Re-posted from Socialist Economic Bulletin
By Michael Burke
But this total is flattered by the strange decision relating to the acquisition of the Royal Mail Pension funds ahead of planned privatisation. In effect the government has decided to include the assets of this fund, but not its much greater pension liabilities in its own accounts. This and another smaller transaction lowered government borrowing by £30.3bn. The underlying deficit, excluding these transactions is therefore £67.6bn in the first 6 months of this year.
This compares to a deficit of £60.5bn in the first 6 months of 2011. The deficit is rising, not falling.
Factors Affecting Borrowing
This deterioration in the deficit, places British government finances in a growing band of European economies where sharp cuts in government spending are leading to economic contraction, which in turn produces widening deficits.
This should come as no surprise. As the crisis is effectively an investment strike by capital, spending cuts by government will only lead to a further decline in private investment. The reason this logic has taken some time to work through in Britain is due to a number of factors. These are primarily the zig-zag in government policy, which initially saw an very modest increase in government investment under Labour and so produced a reduction in the deficit. This was compounded by the uniquely high level of inflation during the British slump, which eroded the real value of all government spending.
SEB has previously shown that the very moderate increase in government investment from the 2009 Budget under Labour was the catalyst for a modest economic recovery. Because of the increase in government spending (including allowing welfare payments to rise automatically as unemployment and poverty increased) the Treasury forecast that the deficit would rise to £178bn in the following financial year. In the event, the deficit began to decline and was £158bn for the financial year.
In addition, the effects of economic growth are felt on both sides of government accounts. Expenditure is lower than it would have been because more are in work and the benefits’ bill falls. Revenues are higher because incomes, profits and consumption all raise the level of tax revenues.
It is widely known that government policies have led to economic stagnation. Yet it is only now that the deficit has started to rise. The British economy has grown by just 0.5% in the two years since the Coalition came to office. But in nominal terms, before taking account of inflation, the GDP has increased by 6.1%. This surge in inflation during the slump is highly unusual, placing Britain on a par with countries such as Iceland. Britain has an incredible shrinking economy when measured in international currency terms.
Domestically this is reflected in a surge in inflation. While severely denting the purchasing power of all those on fixed or low-growth incomes, the fiscal effect was to increase nominal government revenues by £56bn over the last 2 years. This compares to annualised nominal growth in GDP of £88bn.
The Treasury’s estimate is that every £1 increase in economic activity will lead to a 50p increase in government revenues. In fact the increase over the last two years has been 64p (£56bn of revenues of £88bn increased output). However, government current spending has also risen by £42.3bn over the same period. This is an inevitable consequence of the savings (i.e refusal to invest) by firms.
This points to the essential fallacy of all ‘austerity’ measures, whether from the Coalition’s frontal assault, or the slightly shallower, slower cuts favoured by current Labour policy. Even nominal growth will largely be reflected in increased government revenues. But spending cuts have the effect of weakening economic activity and so drive up government expenditures.
Even in the narrow terms of reducing the deficit, the only effective prescription is growth. The most effective means of promoting growth, as even the cautious 2009 Labour Budget shows, is for the government to increase investment.
First posted on SEB Sunday, 22 July 2012
Cut out Cuts – Leave the Eton Mess Behind
* A government budget deficit occurs when a government spends more than it receives in tax revenue. It becomes a Structural Deficit when the budget deficit has persisted over a period of time.
“the only effective prescription is growth”…except economic growth increases greenhouse gas emissions, accelerating catastrophic climate change. Doh!
Is that how you spell ‘Doh’? I’ve always wondered. You clearly have not read Cut out Cuts – Leave the Eton Mess Behind https://think-left.org/2012/07/26/cut-out-cuts-leave-the-eton-mess-behind/… we need investment in powering up and powering down with renewables etc. This will create jobs, apprenticeships, new manufacturing and so on which will be growth whilst reducing greenhouse emissions and mitigating oil dependency. However, I completely agree that we do not need, indeed cannot continue, with ever increasing growth. We need progressive taxation and an end to offshoring in tax havens, but we also need to change the economy such that the accumulation of wealth is not the motivator.
British Senior Citizens Party have been promoting growth,Not Austerity,for a year now.Building CCl Houses for low cost rent will B an investment in infrastructure that has been neglected for 50yrs.We now need 500,000 homes p/a for next ten yrs.This will bring a boom in all sections of manuf.Many apprentsips.& give a boost to manuf.Investment Plus many more advantages
Investment in new low cost rental homes is a policy on which we can agree. As proposed in Cut out Cuts – Leave the Eton Mess Behind https://think-left.org/2012/07/26/cut-out-cuts-leave-the-eton-mess-behind/… this could be achieved by a mix of new builds and retrofitting existing unsuitable vacant housing. A priority would be to include energy saving measures which would simultaneously reduce greenhouse gas emissions, household bills and temperature related illness. A mass programme of insulating already occupied housing could be another important employment creating policy.
I agree with what you say, but the need for lowcost rented newbuilds is paramount because House prices have outstripped Salaries and conditions for servicing a mortgage are nolonger in place.We have reached the German position of renting being only option for most people.This has been ignored for 40yrs now WHY?
We are a group of researchers from the University of Mannheim interested in how social media is used to organize successful protest action and would love to hear from you. We have created an anonymous online survey. It is only 10 questions and takes less than 2 minutes. You can find it here: http://www.mzes.uni-mannheim.de/survey/socmedia/index.php/survey/index/sid/924582/lang/en
A Facebook group with all the details about our project and about our previous work on protest politics can be found here: https://www.facebook.com/groups/socialmediasurveyMZES/
Looking forward to hearing from you.
Thanks for the link. Whilst it is a bit apocalyptic, I agree with the general thrust which could be summed up as ‘Capitalist solutions will not be what the environment needs’. One wind turbine does not offer the same threat to migrating birds as a huge field of wind turbines, but energy companies want to centralise and monopolise in order to preserve profitability. Equally energy conservation is not very profitable.
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