Local Impact of the Coalition’s Policies

Local Impact of the Coalition’s Policies

By Michael Burke

Opposition to the Tory dominated coalition government’s economic policy is already growing, with just 22% supporting their programme of cuts. This is well before the majority of this year’s cuts of £9bn are implemented, which are themselves overshadowed by the £41bn in spending cuts due next year. The Comprehensive Spending Review on 20th October will spell out in greater detail where spending will be axed. The unpopularity of current policy seems set to grow.

One of the key areas targeted by the coalition is spending in the devolved authorities, regions and local authorities. Local government spending was cut almost immediately after the election, £2.8bn slashed from the devolved administrations, local government and Transport for London in the first £6.2bn package . Other cuts, such as to transport projects and flood defences will have a specific impact on local spending and services.

Reactionary “Localism”

This is a political choice. The coalition’s aim is twofold: to deflect criticism away from central government and to co-opt others, especially those outside the coalition parties into supporting or defending the programme of drastic cuts. Floundering for a contemporary or historically important example of where spending cuts had actually reduced the deficit, the coalition has met with the BBC”s approval in alighting on the Canadian cuts of the 1990s. Ignoring the five-year domestic recession and rising debt level the Canadian federal government policy caused, even while benefitting from the “Clinton boom” to its South, the main mechanism Ottawa chose was simply to choke off the very large transfers to Canada”s provinces, which were responsible for huge budget items such as healthcare and welfare provision.

Now a host of reactionary commentators, such as the Centre for Policy Studies are urging a new “localism” on the coalition, a call which is echoed by Guardian columnists including Simon Jenkins, who cynically argues that Cameron can “spread the blame on cuts” by devolving welfare budgets to local authorities, and cutting them. This has nothing to do with increased local democracy, but is merely a self-serving attempt to avoid the political consequences of a reactionary and deeply unpopular policy.

Local Effects of the Cuts

That cynicism is widespread, with many local political leaders attempting to blame coalition cuts for their own policies which had pre-empted them. This is true of Boris Johnson in London and the Tory-LibDem coalition in Birmingham, both of which cut spending before their government funding was reduced. Yet the power of local opposition to cuts is demonstrated by the postponement of the measures for one year in Scotland- even if the cynical motivation is the same, with Tories, LibDems and the incumbent SNP all hoping to soften the expected backlash at the May 2011 Assembly elections.

The actions of the mini-coalition leadership of the council in Birmingham are perhaps the most brutal. Almost 26,000 local authority staff (all the council’s non-teaching employees) have been threatened with redundancy and issued with legal notices informing them that their pay and conditions have been cut.

The impact of either redundancies or pay cuts will be severe, not only for the workers and their families and all those who rely on the services provided. But it will also have a direct negative impact on the local economy.

These can be measured in terms of employment and incomes. There are both direct and indirect effects of reducing employment in the public sector. The indirect effect falls mainly on the private sector. This is shown in the table below, from analysis of the Input-Output tables, and is published by the Scottish government . Type I effects in this table are the direct impacts of a change in the employment levels or incomes of the sector. Type II effects include the indirect effect from those changes on other sectors (arising from changes in demand for supplies to the sector, and in demand arising from changes wage totals, etc).

Table 1

10 10 01 Table 1 Local Effect of Cuts
Therefore, if 1,000 jobs are cut in public administration the direct effect will be to create 1,410 total job losses mainly as private sector activity is also hit. As jobs are also hit in those sectors the total job losses arising from the initial job losses of 1,000 rises to 1,760.

Likewise, if incomes (pay) are cut by £1mn in public administration, the direct effect will be to reduce incomes by £1.35mn as the loss to spending power multiplies through the economy. But, as incomes in other sectors are also adversely affected, this total loss of income rises to £1.6mn. These losses mainly take place in the locality where the initial cuts are made, since middle and lower income workers spend the overwhelming bulk of the pay locally.

Outsourcing, Privatisation

In the case of Birmingham, any redundancies will cause private sector job losses, and any reduction in pay will have the same effect. The actions of Suffolk county council also directly impact 26,000 workers, although here the mechanism is to cut 30% of the budget and outsource the entirety of its current service provision- in all areas. Community groups, volunteer and charities are supposed to fill the gap. But in reality, the bulk of all outsourced services will go to the private sector, where the compulsion to secure profits will mean either a worse service and fewer jobs, or higher costs than via council provision.

In both the Birmingham and Suffolk cases a policy of reducing public services and jobs in order to boost the profits of the private sector is being dressed up with the rhetoric of “fairness” and “democracy”. There will be more dishonest rhetoric, and greater damage done to the wider economy as the programme of cuts deepens.

As I have already shown in Tribune, the alternative approach, investing to boost the economy, already had a limited but definite beneficial effect in the UK, due to measures taken by the Labour government, and has already shrunk the budget deficit. The fall is a modest one, but that is a function of the very small boost to the economy from the 2009 Budget. The general proposition is that cuts lead to a disastrous slump and deficit-widening, while government spending focused on investment increases wider activity, which reduces the deficit. This is very clear from the different trajectories of Irish and Spanish economic activity and their public deficits – an issue I have looked at in detail on the Guardian’s Comment is Free.T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

Lessons for Britain’s economy from the stimulus packages in Europe

Lessons for Britain’s economy from the stimulus packages in Europe

By Michael Burke

The pattern emerging from the European economies on growth and public finances holds important lessons for Britain as the coalition begins its policy of cuts to public spending. Most European economies adopted some combination of tax and spending stimulus measures in 2009 in an attempt to restore economic activity. By contrast, the Dublin government took the diametrically opposite approach, and in a series of Budget and ‘emergency’ measures embarked on a ferocious reduction in public spending. The verdict on the impact of those differing policies is now in, and holds clear implications for Britain over the next period.

The Impact of Measures To Support Growth

The economic response to any stimulus measures is apparent after a time lag of some months. There is a further time lag as this change in economic activity is reflected in government finances. This is because many taxes (self-assessed income taxes and taxes on profits in particular) are paid some time after the income or profits were made, sometimes long afterwards.

The size and composition of the measures to boost growth varied across Europe. The European Central Bank (ECB) has an analysis of those measures, which were mostly adopted in 2009. (France and Germany also took further measures at the beginning of 2010, which are not part of the ECB’s analysis). Following the ECB, the table below sets out the level of fiscal stimulus measures in some European economies as a proportion of GDP. Alongside we show the impact both on taxation receipts and the overall level of the public sector deficit in the latest data for those countries.

Table 1

10 09 26 European stimulus table
The most striking feature is that in all cases, without exception, taxation revenues are increasing and the deficit is falling in those countries which adopted measures to boost growth. By contrast, in the one country which did nothing to boost activity, Berlusconi’s Italy, taxes continue to wilt and the deficit is higher in the first half of this year than in the same period in 2009.

It should also be noted that the size of the stimulus measures has some relationship with the pay-off in terms of the subsequent growth of taxes. But there is not a direct correlation. This is because the composition of the measures is also significant. In Keynesian terms, it is because differing types of stimuli have different multipliers attached; they have a widely differing ‘bang-for-buck’, with investment the highest multiplier of all. In Marxist terms, an increase in productivity relies on the investment of capital – combined with the energy and intelligence of labour. But investment formed only a fraction of the overall stimulus measures in the EU as a whole. The chart below, reproduced from the ECB shows that just 28% of the entire stimulus measures were public investment. The remaining two-thirds were measures to support household consumption and businesses.

Chart 1

10 09 26 European stimulus chart 1

But the different impact of these can be noted from the from the fact that the latest forecasts from Eurostat are that EU household consumption will rise by 2.3% this year, while investment (gross fixed capital formation) will fall again, by 2.6%

That is to say, the measures to boost private consumption have had a modest positive effect, whereas the measures to support business activity have not produced any positive result.

Lessons From Madrid

If we take the case of Spanish state, which had the largest package of measures, there has been a vigorous economic response. This seems to have completely by-passed the English-speaking commentators and analysts, who have focused on the meagre recovery in aggregate GDP, up just 0.3% in the first half of his year .

But there has been little analysis of the data, which shows a surge in import demand that masks the much stronger rise in the domestic economy and arithmetically subtracts from it. The final consumption expenditures of households, government and the non-profit sector rose by 1.9% in the first half of this year. Only investment continues to decline, down 2.4% in the first half of the year, hampered by the continuing meltdown in construction. But even here, investment in equipment has risen sharply. In the year since the stimulus measures were announced, investment in equipment has risen by 8.7%. As a result of this rising activity, the public sector deficit has halved in the first 7 months of this year. Rising taxes are overwhelmingly responsible, €18.5bn higher of a total €21.3bn improvement .

Of course the combination of EU, IMF, ratings’ agencies and financial markets have all conspired to strong-arm the Spanish government into adopting massive spending cuts, which were implemented after these data and will impact fully only with their own time lag. A rear-guard action in the form of clinging to cherished investment projects and a modest rise in the minimum wage will not be enough to prevent this capitulation from wrecking both the recovery and the improvement in government finances.

Crucially, over 50% of Spain’s measures took the form of direct investment by the government via public works’ programmes. Of the remainder, the bulk was in tax cuts aimed at the poor, along with the 1.5% increase in the minimum wage. It is this composition of the ‘stimulus’ measures, relying mainly on government investment and boosting the incomes of the poor, that accounted for the Spain’s relative success story. By contrast, initially, the entirety of Germany’s measures were tax cuts, with much more modest results.

Lessons From Dublin

The policy of the Dublin government was precisely the opposite to that of Madrid. Beginning at the end of 2008, a series of Budgets and emergency measures provided a fiscal contraction equivalent to 6.6% of GDP. More spending cuts were made this year more again are threatened for 2011.

The effects have been the reverse of those advertised. Recent editorials in both the Financial Times and the Guardian have highlighted the growing disillusion with the Dublin government’s severe reductions in public spending, arguing that they have not led to any narrowing of the Budget deficit. Only The Economist could find (modest) reasons for optimism, by the simple expedient of accepting the Dublin government’s own forecasts for the deficit rather than analysing the current situation .

The latest economic data show the Irish economy contracting once more in the 2nd quarter of this year. In contrast to Spain, the domestic sector has contracted at a faster rate than GDP, as import demand has plummeted. Crucially, this domestic downturn has led to a continuing contraction in taxation revenues despite a series of tax increases. Overall, investment is 54% below its peak level and is equivalent to the entirety of the slump in GDP.

Equally bad, there is outright deflation in the economy, with prices falling since the end of 2008. These price falls include wages as well as goods, and therefore lower the taxation revenues on all activity. This has the disastrous effect of reducing the government’s income stream to finance the existing level of debt. In real terms, deflation increases the debt burden.

Normally, ‘Depressions’ are spoken of when output falls by 20% or more. In nominal terms Irish GNP, excluding the external sector, has now fallen for 9 consecutive even though the Euro Area recession ended a year ago. And it has fallen by 24% from its peak. This is an Irish Depression.

Of course, Irish tax revenues have plummeted as a result, and now the public sector deficit is projected by the EU to be 14.7% of GDP next year. This is more than double the initial size of the deficit in response to the slowdown and is now the highest in the Euro Area. This is a policy-induced crisis of the economy and of government finances.

The cuts promised by the collation government in Britain are of the same order as their fellow Thatcherites in the Dublin government.T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com1

Structural weakness of UK GDP

Structural weakness of UK GDP

By Mick Burke

The British economy grew 1.2% in the 2nd quarter of this year, following a rise of 0.3% in the previous quarter. It was the strongest quarterly growth rate recorded since the beginning of 2001, prompting the Daily Express to talk of a ‘mini-boom’ continuing into next year.

A more sober consensus is that this may be the strongest growth rate for some time and many commentators, some of whom are very far from the political left, continue to point to the danger that the government’s fiscal policy is increasing the risks to the recovery. Thus for example, according to David Kern, economist at the British Chamber of Commerce: ‘The huge scale of the retrenchment that the government wants to implement, and the decision to cut the fiscal deficit at an accelerated pace, will inevitably increase dangers of double-dip recession. In spite of the relatively strong recent UK performance in the second quarter, the recovery is still fragile and risks of a relapse are high.’

State of the Economy

The cyclical upturn in the economy follows the sharpest British recession in the post-World War II period, a contraction of 6.4% taking place over 18 months (six quarters). The economy has been expanding now for nine months and yet GDP remains 4.5% below its peak.

There is nothing ‘V-shaped’ about the recovery. In monetary terms the real decline in the economy, measured in constant 2006 prices, was £88bn, while the subsequent expansion has been just £20bn – £16bn of that in the latest quarter.

Even this rebound is not a token of renewed underlying strength, but above all a restocking of inventories. The quarterly change in business inventories accounts for 1.0% of the 1.2% growth in the quarter. Even if the restocking has further to run, which seems probable, it is not a sustainable basis for economic recovery without a rebound in consumption and investment.

The slump in fixed investment was a key contributor to the recession and remains its main area of weakness. The charts below highlight this Figure 1 shows the changes in the components of GDP over the six quarters from the beginning of the recession to its deepest point.

Figure 1

10 09 06 Mick Burke Chart 1

GDP contracted by £88bn. This was driven almost equally by a fall in personal consumption and in fixed investment (gross fixed capital formation) which were down £42.9bn and £40bn respectively. Declining inventories also subtracted from growth. Statistically, net exports rose but this was only because the decline in imports exceeded the fall in exports. The only substantive positive contribution to growth came from rising government consumption spending which was up £9.5bn. It should be noted that the latter important government prop to growth has led to a reduction in the budget deficit, not an increase. As SEB has previously shown, government income have risen in response to increased government spending.

Chart 2 below shows the same components of GDP from the beginning of the recession in 2008 to the second quarter of 2010. The main feature is that the decline in investment has continued, falling again in the 2nd quarter of this year even while other components such as personal consumption have recovered and dragged aggregate GDP higher.

Figure 2

10 09 06 Mick Burke Chart 2

As a result, the decline investment now accounts for nearly two-thirds of the entire decline in GDP to date, £40bn within a total decline of £62.7bn. In consequence, net exports make a reduced contribution to growth, as exports have barely recovered and remain 9.4% below their peak while imports have risen faster. Among the many fantastical forecasts made by the Office of Budget Responsibility was that a 6.1% rise in world trade this year would lead to a growth in British exports of 4.3%. Yet the rebound in world trade already exceeds that forecast, up 7% according to the IMF. Yet British exports are up just 2.7% in the 1st half of this year, despite a fillip from Sterling’s depreciation.

Since investment is the key determinant of long-term growth the persistence of this private sector investment strike will transform a cyclical weakness into deepening structural one.

Private firms cannot be certain of achieving a profit when demand is subdued. Their response is to cut investment programmes and to attempt to reduce costs. They also look to government to reduce their external costs via lower tax rates and other means (reduced pension contributions, lower entitlements to sickness and maternity pay, abandoning equality provisions, etc.) and above all, lower wages.

The chart below shows the main income categories of GDP; compensation of employees, the gross operating surplus of firms (GOS – akin to profits) and taxes (all in nominal terms). As the chart shows, the GOS fell in the recession, down by 8.3%. It has since recovered but remains well below its peak, whereas taxes have risen and the compensation of employees, initially flat, has recently risen. (This rise is not a significant increase in wage levels but reflects the increases in pay and bonuses in the financial sector).

Figure 3

10 09 06 Mick Burke Chart 3

Political Response

From the perspective of many individual capitalists, all this is a disaster. Profits have declined, but taxes and compensation have risen. Aside from reducing investment and hoarding cash, the response demanded is that the government reduce taxes and take measures to reduce wages. The hue and cry about the deficit masks this central thrust of economic policy. Corporate taxes are being lowered towards 24% (even as VAT rises, hitting the poor) and all types of welfare benefits are reduced in an effort to drive incomes lower.

This is the thrust of government policy. It has the effect not just of increasing short-term risks to the economy but ensuring long-term damage via the continuation of the investment strike. It enshrines a lower level of wages and benefits to the poor in return only for the prospect of increased profits.

But recently, David Milliband argued, echoed by Tony Blair in the BBC interview with Andrew Marr on his biography, that this government economic policy should be accepted!

David Milliband even claimed:”The closest parallel [to Labour’s current situation] I can think of is the Tories’ rethink under R.A. Butler after they lost the 1945 General Election”. “Rab” Butler was the prime mover behind the post-War Conservative acceptance of the 1945 Labour government’s reforms, the introduction of the welfare state, the NHS and nationalisation of major bankrupt industries. In this speech, David Milliband signals he is willing to accept the ferocious assault now being organised against workers and the poor. It would condemn the whole economy to prolonged slow growth, with the poorest suffering the most.T Walkerhttps://www.blogger.com/profile/11107827543023820698noreply@blogger.com0

US economy – the combination of structural slowdown and cyclical recession

US economy – the combination of structural slowdown and cyclical recessionBy John Ross


This article focuses on evidence confirming long-term slowdown, as well as cyclical recession, of the US economy as indicated in the latest release of the 2nd quarter 2010 US GDP figures.


As widely reported, the second estimate of 2nd quarter 2010 US GDP revised annualised US growth down from 2.4% to 1.6% – i.e. US GDP grew by 0.4% during the 2nd quarter. The main changes compared to the first GDP estimate, in constant and annualised 2005 price terms, were a downward revision of net exports by -$19bn, due primarily to an upward re-estimation of imports by $14bn, and a revision of inventories downwards by -$13bn. Fixed investment remained essentially unchanged compared to the earlier first GDP estimate, with a revision downwards of -$1bn, and personal consumption was recalculated as $8bn higher than in the first GDP estimate (Bureau of Economic Analysis, 2010b) (Bureau of Economic Analysis, 2010a). An earlier article made a detailed examination of 2nd quarter US GDP data and therefore only the implications for long-term trends are dealt with here. (Ross, 2010)

Slow recovery

The downward revision of 2nd quarter GDP naturally highlights how much slower present US recovery is than in previous post-World War II business cycles. Ten quarters into the downturn US GDP still remains 1.3% below its peak in the 4th quarter of 2007 – see Figure 1. In the previous worst post-World War II business cycle, that following 1973, recovery to the previous peak level of GDP was complete after eight quarters. Unless there is a significant acceleration of growth, US GDP will not regain its peak level until 2011 – meaning at least three years of net zero percent growth.

Figure 1

10 08 28 Bus Cycles

This slow recovery is, however, in line with a gradual but clear deceleration of long-term growth in the US economy – see Figure 2. The moving 20 year average of US GDP growth has now fallen gradually to 2.5% – significantly below its 3.5% historical average. Reasons the US is unlikely to reverse this trend in the foreseeable future are analysed below.

Figure 2

10 08 28 20Y Growth Annual

Fixed Investment fall

The new GDP figures also cast clear light on the issues of whether the recession in the US is primarily created by trends in consumption or investment. A number of analyses suggested that the core of the US economic crisis would be deleveraging by US consumers– see for example (Roach, 2009). If so the decline in US GDP would be centred in US consumption. The present author has consistently argued that this analysis is in error and that the core of the recession in the US is the decline in fixed investment. (Ross, 2010a) This is again strongly confirmed by the new revision of US GDP data.

Due to the significant downward revision of the US GDP figures, and the small upward revision of the consumer expenditure figures, consumption as a percentage of US GDP clearly remains well above its pre-financial crisis level – see Figure 3. Between the peak of US GDP, in the 4th quarter of 2007, and the 2nd quarter of 2010, US personal consumption has risen from 69.9% of GDP to 70.5% and total US consumption has risen from 85.8% of GDP to 87.6%.

Figure 3

10 08 28 Ch Personal & Total Consumption

The 1.8% of GDP increase in consumption as a percentage of US GDP is accounted for by a 0.8% of GDP increase in the share of military expenditure, a 0.6% of GDP increase in the share of personal consumption, and a 0.4% of GDP increase in the share of Federal non-military consumption.

In contrast the share of fixed investment in US GDP has fallen sharply by 3.6% of GDP. The share of non-residential fixed investment has fallen by 2.1% of GDP and the share of residential fixed investment by 1.5% of GDP.

The changes in components of US GDP, in terms of fixed price annualised 2005 dollars, are shown in Figure 4. US GDP remains $172bn below its previous peak level. However net exports, inventories, and government consumption are already above their 4th quarter 2007 level – by $116bn, $51bn and $112bn respectively. Personal consumption is below its 4th quarter 2007 level but only by $72bn. The US recession is entirely dominated by the $410bn decline in fixed investment.

Figure 4

10 08 28 $ 2Q 2007

The US economy, therefore, has not responded to the financial crisis primarily by reducing consumption, through personal debt deleveraging or other means, but by sharply reducing fixed investment.

Implications for long term US growth rates

A severe decline in US fixed investment, however, does not have only short term effects. As confirmed in the latest data of Jorgenson and Vu, capital investment continues to account for more than fifty percent of US GDP growth – the percentage for the latest period they analyse, in 2004-2008, is 61%. (Jorgenson & Vu, 2010) Under such conditions a severe decline in US fixed investment, of the type seen during the current recession, in practice excludes a rapid resumption of US GDP growth.

The slowdown that has been witnessed in long term US economic growth is therefore likely to continue. The present recession confirms a pattern of not simply cyclical downturn but structural slowing.

In that context the marked acceleration of US GDP growth which took place in 1995-2000 would appear to be a temporary upward fluctuation, financed by large scale import of capital, within an overall context of a long term structural slowdown of the US economy. It would not appear to mark the beginning of a more rapid US growth period.

The above trends therefore indicate that not only short but medium and long term projections for US economic growth should be assumed to be lower than historical averages. The US economy has been gradually slowing in not only a cyclical but a structural fashion.

* * *

This article originally appeared on the blog Key Trends in Globalisation.


Bureau of Economic Analysis. (2010b, August 27). National Income and Product Accounts Gross Domestic Product, 2nd quarter 2010 (second estimate). Retrieved August 27, 2010, from Bureau of Economic Analysis: http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_2nd.htm

Bureau of Economic Analysis. (2010a, July 30). National Income and Product Accounts: Gross Domestic Product: Second Quarter 2010 (Advance Estimate). Retrieved July 30, 2010, from Bureau of Economic Analysis National Economic Accounts: http://www.bea.gov/newsreleases/national/gdp/2010/gdp2q10_adv.htm

Roach, S. (2009). The Next Asia. Hoboken, New Jersey: John Wiley and Sons.

Ross, J. (2010a, February 11). The myth of the decline of the US consumer. Retrieved August 28, 2010, from Key Trends in Globalisation: http://ablog.typepad.com/keytrendsinglobalisation/2010/02/the-myth-of-the-decline-of-the-us-consumer.html

Ross, J. (2010, July 31). US 2nd quarter GDP figures – investment remains the key issue for US recovery. Retrieved August 28, 2010, from Key Trends in Globalisation: http://ablog.typepad.com/keytrendsinglobalisation/2010/07/us-2nd-quarter-gdp.htmlJohn Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com1

Sales of Marx’s Capital increase by 1000% in Germany

yesSales of Marx’s Capital increase by 1000% in GermanyIt has been the resurgence of Keynesian economics, led by figures such as Joseph Stiglitz and Paul Krugman, which has been the largest beneficiary from the crisis of the former ‘conventional wisdom’ in academic economics. However more radical views have also gained a wider audience. One index of this is a tenfold increase in the sales of Marx’s Capital in Germany. An account of this, together with a rather accurate description of Marx’s theory of crisis by Cliff Bowman, Professor of Strategic Management at Cranfield University School of Management, can be found in a video posted on the Socialist Unity website.
John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

Trade Unions Call for Investment as the Means to Economic Recovery

Trade Unions Call for Investment as the Means to Economic RecoveryBy Michael Burke

‘The government’s deflationary policies have been a major driver in our recession. They have cut growth and economic activity, reduced employment, driven down tax revenues and driven up unemployment costs…. borrowing costs increased. It’s like running in quicksand – the more the government cuts, the more we sink. The dole queues, the emigration lines, and the vacant shop-fronts are a testament to government policy.’ So says Jimmy Kelly, Irish Regional Secretary of UNITE, the union, writing in the latest Sunday Business Post .
In British Tory circles, the policy of the Irish government in moving straight to massive spending cuts is much admired, even if the outcome has been an embarrassment. Prior to the recession there was a small budget surplus. The deficit rose to 7.3% of GDP by the end of 2008 as the recession began to bite. But the policies of the Irish government in effect doubled it to 14.3% of GDP in 2009- and created the longest and deepest recession in Western Europe. Yet, while welfare payments to young jobseekers were halved, medical cards for the elderly withdrawn, and payments to single parents and the disabled were slashed, huge sums have repeatedly been found to bail out zombie banks. The €25bn to Anglo-Irish Bank alone dwarfed the spending cuts of over €14bn. If the bank bailouts are also included the deficit rises to just under 20% of GDP.
Despite all this, the debate in Ireland is frequently dominated by Thatcherite ideology, shared not simply by government supporters (who have dwindled to below 20% in opinion polls) but also by many of their supposed critics. One of these erstwhile critics, central bank Governor Honohan recently claimed in a New York Times article that ‘no-one is arguing for stimulus.’ This is not true, with ITUC General Secretary David Beg calling for investment, a view echoed by the main employers’ association the IBEC.
In fact, Jimmy Kelly is calling for something far more productive than stimulus. ‘This is not a traditional stimulus programme, whereby the government temporarily boosts demand until such time as the private sector gets back on its feet. It is an investment-led programme constituting a major drive to modernise our economic base and boost productivity.’
‘Take the example of our physical infrastructure; our transport, telecommunications and energy networks are ranked as among the worst in the industrialised world. This is a major drag on growth, productivity and competitiveness. An investment drive that delivered next generation broadband to every house and business, a coherent public transport system, a water network that didn’t leak and an upgrading of our building stock to the highest possible energy rating is the type of bold, creative vision we need.
‘The best thing is that this will not cost the country any real money. Investment in wealth-creating and cost-reducing assets does not create debt – it creates an economic return which, in turn, reduces deficits and debt. We must invest our way to a balanced budget’.

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

Sales of Marx’s Capital increase by 1000% in Germany

Sales of Marx’s Capital increase by 1000% in GermanyIt has been the resurgence of Keynesian economics, led by figures such as Joseph Stiglitz and Paul Krugman, which has so far been the largest beneficiary from the crisis of the former ‘conventional wisdom’ in academic economics. However more radical views have also gained a wider audience. One index of this is a tenfold increase in the sales of Marx’s Capital in Germany. An account of this, together with a rather accurate description of Marx’s theory of crisis by Cliff Bowman, Professor of Strategic Management at Cranfield University School of Management, can be found in a video posted on the Socialist Unity website.

Improved growth shows investment works – the 2nd quarter UK GDP figures

Improved growth shows investment works – the 2nd quarter UK GDP figuresBy Michael Burke

The British economy expanded at its fastest rate since the recession ended, up 1.1% in Q2 according to preliminary data. These data are often subject to substantial revisions, but the hope must be that, having been held over and scrutinised for 2 weeks, they are an accurate reflection of the pick-up in activity.

The latest growth rate represents a significant acceleration over the prior two quarters when the cumulative expansion was just 0.7%. But the pace of the recovery is almost exactly in line with the recoveries from both the 1980 and 1992 recessions, which were much milder and shorter than the recent slump. In both the 1980s and 1990s recessions the previous peak in activity was recovered after 3 years. At this similar pace it will take close to 5 years to recover the previous peak in activity.

There are two key factors which supported the modest rebound in activity- the depreciation of the pound and the 2009 Budget.

The fall in the pound has been precipitate. As the chart below shows, prior to the recession Sterling was valued at over 2 US Dollars, and fell by over 26% in 2008 and to a low of US/£$1.37 early in 2009. This depreciation and the recovery in global trade prompted a very modest pick-up in exports. In the Q1 GDP data (the preliminary Q2 do not provide a breakdown of the national accounts) exports are 2.9% above their recession low in Q2 2008.

Chart 1

At the same time government spending has been the main support for the recovery. Current government spending and government’s share of investment (gross fixed capital formation) have risen by a combined 12.6% since the recession began. In the course of the recession, government spending rose by £18bn compared to an aggregate contraction of £88bn. In the two quarters of recovery to Q1, the further direct effect of these two factors, export growth (£7.3bn) and increased government spending (£13.6bn) has more than accounted for the entire growth of the economy (£9.7bn). If, as reported, other sectors of the economy made a greater contribution to growth in Q2 – with construction said to add 0.4% to GDP in the quarter, it will be because of the direct and indirect support received from government spending.

Economic Outlook

These positive effects of increased government spending and a weaker currency are already beginning to wear off and the impulse being reversed. As the chart above shows, the currency has already appreciated by over 10% from its January 2009 low against the US Dollar, and Sterling has also been appreciating against the Euro, the currency of Britain’s main export markets.

It is also widely known that this expansionary fiscal policy is shifting into reverse, with significant cuts enacted and vastly more in the pipeline.

The forward-looking indicators of the economy are already warning of a slowdown, before those cuts bite. Recent surveys of both manufacturing and construction growth have both shown a levelling off in activity. But surveys of the service sector, which accounts for three-quarters of the economy, have seen a marked deceleration with the June reading the lowest for 10 months . As the Bloomberg news service puts it, ‘U.K. services growth slowed more than economists forecast in June after the government’s austerity measures to cut the budget deficit sapped confidence’. Both house prices and consumer confidence recently recorded their first falls in over a year.

Previous optimism that a pronounced slump would lead to a sharp recovery has given way to a more sober assessment. These are strong grounds for the view that the growth rate is already peaking and a slowdown likely later in the year. With the extraordinarily deep cuts planned by the ConDem coalition, a double-dip recession or a severe slowdown in recovery is a real threat.

The Deficit & Growth

It is evidently the case that a further increase in government spending would benefit the economy. It might even lead to a renewed decline in the currency, as the combination of relatively loose monetary policy and fiscal policy is held to be a prescription for currency depreciation.

But the argument of the government and its supporters is that there is simply no room to increase government spending. Drawing comfort from Liam Byrne’s crassly ignorant phrase, they argue that ‘there’s no money left’.

On that logic, of course, however desirable increased government investment might be to support the economy, it is not sustainable. Government finances would go to hell, with huge deficits, loss of credit rating, IMF missions, and so on.

All of which seems very compelling – except that it is factually incorrect. As SEB has previously noted, the 2009 Budget was moderately stimulative and that worked. Growth was higher than anticipated and the deficit narrowed as a result.

The latest trends in public finances confirm that point and amplify it, as well as providing a warning about the impact of cuts. In the December Pre-Budget Report Alistair Darling forecast a public sector borrowing requirement (PSBR) of £178bn in the current financial year. In his March Budget this year, that projection had fallen to £167bn. The Office for Budget Responsibility lowered it to £156bn and Osborne’s June Budget shaved it to £155bn. Yet they are all still playing catch-up to the trend improvement in government finances.

In the chart below we show the 12-month rolling total for the PSBR, which has consistently undershot official forecasts and has been falling outright since February this year, when it peaked at £144.4bn. In June it had declined to £143.1bn.

Chart 2

The reason for the undershoot in the deficit is that tax receipts are much higher than anticipated, up £8.3bn in the latest 3 months alone. In the latest 12 months, that is in the period after the 2009 Budget, total government spending is £36.8bn higher than in the prior 12 months. Of that, £3.4bn is increased interest payments, and therefore £32.4bn is the actual increase in government outlays on goods, services and investment. This boosted economic activity, and the taxes that derive from it. Taxes on production are £18bn higher in the latest 12 months than in the prior period. In addition, the rise in unemployment has only been a proportion of what was expected. This feeds into lower-than-anticipated welfare payments.

Yet according to official wisdom, this cannot be. Increased government spending ought to be leading to an increase in the deficit, not its narrowing. The reason that the forecasts on the deficit are so faulty is that they overlook or completely ignore the stimulative effects of government spending and its positive effects on government finances, both revenues and outlays.

That ignorance stretches into the labour movement. Ex-Chancellor Alistair Darling quite rightly ascribes the improvement in the economy to Labour government’s actions. But these were from the investment and increased spending of the 2009 Budget not his 2010 cuts Budget where he threatened to be ‘worse than Thatcher’. Further, the connection between this rebound in GDP and the improvement in government finances seems to have escaped him entirely.

By contrast, Brendan Barber says, ‘The impressive GDP figures are the result of fiscal stimulus and active policymaking. But continued growth cannot be taken for granted, and there is now a huge risk that cuts in spending will bring the recovery to a shuddering halt. Deficit fetishism still risks a return to a flat line economy’.

The TUC general secretary is quite right. Not only is the policy of cuts to public spending sure to weaken growth, but it threatens, as a result, to lead to renewed widening of the deficit.

Green Campaign Builds for RBS’s Capital To Be Used Productively

Green Campaign Builds for RBS’s Capital To Be Used ProductivelyBy Michael Burke

Campaigners have called for the Royal Bank of Scotland to be transformed into a Green Investment Bank to kick start a wave of investment in green technologies The supporting document suggests that it would create 50,000 new green jobs a year, boost the UK economy, reduce the UK’s carbon emissions and improve international competitiveness – whilst not increasing the budget deficit. The report was commissioned by pressure group PLATFORM and the anti-poverty campaigners, World Development Movement, who reject the premise that investment in a green economy should be scrapped due to public sector cuts.

By contrast, it has recently been reported that the coalition government may scrap plans to invest public money in a Green Investment Bank. Instead the government may rely on private capital to fund green projects such as wind farms, high-speed rail and electric cars.

Deborah Doane, director of the World Development Movement, said, ‘It would be completely irresponsible and short-sighted to scrap public investment in a low carbon economy. RBS is sitting on billions of pounds from the taxpayer which is going to finance dirty projects often linked to human rights abuses, instead of more productive ends. The money we’ve invested in RBS should be directed towards green investment. It’s a no-brainer: not only wouldn’t it cost the taxpayer directly, it would boost the economy and create new jobs in the UK at a much-needed time.’

The idea has received backing within parliament; one hundred and seven MPs signed an Early Day Motion which calls on the Government to use its majority share in RBS to prioritise climate change as a principal concern in RBS’s lending decisions.

Room To Invest

SEB has previously argued that RBS, 84% owned by taxpayers, has scope to increase its lending very substantially without endangering its solvency. Indeed, attempts to bolster RBS’s capital beyond those of its High St. rivals simply increase that spare lending capacity

The recent European-wide stress-testing of banks’ balance sheets was widely criticized as insufficiently robust. British banks had previously been put to a more severe test by the Financial Services Authority (FSA), which also published the results.

The key features of those are set out in the table below – it is calculated from the FSA data.

Table 1. FSA ‘Stress Test’ Results for British Banks

The FSA focuses on ‘Tier 1’ capital, mainly shareholders’ funds, as the main buffer against further crises. It projects what the ratio will be in 2011 assuming economic recovery, rising profits and weak lending growth. It also provided a stress test which included double-dip recession, a rise to 12.5% unemployment, a 60% fall in house prices and default by one or more European government. The FSA’s estimate of the impact of all those events combined for each bank is shown in the final column.

Here it is important to note that the banks actually have a huge and growing excess of capital over any prudent requirements, with RBS one of the most awash with the capital that is being hoarded. Previously, the FSA had required Tier 1 capital to amount to 4% of total assets. During the financial crisis in 2008 it altered the requirement so that total capital, Tiers 1 and2, must be 8% of assets . There has been some discussion that new international rules (‘Basle III’) will change the requirement so that Tier 1 capital must be 6% of assets.

Yet all the banks have spare capital way in excess of the expected 6% total. RBS currently has 14.4%. And even in a disastrous set of circumstances it would have nearly double the required international level. Paradoxically, it is the banks’ refusal to lend which is one of the key factors, along with government economic policy, increasing the risk of a double-dip recession and all its negative consequences. Furthermore, the ratios are based on ‘risk-weighted’ assets where values are already deflated by that adjustment for risk. RBS’s actual assets amounted £1,523bn at the end of 2009 .

Given the vast sums in the banks’ balance sheets, even fractional changes in the capital ratios through increased lending would release very large funds for investment. Currently, £100bn in new investment would only entail RBS’s Tier 1 capital ratio dropping to 13.5% from 14.4%. This could provide an enormous economic boost, kick-starting a Green transformation of the economy, creating new jobs, meeting the needs for housing, transport and infrastructure – and not a penny of new government borrowing.