The Alternative Budget

The Alternative Budget

There is an alternative to George Osborne’s austerity budget. Richard J Murphy of Tax Research UK has prepared this alternative budget for 2015. I wonder if Mr Osborne will take note?

Richard Murphy: My Budget for 2015

I gave a talk to Quakers in Bury StEdmunds last night, and thank them for their hospitality. In the question and answer session, which took up the larger part of the evening, I was almost inevitably asked what I would be doing tomorrow if I was to be presenting the budget. It was a good question. It deserves an answer, albeit in somewhat less detail than if I was really at the despatch box.

  • I would first lay out the background to an economic plan for the UK that recognises three fundamental facts. The first is that we need more, better paid, jobs. The second is that we need to tackle wealth and income inequality. The third is that we are going ridiculously slowly in tackling climate change and its causes. I would also raise some fundamental questions of tax reform. So, in very broad outline this would be my plan.
  • I would commit to a programme of Green Infrastructure Quantitative Easing of not less than £50 billion a year to generate jobs in every constituency in the UK, to drive up pay, provide careers and tackle the causes of climate change in a way that also reduces our dependency on imported fuel. Being funded by QE the programme has no impact on real government borrowing or real lending costs but yields a substantial return for the economy as a whole and for the Treasury and so reduces the deficit.
  • I would link payment of the minimum wage to a reduced rate of employer’s national insurance. This would be self funding in terms of benefits saved.
  • I would begin a programme of moving towards a guaranteed minimum income by announcing that those in work not earning enough to use their personal allowance would be paid the cash value of their unused allowance at the basic rate of tax. This would be funded by withdrawing all higher rate tax reliefs of all sorts, including those on pension contributions, personal allowances and charitable giving.
  • I would increase the national insurance threshold at the lower end to match the income tax threshold for the time being, providing a direct boost to those on lowest pay.
  • I would pay for this by aligning the capital gains tax rate and income tax rates and reducing the capital gains tax allowance to £5,000 a year and by introducing measures to prevent abuse of the right to transfer property between spouses immediately prior to sale.
  • I would also introduce an investment income surcharge of 15% on all investment income of those earning more than £5,000 a year from savings or capital gains to match the national insurance charges earned by those in employment for three reasons. The first would be to introduce horizontal equity into the tax system, where it is absurd that those who work for a living pay a great deal more tax than those who do not. Second, this would reduce the abuse of limited companies by those paying dividends instead of salaries to avoid national insurance charges. Third this would reduce income inequality. Pensioners would be exempt from the charge unless their income exceeded £23,000 a year.
  • I would reduce the tax relief on borrowing for buy to let mortgages, so that interest on any borrowing exceeding 60% of a property’s value at the time of purchase would be disallowed for tax. The aim would be to reduce this ratio over time. The calculation would be on a per property basis. Funds raised would be used to fund new social housing.
  • I would announce the planned abolition of inheritance tax and its replacement with a lifetime gifts receipts tax, charged on cumulative sums received. This tax has outlived its usefulness in its current form.
  • I would increase the rate of corporation tax paid by small companies by 2% and by large companies by 4% as a specific charge to cover the costs that the risk of limited liability imposes on society when companies fail, as was evidenced in 2008. The charge would be a specific tax for the benefit of not having to pay all debt if companies fail.
  • UK controlled foreign company legislation would be radically overhauled to increase its effectiveness.
  • The OECD BEPS package would be welcomed.
  • The Diverted Profits Tax would be abolished but be covered by a new general anti-avoidance principle (see below) that would extend to artificially avoiding the creation of a permanent establishment in the UK.
  • The close company rules that permitted the apportionment of income from a company controlled by five or fewer people would be revived so that profits could not be permanently hidden from higher rates of income tax in a UK privately owned company. These rules would in the first instance apply to all investment and property related income and retained taxable profits held in cash or near equivalents and undistributed resulting from trading exceeding £100,000.
  • To compensate 100% capital allowances for trade related assets would be introduced for all such companies.
  • The UK research and development tax regime would be reviewed to prevent abuse for tax avoidance.
  • I would introduce mandatory country-by-country reporting for all multinational corporations of any size.
  • I would abolish the exemption from filing full accounts currently provided to small companies in the UK. Every company must account for its use of limited liability.
  • I would require that all banks trading in the UK provide an annual report to HMRC, to be shared with Companies House, on who persons beneficially owning more than 10% of any limited company might be and that they report how this has been established.
  • I would legislate to require all UK Crown Dependencies and Overseas Territories match these company law and disclosure provisions or require mandatory withholding of tax from all interest, royalty, copyright, dividend and management fee payments to them in the case of non-compliance. The right to extend this to other non-Uk territories would be reserved (the EU excepted).
  • The domicile rule would be abolished and be replaced by a four year temporary residence rule.
  • There would be no cuts in benefits but the benefits bill would fall because of the measures introduced to increase wages and employment.
  • The bedroom tax would be abolished.
  • New rules on benefits sanctioning would be introduced permitting such action only in the case of obvious abuse of the welfare system.
  • The benefits cap would be abolished. There would be almost no cost from doing so.
  • Child benefits would be restored as a universal benefit.
  • The personal allowance would be restored for those earning over £100,000 a year, but as with all other allowances would only be provided at basic rate.
  • The rate at which higher rate taxes started to be paid would be eased by the introduction of a 30% band for the first £15,000 of income over the basic rate band. The point at which the 45% tax rate was charged would be lowered to compensate.
  • HMRC would be subject to a wholesale review and an Office for Tax Responsibility, reporting to a new parliamentary select committee for tax would be created.
  • The HMRC board would be required to represent all taxpayers and their interests and not just big business.
  • HMRC would be provided with additional funding of £1 billion a year and be tasked with reducing the tax gap by at least £10 billion as a result.
  • The Office for Tax Responsibility would be tasked with establishing the tax gap and then monitoring progress.
  • The Office for Tax Responsibility would be tasked with simplifying the tax gap.
  • A new general anti-avoidance principle with penalties and a clearance system would be introduced.
  • A review of UK tax penalties, including the mandatory penalty regime for VAT, would be reviewed to prevent injustice arising.

This would be a budget for the lowest paid and the vulnerable. It would be a budget for jobs. It would be a budget for justice. It would be a budget that reduced inequality. It would be a budget for a level playing field. It would be a budget for tax simplification. It would be a budget for reducing the deficit. It would be a budget for business responsibility. It would be a budget that encouraged business investment but not business speculation. It would be a budget for a fairer, wealthier, more sustainable and progressive UK.

I would have no hesitation in recommending it to the House.

See more at:

Austerity, the Paradox of Thrift and a great graph.


Definition of ‘Paradox Of Thrift ‘

The notion that individual savings rather than spending can worsen a recession, or that individual saving is collectively harmful. This idea is generally attributed to John Maynard Keynes, who said that consumer spending contributes to the collective good, because one person’s spending is another person’s income. Thus, when individuals save rather than spend, they cause collective harm because businesses don’t earn as much and have to lay off employees who are then unable to save. Therefore, an increase in individual savings rates is believed to create a flattening or diminishing of the total savings rate.

Clearly, the ‘paradox of thrift’ applies equally whether individuals are saving, paying off their debts or having their wages are undercut… in all these situations, spending contracts, demand falls, and businesses lay off workers and/or stop investing.  The effect is a positive feedback loop which deepens the recession.

George Osborne of course would argue the non-Keynesian viewpoint explained by

Investopedia explains ‘Paradox Of Thrift ‘

It is important to note that the paradox of thrift is a theory, not a fact, and is widely disputed by non-Keynesian economists. One of the main arguments against the paradox of thrift is that when people increase savings in a bank, the bank has more money to lend, which will generally decrease the interest rate and spur lending and spending.

So that’s worked well hasn’t it … Big businesses are estimated to be holding back £700+billion, whilst SMEs continue to struggle to obtain finance from the banks, for day to day cash flow, or expansion.  Furthermore, individuals are not saving.  Where possible, they are cutting back and trying to pay off their debts which again reduces demand.  The ‘crowding out’ of the private sector by the public sector has been well and truly shown to be mythology.

Osborne’s austerity measures dramatically exacerbate the effect by creating even more unemployment, further reducing demand, reducing tax revenue, increasing the benefit’s bill.. and cutting the benefits of people at the bottom of the ladder has a profound effect, not only personally but unlike tax cuts to the wealthy, the ‘poor’ spend all their money because they need to…

False economy have added to their impressive collection of posts and factsheets, two of  which are re-posted here.  The first is ‘5 things you need to know about welfare cuts and the economy’, and the second is a piece by Brendan Barber, the outgoing Trades Union Congress leader ‘The great wages grab: how the share of the economy going into wages has shrunk’.  Together, with the ‘great graph’, they show how George Osborne is helping the stoke up the recession with his policies.


5 things you need to know about welfare cuts and the economy – new factsheet

1. Welfare payments can stabilise the economy

In a recession people lose their jobs, businesses stop investing and the economy risks a downward spiral.But social security, benefits and tax credits kick in, propping up incomes and acting as ‘automatic stabilisers’. Government spending increases temporarily to ensure people still have money to spend on basic needs. This means businesses have customers,keeping the economy stable and preventing a terminal spiral of decline. 

2. Countries that increased welfare payments 
had the strongest economic recoveries

Families on low incomes are most likely to spend extra money quickly in their local shops and services, boosting demand and helping businesses. The International Institute for Labour Studies found: ‘Social and cash transfers [following the credit crunch] not only assisted those in need, but by putting cash in the hands of those most likely to spend it, helped to shore up household consumption. For this reason, countries that strengthened the policies towards income transfers managed to recover faster than others.’

3. Cutting welfare can damage growth

When deep cuts to welfare dramatically reduce the incomes of families who are already on low incomes, the opposite of fiscal stimulus happens: fiscal hindrance. Billions of pounds are removed from the active economy, so struggling businesses lose customers and lay off more staff. A vicious cycle is created.

4.  Welfare cuts are shrinking the UK economy

Economists say that in a recession, increased welfare spending 
has a strong multiplier effect of around 1.6. This means every £1 is worth £1.60 to national income once it has worked its way around the economy through shop tills and pay cheques. When welfare is cut, the multiplier works in reverse. So £20bn of welfare cuts could depress the economy by as much as £32bn – more than 2% of GDP.

5.  The Chancellor wants even deeper cuts

Despite the damage the cuts are causing, George Osborne wants
to cutanother £10bn from welfare. This will not just be a social disaster, it could cut a further 1% off the economy, meaning a longer depression, a larger deficit and more debt for Britain.


The great wages grab: how the share of the economy going into wages has shrunk  by Brendan Barber

As people struggle to pay rent and bills, new research by the TUC shows how the share of the economy going into wages has continued to shrink.

Despite the crash, the economy has almost doubled in size over the last thirty years.

But most people at work have been cheated out of their fair share of that growth.

Since the start of the 1980s, the share of the economy going to wages has shrunk. And those with the highest salaries have done better than those below them. The result is that average workers now get a smaller section of a smaller pie.

New research by the TUC reveals that the wage grab is now running at £7,000 a year.

The average full-time worker is now paid around £26,000 a year. But if wages had grown in line with economic growth, and if the gap between those right at the top and the rest had not increased, the average worker would now be getting £33,000 a year – a £7,000 pay rise.

This is not just unfair, but bad for the economy as it holds back growth.

Companies need customers with cash in their pockets. That is why the UK economy is scraping along the bottom. Employees are cutting back as their living standards are squeezed. And the public sector, far from making up the gap, is slashing spending too.

But this wages squeeze was a prime – or should we say sub-prime – cause of the crash. Excess profits and bonuses went into the finance system rather than new investment. Workers deprived of proper pay borrowed to make up the difference. And when bankers stopped considering risk before lending, we had started the inevitable slide to the global crash.

Of course the wage share of the economy will change from year to year. But for 30 years after the Second World War, it was relatively constant. In the 1970s, during the oil shock and high inflation, it was arguably too high, but then fell back. That is why we have taken 1980 as our starting point.

That is also when we started the three decades of deregulation, growing inequality and letting the market rip that led to the crash. It was when governments stopped caring about industrial policy or balancing the economy. And when the cult of the ‘private sector knows best’ began.

The austerity economics of this government fails to learn why the economy crashed. Ministers want to go back to business as usual, continuing to hold down the wages of ordinary employees.

Of course we cannot close that wage gap overnight, nor deny the difficult challenges economies face after the crash. But current policies fail to understand the causes of our problems or to set out how to build an economy that delivers decent jobs, wages and prospects for all our citizens.

That is why on 20 October we will bring hundreds of thousands of people to London to argue for an alternative to austerity.

From Touchstone

See also:

Foodbank: our biggest client group now is people in work on low incomes

A future that works: march against austerity 20 October 2012

The great Graph produced by the TUC shows how much the average worker has lost because wages have not kept up with growth over the last thirty years… the last thirty years being the years of TINA, Mrs Thatcher’s ‘There is no alternative’.


Hat tip Richard Murphy who adds:

The “missing income” went to profits and investment returns, of course.

The trouble was with profits concentrated in very few hands and wages widely spread people couldn’t afford to buy the products that were being made without borrowing back the wages they’d lost from the people who’s taken them from them with the result that debt skyrocketed and recession followed.

And the tax take fell too as profits are taxed less than wages.

In other words, government ‘thrift’ (austerity policies), banking ‘thrift’ (not lending) and corporate ‘thrift’ (squeezing wages to increase profitability) are the causes of the current economic failure.  

Therefore, increasing government spending, a nationalised bank(s), a debt jubilee, closing of tax haven loopholes and a redistribution of wealth are the way forward.  

In fact, everything that is the very opposite of what George Osborne is actually doing… so what is he playing at?  Austerity is justified by the dubious structural deficit but he is actively increasing it .. so it seems that there is a very different agenda from the one with which we are presented.

Why does the Structural Deficit remind me of LIBOR?


(I know this might sound rather boring but the facts are actually a bit incredible…)

The London Interbank Offered Rate (LIBOR) is a benchmark interest rate used broadly all over the world and affects trillions of dollars of loans worldwide – mortgage loans, small-business loans, personal loans. ‘The Libor is not based on an objective measure of the interest for bank-to-bank loans. It is the average of a daily poll of the Association’s member banks, who give an estimate of the interest rate they think they would pay if they sought to borrow from another bank. It is supposed to be the way the financial system assesses the overall health of the financial system.It has now been discovered that a substantial number of banks were manipulating their estimates of the interest rate to their own advantage.

Rep. Denis Kucinich, U.S. Representative from Ohio’s 10th District on the LIBOR-participating banks:  “We don’t know just how deep this scandal goes. But the fact is that if a fundamental component of our financial system has been or is being manipulated, we have the right to know about it.”

In May 2010, the coalition decided to place the structural budget deficit at the heart of its fiscal policy, and George Osborne’s argument for his ‘austerity’ programme depends largely on his assertion that it is necessary to completely eliminate it.  Initially, clearing the deficit was projected to occur within the course of one parliament but the time-span has been extended repeatedly, and estimates currently seem to be somewhere between 2017 and 2020.

So given its central importance for the coalition’s policies, we need to know what is a structural deficit?  How is it calculated?  And is it a valid measure justifying the coalition’s draconian austerity programme?

structural deficit

A budget deficit that results from a fundamental imbalance in government receipts and expenditures, as opposed to one based on one-off or short-term factors. [1]

A government budget deficit occurs when a government spends more than it receives in tax revenue.  It is called a structural deficit when the ‘spending-exceeding-income’ state persists for a period of time.  This causes concern to mainstream economists because they argue that if the deficit is actually over and above the ability of the country to repay, then a government can only clear it by cutting spending, defaulting, or by deflating the debt through engineering a high inflation rate.

Clearly these last two options alarm lenders, and since in a neoliberal world, governments can only borrow from the markets, governments worry that if there is a crisis of confidence, the bond markets will impose very high interest rates or yields ….  which in turn, will increase the structural deficit still further!  This is what is supposed to have happened in Greece and Spain.

At its simplest, the Structural deficit is calculated by finding the difference between government spending and the amount it receives in the form of tax … but nothing about economics is ever that straightforward.  The important thing to take on board is that if tax revenue falls, as it did in the 2007 recession, there will be an increase in the budget deficit without there having, to have been any increase, or change, in government spending.  Nevertheless, since job losses occur in a recession, government spending will inevitably rise because of paying out in unemployment benefits.

Budget Balance = Revenue – Spending.

Budget Balance = (Tax Revenue + Other Revenue) – (Welfare Payments + Other Spending)

We know that Tax Revenue and Welfare Payments move inversely with respect to each other, with the latter rising when GDP growth falls and the former rises with GDP growth. These components of the Budget Balance are the so-called automatic stabilizers (2)


Furthermore, the ability to pay off the deficit is assessed by a country’s deficit relative to its GDP. Therefore, without any change in absolute size, the deficit becomes a proportionately bigger percentage of GDP when the economy is contracting (as in a recession) and proportionately smaller when the economy is growing.  Hence:

‘Before the financial markets went into meltdown in the summer of 2007, it was assumed the structural deficit was about 2-3% of GDP; Osborne’s plans are based on estimates from the Office for Budget Responsibility that the structural deficit is actually more like 5-6% of national output.’ (3)

In other words, the structural deficit grew as a percentage of GDP because the economy contracted in the summer of 2007, but in addition, it also actually increased because of falling tax receipts and increased welfare spending.

‘…. the drastic nature of the government’s deficit-reduction plan is explained by the belief that the economy suffered severe permanent loss to its productive potential as a result of skills being lost, capital being scrapped and the closing down of entire bits of the financial system. According to this view of the world, the fact that inflation has been well above its target for the past 18 months suggests that there is little or no spare capacity in the economy despite the severity of the recession.’ (3)

The words, ‘productive potential’ and ‘inflation’, are the nub of complications in calculating the revenue part of the structural deficit.

The ‘productive potential’ is an estimate of what the tax revenues would be if there were ‘full employment’.  In fact, the structural deficit used to be called the Full Employment or High Employment Budget. Professor Bill Mitchell says “The change in nomenclature is very telling because it occurred over the period that neo-liberal governments began to abandon their commitments to maintaining full employment and instead decided to use unemployment as a policy tool to discipline inflation.”(2)

The puzzle is, that in a neoliberal world, ‘full employment’ is not what you think … For most of us, full employment’ is ‘an economy that delivers as many jobs as there are people wanting them and hours of work consistent with the desired hours of the workers.’  But in the neoliberal world of OECD, the IMF et al, ‘conceptions of full capacity are ideologically-loaded by the NAIRU concept and are frankly … a total joke. (2)

 From the 1970s, the concept of the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) became a central plank in the front-line attack on the use of discretionary fiscal policy by governments. ‘It was argued, erroneously … that full employment occurred when the unemployment rate was at the level where inflation was stable.’(2) Estimates of NAIRU are just that… ‘estimates’… and the standard errors of these estimates can vary between 3 and 13 percent in some studies.  Clearly, such a large range for error means that an estimate of the structural deficit based on the NAIRU, or some derivation of it, is highly questionable.

Nevertheless, these estimates are used to compute the tax and spending that would occur at the so-called ‘full employment’ point. But, according to Bill Mitchell, because it ignores 5% (usually) of the working-age population ‘it severely underestimates the tax revenue and overestimates the spending and thus concludes the structural balance is more in deficit (less in surplus) than it actually is.(2)

The significance of the statement, the fact that inflation has been well above its target for the past 18 months suggests that there is little or no spare capacity in the economy despite the severity of the recession’ (3), is that… given full employment is defined as that point where inflation is stable,… there is an assumption that the current tax revenue is more or less at full capacity.  (Madness or what?)

In June 2012, the official unemployment rate was 8.2% of the economically active population. This means that there were 2.61 million unemployed people, but there was also another 9.23 million economically inactive people aged from 16 to 64.  (4)

It seems that government ‘believes’ that this is the new ‘full employment’ because the economy is supposed to have ‘suffered severe permanent loss to its productive potential as a result of skills being lost, capital being scrapped and the closing down of entire bits of the financial system.(3)

This is turning common sense on its head.  In an economy that is designed for the whole population, and not just the wealth of the 0.014%, there are a multitude of jobs that need doing, a ‘green revolution is required… and if there is still not enough employment, cut back the number of hours that each person works and reduce the pension age.  This would pump demand back into the system, balance the economy and potentially mitigate the looming energy disaster.

I can almost hear the cries of  ‘we can’t afford it, there’s no money left’.  But quite apart from the obvious course of increasing taxes on the wealthy and corporations and the shutting down of tax havens, £31 billion is currently sitting unused in HMT’s Debt Management Office; £1 billion from TV licenses paid 6m in advance and so on… not to mention the fact that Quantitative Easing has poured 375bn into the banks and that may well be increased to 500bn in the future (5).  And to complete the heresy…. there is no reason why governments cannot afford to run a bigger debt and structural deficit, than we currently enjoy, in order to create real full employment.

But to get back to the structural deficit – tax revenue is not only derived from individual employment, there are also taxes paid by companies and corporations.  So what has George Osborne done?  He has cut corporation tax from 28% in 2010 to 23% in 2012, with the aim of eventually reducing it to 20% or less.  He has made it easier to put wealth into tax havens and removed the requirement on UK companies to pay tax to British authorities on overseas earnings.  Furthermore, he has cut the top tax rate for individuals from 50% to 45%, on the basis of the improbable Laffer curve.

The Office for National Statistics said the data for July 2012 heightens concerns that the government will miss its deficit reduction target.

The ONS said the total deficit since April had reached £47.2bn – up £11.6bn on 2011 – excluding financial interventions and a one-off boost after assets from the Royal Mail’s pension fund were transferred to the Treasury… At this rate, borrowing for 2012/13 overall will massively overshoot the Office for Budget Responsibility‘s forecast of £120bn, excluding Royal Mail effects, by over £35bn…”we think that the government will struggle to cut borrowing at all next year.”  Government spending, meanwhile, grew 5.1% on the previous year, mostly on welfare payments….  (6)


Richard Murphy suggests that George Osborne should take the blame for July’s dramatic fall in tax receipts:

‘… this loss can simply in part be due to a deliberate government give away at a time when it could not be afforded… some companies may now be anticipating the impact of new controlled foreign company rules in their payments on account. The Treasury said in Budget 2011 that these would cost £210 million in lost revenue this yearand I have always thought this a massive underestimate. This encouragement for companies to abuse tax havens to hide their profits may already be costing us dear. (7)

Putting it simply, George Osborne says one thing and has done the opposite in many instances.  He has reduced the amount of money coming into government by the loss of tax caused by cutting jobs, tax cuts for the wealthy and corporations, including through tax haven legislation. He has increased the spending on welfare payments by 5.1% because of the increased unemployment resulting from his austerity programme.  And this is notwithstanding either the extra expenditure on the reorganization of the NHS, education, the courts and so on, or the cuts in expenditure on benefits which came into force in April.

Budget Balance = (Tax Revenue + Other Revenue) – (Welfare Payments + Other Spending)

And now, on the basis that the deficit is rising not falling, there is talk of more cuts being introduced in the November Spending Review … more cuts on top of those already scheduled.  For example an additional 10bn from the Welfare budget.

Chris Dillow wrote in November 2011 after the last Spending review:

. Forecasts of the structural deficit rest upon two huge uncertainties – and it’s not clear that they offset each other: an uncertain estimate of the output gap (and sensitivities of spending and revenues thereto); and  the usual uncertainties surrounding any fiscal forecast. I’m with Simon Ward on this: “it is troubling that the fiscal framework pivots on a concept subject to huge empirical uncertainty.”

I suspect that the notion of a structural deficit is playing an ideological role… (8)


Chris Giles of (9) agrees that the use of the ‘structural budget’ as a fiscal target leaves a lot of room for games. And as an example, Simon Ward reported that:

The Chancellor and the Office for Budget Responsibility (OBR) have, in effect, traded assumptions. The OBR has cut its guess about potential output, implying that a larger proportion of the current deficit is structural. The Chancellor has retaliated by assuming that he will be able to cut public spending by 0.9% a year in real terms in 2015-16 and 2016-17, thereby putting the structural budget position back on track. (10)

To be frank, all of George Osborne’s approaches are consistent with, and have striking parallels, with the last 30 years of disastrous Republican ‘neoliberal’ or plutonomic economic strategy  ‘Has George Osborne been taking Trans-Atlantic lessons from Jude Wanniski and the Republicans?’

So to sum up as to why the Structural Deficit reminds me of Libor:

The Libor is a fundamental component of our financial system, and the structural deficit is a fundamental component of the coalition government’s programme.

‘‘The Libor is not based on an objective measure of the interest’ and the structural deficit is not based on an objective measure of potential tax revenue… both are more or less ‘guess-timates’.  Yet Libor is ‘supposed to be the way the financial system assesses the overall health of the financial system’ and the structural deficit is used by the coalition government to assess the health of the UK economy.  Both the Libor and the structural deficit ‘guess-timates’ have a direct impact on the lives of millions of ordinary people.

It has been admitted that the Libor was manipulated in the interests of the banks, and the structural deficit is clearly open to being used to justify the unjustifiable… for example, in terms of dismantling/privatizing the welfare state, and cutting benefits to those who are disabled, unable to work, unemployed, low waged or suffering from high rents.

As Denis Kucinich says ‘If a fundamental component of our financial system has been or is being manipulated, we have the right to know about it.’  The same holds for government economic strategy.  Bill Mitchell calls Structural deficits – the great con job! 



The structural deficit is ‘the problem’ in the neoliberal ideological construct of the world.   But in the ‘real’ world, the problem is the lack of demand, a global ‘out of control’ banking system, and the level of private sector debt.  According to Michael Meacher:

‘…. the first forecasts of the newly formed OBR in 2010, the government was expecting the level of private household debt, already £1.57 trillion, to rise to a staggering £2.13 trillion by 2014-5.   It should be emphasised that this was not something they feared would happen or were simply allowing to happen, but rather it was a deliberate aim of monetary policy that it should happen.   The plan was that the deficit provided the perfect excuse to squeeze the public sector, shrink the Welfare State, but ever-increasing private household debt would provide the extra demand to maintain at least some modestly decent growth.   The opposite has happened.

In the private corporate sector deleveraging (i.e. paying off debt) has gathered pace because the corporates are sitting on mountains of cash (at least £70bn) but not investing because demand is being squeezed.   Equally in the private domestic sector households are being forced to pay down their debts and cut their consumption as rapidly as they can as the only way to get by.   The effect is massive private debt deflation, which is the real cause of the slump. (11)


Related posts:

‘Has George Osborne been taking Trans-Atlantic lessons from Jude Wanniski and the Republicans?’

Thom Hartmann describes Osborne’s vision for the UK

Simon says: QE is the biggest confidence trick of all time.

A Modern Jubilee: How to End the Recession 

What is George Osborne playing at?


(2)  Structural deficits – the great con job!










Has George Osborne been taking Trans-Atlantic lessons from Jude Wanniski and the Republicans?


Many commentators have been puzzled by George Osborne’s management of the economy…  Others share cartoonist Martin Rowson’s assumption that this is a ‘wrecking’ government implementing ‘scorched earth policies’  (see ‘anti-cuts protest’s ‘hooligan’ minority’) (1)

‘What is George Osborne playing at?’ (2) offers some of the ways in which Osborne is deliberately undermining the economy but I accept that it all sounds extraordinary.. Why on earth would he/they be doing that?  How do the Tories ever expect to be re-elected?  What’s the rationale, the reasoning behind their actions?

Looking across at the States, Michael Meacher sees the increasing similarities between the plans of Mitt Romney’s running mate, Paul Ryan, and the tactics of George Osborne et al in the UK (3).  Think Left also highlighted the parallels between the political views of George Osborne and Paul Ryan (4).

Paul Ryan is said to be an ardent Ayn Rand advocate … but forget that…  whether Osborne or Ryan know it or not, the really significant person of influence is Jude Wanniski.

 Who is Jude Wanniski?

Jude Wanniski was the originator of the ‘Two Santa Clauses’ Theory. His notion was that the Democrats acted like Santa Claus, when they got into power, because they would put in place Social security, unemployment benefit and invest in massive infrastructure programmes which created employment. Wanniski’s argument was that the Republicans had to find a way to ‘out-santa’ the Democrats because they were constantly wrong-footed by the fact that:

the Democrats kept raising taxes on businesses and rich people to pay for things…. and that made them seem like a party of Robin Hoods, taking from the rich to fund programs for the poor and the working class. Americans loved it.’*

 Thom Hartmann explains Wanninski’s ‘Two Santa Clauses’ theory and how it has allowed the Republicans to con America for the last 30 years (5). I have quoted at length from his article but the original is well worth reading:

‘Wanniski decided to turn the classical world of economics … on its head. In 1974 he invented a new phrase – “supply side economics” – and suggested that the reason economies grew wasn’t because people had money and wanted to buy things with it but, instead, because things were available for sale, thus tantalizing people to part with their money. The more things there were, the faster the economy would grow.

At the same time, Arthur Laffer was taking that equation a step further. Not only was supply-side a rational concept, Laffer suggested, but as taxes went down, revenue to the government would go up!

Neither concept made any sense – and time has proven both to be colossal idiocies – but together they offered the Republican Party a way out of the wilderness…..

There was no way, Wanniski said, that the Democrats could ever win again. They’d have to be anti-Santas by raising taxes, or anti-Santas by cutting spending. Either one would lose them elections….

When Reagan rolled out Supply Side Economics in the early 80s, dramatically cutting taxes while exploding (mostly military) spending, there was a moment when it seemed to Wanniski and Laffer that all was lost. The budget deficit exploded and the country fell into a deep recession – the worst since the Great Depression – and Republicans nationwide held their collective breath.

But David Stockman came up with a great new theory about what was going on – they were “starving the beast” of government by running up such huge deficits that Democrats would never, ever in the future be able to talk again about national health care or improving Social Security – and this so pleased Alan Greenspan, the Fed Chairman, that he opened the spigots of the Fed, dropping interest rates and buying government bonds, producing a nice, healthy goose to the economy. Greenspan further counseled Reagan to dramatically increase taxes on people earning under $37,800 a year by increasing the Social Security (FICA/payroll) tax, and then let the government borrow those newfound hundreds of billions of dollars off-the-books to make the deficit look better than it was.

Reagan, Greenspan, Winniski, and Laffer took the federal budget deficit from under a trillion dollars in 1980 to almost three trillion by 1988 …They and George HW Bush ran up more debt in eight years than every president in history, from George Washington to Jimmy Carter, combined. Surely this would both starve the beast and force the Democrats to make the politically suicidal move of becoming deficit hawks….

Ed Crane, president of the Libertarian CATO Institute, noted in a memo that year: “When Jack Kemp, Newt Gingich, Vin Weber, Connie Mack and the rest discovered Jude Wanniski and Art Laffer, they thought they’d died and gone to heaven. In supply-side economics they found a philosophy that gave them a free pass out of the debate over the proper role of government. Just cut taxes and grow the economy: government will shrink as a percentage of GDP, even if you don’t cut spending. That’s why you rarely, if ever, heard Kemp or Gingrich call for spending cuts, much less the elimination of programs and departments.”

George W. Bush embraced the Two Santa Claus Theory with gusto, ramming through huge tax cuts … and blowing out federal spending. Bush even out-spent Reagan, which nobody had ever thought would again be possible.

And it all seemed to be going so well, just as it did in the early 1920s .. inflating a bubble that … would have to burst….

The Republicans got what they wanted from Wanniski’s work. They held power for thirty years, made themselves trillions of dollars, cut organized labor’s representation in the workplace from around 25 percent when Reagan came into office to around 8 of the non-governmental workforce today, and left such a massive deficit that some misguided “conservative” Democrats are again clamoring to shoot Santa with working-class tax hikes and entitlement program cuts.’…..

The Two Santa Claus theory isn’t dead, as we can see from today’s Republican rhetoric. Hopefully, though, reality will continue to sink in with the American people and the massive fraud perpetrated by Wanniski, Reagan, Laffer, Graham, Bush(s), and all their “conservative” enablers will be seen for what it was and is. And the Obama administration can get about the business of repairing the damage and recovering the stolen assets of these cheap hustlers.

Published on Monday, January 26, 2009 by



The greatest significance in this history is how the Republicans have deliberately ‘wrecked’ the economy so that any incoming Democratic government would be hamstrung from implementing their social programmes, and could instead be ‘forced’ into making huge cuts/ increasing taxes in their efforts to return to the US to economic sanity.

I suspect that this is the over-riding explanation behind the deliberate ‘wrecking’ of the UK economy, along with the dismantling of the welfare state, the selling off of assets and the locking in of long-term contracts with transnational corporations who come under the jurisdiction of the EU and the WTO.  It is to ‘stitch up’ any future government…

The Tories know that they have been in decline since the 1950s. Gerry Hassan who charts the ‘Strange death of Tory England’ (6) suggests that the future:

‘…holds the prospect of the Tories becoming a ‘zombie party’, more and more divorced from reality and shaped by its own partisan obsessions. This will entail embracing an unapologetic and dogmatic failed Anglo-American capitalism which does not deliver for most people, instead producing middle-class mass anxiety, widespread poverty and exclusion, and an entitlement culture in the super-rich…. In this they will be in the company of their cousins the US Republicans who have become prisoner to corporate finance and ideological zealots…The Tory future is one of very few members, atrophied grass root associations, and a professionalised, paid politics: the party reduced appropriately to an offshoot of Serco and G4S and the free market vandalism politics they have personified… This will be a politics for the City, by the City, funded by the City – a caricature of the measured Tory politics of the Macmillan and Home era – but the inevitable result of Thatcher and Cameron.

The Wanniski elements are all in the Osborne plans.  The focus is on ‘supply-side’ measures when the issue is clearly a lack of demand.  The use of the improbable, and unproven, Laffer Curve, to argue that the top tax rate should be reduced to 45% to stimulate growth, and the discredited theory of ‘trickle down’.

There has also been the dramatic increase in public sector pension contributions which could be used in the same way as ‘Greenspan … counseled Reagan to dramatically increase taxes on people earning under $37,800 a year .. and then let the government borrow those newfound hundreds of billions of dollars off-the-books to make the deficit look better than it was..’.

As Michael Burke has demonstrated the Post Office pensions pot has already been used by Osborne to say that he has cut the deficit! (7)  And then there is the un-utilised £31 billion, identified by Neil Wilson (2) which will doubtless be released at the appropriate time to ‘demonstrate’ that the coalition’s ‘austerity plans’ have worked.

 ‘Bush pushed through, utterly irresponsibly, enormous unfunded tax cuts and hugely expensive unfunded wars.   This was not a reluctant necessity of the times.   It was a deliberate policy of cutting revenues (tax cuts for the super-rich) and feeding the Pentagon (Iraq and Afghanistan) precisely in order to drive up the deficit and thus justify cuts in spending.   Similarly for Osborne the financial crash has been a boon – by ‘compelling’ him to cut the deficit drastically.’ Michael Meacher (3)

Richard Murphy quotes from a beyond-the-paywall FT article (8) by John Authers who argues that the issue at the core of the US presidential election debate will be between:

… a distinguished tradition that holds that cutting taxes for the wealthy creates incentives for greater profits, and wealth creation. It is hard to combine deficit hawkery with advocacy of tax cuts even for the wealthiest in society – as it appears the Republican ticket will do – without believing this to be true.

There is also a tradition in economics holding that cutting taxes for the wealthy will not stimulate growth. These two schools will argue it out for the next three months.

Richard Murphy concludes:

And that, in my view, is what modern political corruption is: the advocacy of policy from a position of power created by the capture of wealth even when you know that policy won’t work and you’re only suggesting it for the sake of your own private gain. (8)

Unfortunately, the current LP with its ‘cuts are too deep and too fast’ stance shows all the signs of being like ‘the Democrats [who are making] the politically suicidal move of becoming deficit hawks….’  Hopefully, though (as Thom Hartmann concludes his article) reality will continue to sink in with the [UK] people and the massive fraud perpetrated by [Osborne, Cameron], and all their “conservative” enablers will be seen for what it was and is…  And the Labour Party will find the route to fulfilling its real purpose to improve the lives and well-being of the 99%.


Hat-tip to Brendan

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(5)  Two Santa Clauses or How The Republican Party Has Conned America for Thirty Years by Thom Hartmann