when the economy returns to growth with full employment.

At this point, the argument gets a bit more complicated. During a run-of-the-mill recession, the economy may turn down for a period but soon recovers its previous path—the so-called ‘potential output’ path. In a serious and prolonged downturn such as the one we are experiencing in Britain, part of the country’s productive capacity is lost forever, thus permanently shrinking the tax base and reducing the employment and output potential. When this happens, economists have serious difficulty predicting both by how much potential output has fallen, and how long it will take to get back to the (now lower) full-employment non-inflationary growth path, sometimes abbreviated as NAIRU. Moreover, the story is even more complicated if any external inflationary pressure exists since it is claimed the non accelerating rate of unemployment (NAIRU) may be higher than that which prevailed before the recession.

For example, the Treasury and the OBR differ in their respective forecasts of the ‘recovery’ rates of growth the UK will experience between now and 2015. And on the Monetary Policy Committee (MPC), Andrew Sentance has recently argued that firmer action must be taken to combat the inflationary danger, inter alia, because the gap between current output and potential output, or output gap, may be smaller than we think.[5]

Nevertheless, there are serious reasons for believing that the notions of structural deficit, output gap, and NAIRU are all quite shaky. First, NAIRU is notoriously difficult to quantify, particularly at present when inflation is largely imported and wage pressure on prices is negligible.

Secondly, how large is the output gap? If the pre-2008 trend-line for output is taken as the reference point, the gap measured as a share of GDP is currently 11%. But the Treasury now thinks that 6.5% of GDP has been permanently lost, leaving the (reduced) output gap at 4.5%. If Britain’s output, employment and tax base has shrunk that much, it helps explain why the Treasury believes the two-thirds of Britain’s deficit is now structural; ie, the reduction in full capacity output means that Britain can no longer ‘afford’ to spend as much as it could in ‘normal’ times.

Thirdly, the budget (or ‘government savings’) gap cannot be separated analytically speaking from the other national accounting savings identities. For simplicity, assume that the external current account remains constant – in reality, a tenable assumption. For a given level of national income, if the private sector decides to save more (say in order to rebuild its savings), the public sector must spend more by definition. In short, policy makers lack the autonomy to reduce public spending without having an impact on other variables – in particular, the level of national income (as the Irish and Greek cases clearly demonstrate).

Fourthly, the structural deficit argument depends on assuming a fixed structure of revenue. But the tax-revenue response to each percentage point rise in income is not carved in stone; it can be changed through tax reform. In 2010, a study undertaken for Compass indicated that a further £50bn per annum in tax (about 4% of GDP) could be raised merely by raising the tax paid by the top decile group whose overall percentage tax contribution is currently smaller than that of the bottom 10% of households.[6] Indeed, a Tobin tax of only 0.05% would bring in even more.[7]

Finally, the obvious rejoinder to the argument that the structural deficit is higher because potential output (and output gap) is now lower is to call for more public investment directed towards increasing the economy’s output potential. Such investment – say in modernising infrastructure – would have two effects. It would both help to ‘crowd in’ private investment while, through the multiplier effect, raising national income and employment and thus tax receipts.^[8]

Chris Dillow, a columnist for the Investors’ Chronicle, has summed up the case against the structural deficit concept admirably. As he argues, there are some countries with large structural deficits but low debt-to-GDP ratios in which the bond markets still have confidence, while there are others with much smaller structural deficits which the bond markets have turned against;

I fear, then, that the idea of a structural deficit serves a political rather than analytical function. It’s a pseudo-scientific concept which serves to legitimate what is in fact a pure judgment call – that borrowing needs cutting. By all means, make this call. Just don’t think that talk of a structural deficit helps enlighten us.[^9]

The next time you hear George Osborne reassert the overriding need to eliminate Britain’s structural deficit during this Parliament, ask yourself whether his call is anchored in sound economics or merely in right-wing shrink-the-state ideology.

References

[1] See http://www.guardian.co.uk/commentisfree/2011/feb/28/labour-reality-deficit-ed-balls

2 See http://www.ifs.org.uk/publications/4623

3 See http://socialisteconomicbulletin.blogspot.com/2010/06/fake-independence-of-office-for-budget.html

4 See http://shrvl.com/69SCW

5 See http://www.bankofengland.co.uk/publications/speeches/2011/speech476.pdf

6 See http://clients.squareeye.com/uploads/compass/documents/Compass%20cuts%20WEB.pdf

7 See http://www.guardian.co.uk/commentisfree/2011/mar/02/deficit-cuts-banks-robin-hood-tax?

8 I am grateful to Michael Burke for emphasising this argument.

⁹ See http://shrvl.com/ax6HQ; also http://www.levyinstitute.org/publications /?docid=1258