Flawed political economics are behind the calls for fiscal conservatism
Notwithstanding the social democratic motivation of the writers of the recent essay Moving Labour ‘into the black’, there is a fundamental political economic flaw in their representation of the situation Labour are expected to inherit in 2015.
Their arguments were put forward in their initial leaflet and are starkly illustrated here:
“And third, confronting the reality of limited resources reveals priorities as the true currency of politics. In the coming years, the central distinctions will be about what the political parties choose to spend scarce funds on as much as the total they plan to spend.”
There is a confusion implicit in this description. Clearly in any economy there are going to be limited real resources. The capacity of a national economy in any time period is limited by the productivity of the physical capital and labour available. But in ‘In the Black Labour’ this real constraint is confused with a suggested financial constraint.
It is important to separate the real constraint and the financial constraint. This is particularly the case when we are considering the UK, a monetary sovereign country. The UK issues its own currency and denominates its government bonds in that currency, sterling, and has a flexible exchange rate. This sovereignty means that the UK can never become “bankrupt”, as wrongly suggested by George Osborne. It also means that other myths such as “the national credit card has been maxed out” and “we are mortgaging our grand-children’s future” are also false.
The intelligent implication of the current and medium-term position of the UK is that fiscal stimulation, via, for instance, a VAT cut and increased public expenditure, current as well as capital, are required, until we reach the real constraint of the full employment of resources.
The so-called financial constraint, whether invoked by George Osborne or by Black Labour, is a self-imposed political constraint.
Clearly there may be a constraint emerging in terms of the preferences of the private sector to hold government bonds, at a given price. This will mean a reduction in the price of these bonds and hence an increase in bond rates. However, government bonds increase the wealth of the private sector via a new savings instrument with guaranteed interest income for the pension funds and others who operate in the bond market.
For the current Coalition government an underlying objective is to reduce the size of the state, motivated by a neo-liberal agenda which sees the market as the sole efficient mechanism for providing goods and services. One need not ascribe a similar motive to the authors of Moving Labour ‘into the black‘, but some of the references to the implied failings of an over-large state certainly give a measure of comfort to this view.
Suggestions from their initial paper that the ‘fiscal’ position of the UK in 2015
“may mean very constrained funding for healthcare, pensions and welfare for the foreseeable future. It’s tough, but the alternative is ducking the genuine decisions nearly every government of an advanced economy currently faces.”
is misleading for a number of reasons:
- The issue of pensions is a political decision about income redistribution involving transfers from one set of taxpayers to another, given the total size of the economy and the tax revenue available for re-distribution.
- The issue of the health service is a political decision on whether the state provision of heath care (and social care) which is free at the point of delivery is preferable to commercial provision.
- Welfare funding is a mixture of areas of provision which is best remedied by having economic policies which deliver full employment and therefore reduce welfare expenditure.
‘Fiscal conservatism’ was not the policy chosen by the Labour government in 1945 when there was a massive post-War level of public debt and the damaged economy needed to grow in both a sustainable and equitable manner. Fiscal conservatism, as advocated by Black Labour, is not the policy which the Labour party needs to advocate for the British economy or to present to the people in 2015.
With Ukip’s present success in the opinion polls, and with the local elections on Thursday, it is bad timing that their Immigration Policy, one of the policies most associated with them as a party, is currently undergoing a review and update (18.04.13). Unfortunately, there is an Observer report of Ukip in chaos over policy on eve of key poll, ‘herding cats’ and proposals to buy off-the-shelf policies.
Michael Burke’s evidence-based assessment might be helpful with regard to one of their ‘principles’ on which the detailed policy will be based. This involves future immigration being allowed where it can clearly be shown to benefit the British people as a whole and our economy. As you can read below, Michael Burke’s evidence indicates that:
‘The cause of migration is growth, to which migration is a decisive contributor. The consequence is stronger growth.’
So a bit of a conundrum for any party advocating both economic prosperity and draconian measures to restrict immigration…. Migration results in stronger growth..
Needless to say, Michael Burke’s conclusion is that:
‘the debate on immigration in Britain is not about the economic causes and consequences of immigration at all. It is overwhelmingly a ‘debate’ that allows politicians and others to whip up xenophobia and racism, while posing as being concerned about the interests of workers or the poor.’…
By Michael Burke
Political parties in Britain have once more begun to talk about immigration, especially in the wake of the Eastleigh by-election. Unfortunately the debate is usually an all-informed one and typically just a cover to introduce racist notions about the impact of immigration. Therefore it is useful to examine some of the more important economic aspects of immigration.
There are a number of countries in the world which have a higher per capita GDP than Britain. There are also a number of countries in the world who have a higher proportion of migrants as a proportion of the population. Both those facts are worth stating simply because discussion in Britain often seems to be dominated by the implicit assumption that Britain is both uniquely attractive to migrants and that it alone experiences immigration.
The chart below shows the countries with higher levels of per capita incomes than Britain. It also shows those countries proportion of the population which is migrant, that is not born in the host country. The table below specifies the data shown in the chart.
There are 13 countries in the world with a higher per capita income than Britain. Of these, 10 countries have a higher proportion of migrants. Some of these, such as Australia, Switzerland and Luxembourg have very much higher levels of immigration and have a much higher level of incomes.
There are 3 countries which have higher incomes but lower levels of immigration. However, of these 2 countries, Norway and Iceland have higher per capita GDP because they have a very large energy resource that comes pumping out of the ground (oil and geothermal energy). The remaining country is Belgium, whose geographic position means it has an exceptionally high proportion of people who work in Belgium but commute there from other countries.
By contrast, among the 18 OECD countries with a lower per capita income than Britain 12 also have a lower proportion of the population as migrants. The remaining 6 countries are small economies which generally have specific geographic or historical reasons for unusually high levels of immigration, or both. (The exception in this group is France.)
Migration is part of growth
According to the IMF the total number of migrants in the world rose from 75 million people in 1965 to 195 million in 2005. Official data shows that most of that is to high income countries, about 80 million and most of the remainder to middle income countries.
The growth in the world’s migrant population is far more rapid than the growth in the total population. Over the same 40-year period to 2005, the world population doubled while the migrant population grew by 3 times.
However, this cross-border migration captures only a fraction of the world’s total migrant population. From a strict economic perspective there is little difference between cross-border migration and internal migration. This is especially the case when internal migration encompasses vast distances and differences of language or dialect.
According to China’s National Bureau of Statistics in 2008 there were 285 million internal migrants in China. This is far larger than the world’s total number of cross-border migrants. For the migrants themselves this frequently encompasses far greater geographical distances than is required, say, in intra-Western European migration. This level of migration is certainly the greatest level of internal migration in human history. It is also associated with the greatest rate of growth for any major economy in world history.
In India, the level of internal migration is over 300 million people according to UNESCO. India’s medium-term growth rate is below that of China, but both countries have been growing at a rate considerably faster than the high income countries. The rate of internal migration has been a necessary accompaniment to high growth rates.
Correlation does not prove causality. But within the high-income countries higher levels of income are associated with higher levels of migration. Within the middle income countries, higher growth rates are associated with higher levels of internal migration.
Economic development depends on two key factors, the proportion of national income devoted to investment and increasing participation in the division of labour. Migration is a key part of the division of labour, allowing workers to migrate where production (and wages and jobs) are expanding. It also allows production to increase on the basis of employing the most adaptable workers.
Opposition to immigration
The government has recently produced a video to show potential migrants from Romania and Bulgaria that Britain is not a great country to emigrate to. There is a certain logic to this. The only way to stop immigration over the medium-term is to reduce the growth rate of the economy to zero or below. This is the basis for the government’s self-proclaimed success in reducing net migration in the most recent data; by curbing overseas students growth is directly reduced. Of course prolonged economic stagnation would also lead to a more rapid swelling of the 5 million British people who now live overseas.
Immigration of all types provides a substantial net benefit to the British economy, which a Home Office report clearly demonstrates. Growth attracts immigration but is also increased by it. The proportion of workers leaving a country will increase when there is an economic downturn and the proportion of the workforce arriving from overseas will tend to decrease. The reverse is also true: net immigration increases when the economy prospers.
There are a series of reactionary myths about immigration, which are perpetuated in the labour movement by outfits such as ‘Blue Labour’. These tend to focus on the supposedly local or microeconomic effects of immigration, particularly that they drive down wages. These arguments are a rehash of Labour notions which opposed the growth of women in the workforce and even supported restricting their wages relative to men.
Jonathan Portes has done very good work in countering the assertions that immigration drives down wages, even for the very lowest paid workers in Britain. As the Home Office study shows, the average wages for migrant workers in Britain are also about 5% higher than British workers, because on average they are more highly qualified. The relationship between unemployment and immigration is also equally clear; immigration increases while unemployment falls and vice versa.
In reality the debate on immigration in Britain is not about the economic causes and consequences of immigration at all. It is overwhelmingly a ‘debate’ that allows politicians and others to whip up xenophobia and racism, while posing as being concerned about the interests of workers or the poor. The cause of migration is growth, to which migration is a decisive contributor. The consequence is stronger growth. The contrary argument is being raised now as a reactionary diversion from the current economic crisis, and the policies which are responsible for it.
First posted on Thursday, 28 March 2013 – Socialist Economic Bulletin
By Michael Burke
The Coalition government has announced its intention to privatise the East Coast mainline rail network. The network was nationalised 3 years ago when the previous private operators discontinued their franchise because they could not make a profit.
The re-privatisation of the East Coast mainline highlights a key fallacy of the current government’s failed economic policy. It also sheds light on the role of the state in resolving the current crisis.
Real aims versus stated aims
The stated aim of government policy is to reduce the public sector deficit. George Osborne has swindled and fiddled the figures in a desperate attempt to hide the real position that the deficit is actually rising, including accounting for the assets of the Royal Mail pension fund but not their liabilities, counting government interest paid to the Bank of England as income and withholding payments to international bodies. All of these devices can only massage the deficit temporarily. They cannot produce either growth or, because of that, a lower deficit.
Investment in rail could form an important part of an investment-led recovery, which would also have the effect of reducing the growth in carbon emissions. But private companies struggle because they cannot continually increase profits while very large scale investments are required. They are certainly not in the business of depleting profits further to allow investment. All the large-scale investment in rail projects over the recent past has been led and co-ordinated by government. Returning the East Coast line to the private sector will not produce increased investment.
Privatisation will also undermine the stated objective of debt- and deficit-reduction. In public hands the line has returned £640mn over 3 years to public finances. With current very low returns on capital and low government borrowing rates this represents a very sizeable return. Government propaganda is that ‘we can either invest in rail, or the NHS’. In reality, investment in rail helps to pay for the NHS.
It is possible to establish the value of the rail line which is now on the chopping block. That can be done by using Net Present Value (NPV) methods. NPV simply values all investments from the cashflows they generate. £640mn over 3 years is about £215mn each year. Currently the government’s long-term borrowing rate is just under 1.9%. So, what sum of capital would be needed to yield £215mn a year to the government when interest rates are at 1.9%? If the interest rate is 1.9% and the actual return is £215mn, the NPV is £11.3bn (that is, 215 divided by 0.019).
Therefore any sale of the East Coast franchise for less than £11.3bn is very poor value, one which will see the deficit and the debt rise faster than if it were kept in public hands. The government will be lucky to get one-tenth of that value from a private sale. The giveaway has nothing to do with growth or deficit-reduction. It has everything to do with restoring the profits of the private sector, which is the purpose of austerity.
State versus private sector
This highlights a more general point. The East Coast network is worth far less to the private sector than the public sector. It must pay a far higher rate of interest than the government, so the NPV of any major asset is lower to the private sector.
In addition, the private sector must provide a profit to shareholders. These are funds that cannot be used for necessary investment. As a result, under privatisation, the government subsidy to the rail industry (which is almost wholly for capital investment) has actually risen in real terms to £3.9bn last year from £2.75bn in the late 1980s when it was in public hands.
The private sector is unable or unwilling to make the necessary investment in the rail infrastructure. Its overriding objective is to provide a return to shareholders. The greater risks associated with the private sector mean that the state is better placed to make those investments. The real alternative, aside from government propaganda, is that the state has to fund this capital investment in either event. Keeping rail in the public sector, and taking the remainder into public ownership is simply a cheaper and more efficient option.
The same logic also applies to a series of other industries including energy, telecoms and post, house building and large-scale construction, education, and banking.
Re-posted from Socialist Economic Bulletin
By Michael Burke
The latest public sector borrowing data shows that the UK budget deficit* is widening once more. Indeed despite a series of accounting adjustments which obscure the true picture, it is clear that the underlying trend is also towards rising, not falling deficits.The Office for National Statistics reports that the June public sector borrowing total was £14.4bn, £500 million higher than in the corresponding month in 2011. However monthly data are erratic and subject to significant revision. Taking the data for the first 6 months of this year as a whole is more meaningful and shows that the deficit over that period is £37.3bn.
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
* 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.