It is the Tories who have a 30% strategy

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It is the Tories who have a 30% strategy by Michael Burke

First posted on Socialist Economic Bulletin 20.05.14

Ed Miliband is accused of having a ‘35% strategy’, meaning that he is banking on doing only just enough to win an overall majority at the next general election.  Polling models suggest that 35% would be enough for Labour to achieve an overall majority in Parliamentary seats.  This is because the Tory vote is increasingly concentrated, while Labour’s is far more widely spread geographically.
Since Labour’s electoral strategy has not been divulged to SEB, it is idle to speculate on it, although this has not prevented others from doing so.  Instead, it is possible to demonstrate that the Tory policy is based on an electoral strategy that is focused on an even narrower section of the electorate.  It is the Tories who have a 30% electoral strategy.

The map below (which the present author first saw published by Ian Wright MP) shows the cumulative effect in English constituencies of cuts under the Coalition government during this parliament.  The Tory Party is a fringe grouping in Scotland and is headed in that direction in Wales.  Despite repeated attempts it has also failed to resurrect Conservative Unionism in Ireland.

Chart 1. Cumulative effect on change in spending power 2010/11 to 2015/16

The areas in beige have been barely affected by government cuts (although these are averages, there will be many people living in those areas who are badly affected by austerity).  The areas in green have experienced no net cuts at all.

By contrast, areas coloured in red have seen a fall in living standards of between 15% and 20%.  Those areas coloured deepest red have seen falls of greater than 20% and take in all the large cities, including London.

The economic map almost precisely coincides with the electoral map of Britain.  The Economist and others are keen to argue that this is a North-South divide in British politics.  To that end, they are obliged to perform some logical contortions.  In order to make the main divide in British politics North versus South, The Economist excludes the Midlands from the North and excludes London from the South!

In reality, the Tory Party has been forced out of Ireland, Scotland, the cities, Wales and the North in succession.  It is retreating to its birth place and stronghold in the English shires.

The economic response of the Coalition government led by the Tories is to protect and promote those Tory heartlands, as shown in Chart 1 above.  SEB has previously shown how a minority of society, the owners of capital and the rich, are benefitting from the ‘recovery’ in which most people’s living standards continue to fall.

Perhaps the most flagrant policy in this regard is Osborne’s ‘Help to Buy Scheme’.  The entire policy of increasing demand for housing while doing nothing to increase supply inevitably leads to higher prices.  A number of commentators and economists from the Right have attacked the scheme as an absurd policy, designed solely to boost property prices rather than housing availability.  It is a ‘help to get re-elected’ scheme.  The resulting property price bubble is concentrated in London and the South-East, and even here there is growing resentment at the unaffordability of housing, not a feel-good factor.

Politically and economically, the Tories are pursuing a core vote strategy.  This may not amount to much more than 30% at the next general election, and will certainly be less than the 36.9% they received in 2010.
As a result, support for the LibDems has collapsed as this does not at all coincide with the interests of their electoral base, higher-paid workers, professional classes and small business owners.

Labour’s winning electoral strategy should be equally clear and substantially broader.  In terms of political geography it should embrace the democratic demands for greater national rights within the British state, as well as finally ending the British presence in Ireland.  It needs to have a programme of economic regeneration for the North and the big cities.  It should adopt a very large scale programme of council house building with London at its centre-piece.  Socially, it needs to be a champion of equality and democracy, tackling the huge inequalities faced by women and tackling the endemic racism of British society, which cannot be done while promising to be tough on immigration.

Above all now, it needs to reverse the policy of austerity which is lowering the living standards of the overwhelming majority and will continue to do so.  The Tory policy, of government spending cuts and inducements to the private sector to invest has not worked.  A policy of government-led investment is required, combined with other policies that will directly lift standards.  The Tory party is pursuing a narrow electoral strategy to shore up its support.  Labour can offer something better.

Despite Britain’s New Thatcherites, only the State sector has recovered.

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First posted Tuesday, 30 April 2013 on Socialist Economic Bulletin

Despite Britain’s new Thatcherites, only the state sector has recovered

By Michael Burke
The British economy is becoming more dependent on the state.  This is revealed in the latest preliminary data for GDP in the 1st quarter of 2013.The preliminary data for GDP only provide limited information – it has only a slim table of data in the preliminary release compared to 40 pages of data in the final release.  The data is confined to measures of output from the different sectors of the economy.  Even so the preliminary release is very revealing. Taking the starting-point of the recession in the 1st quarter of 2008, only one sector has increased its output.  This is the output of government services.  It has contributed 1.4% to GDP growth over that period.  The whole economy is still 2.6% below its peak level prior to the recession.  Over that time the private sector as a whole has subtracted 4% from GDP.  The contributions to GDP growth are shown in Figure 1 below.

Figure 1

13 04 30 Chart 1

The preliminary data itemise ten separate sectors of output.  Construction has fallen by nearly 19% in the recession.  Manufacturing, which comprises little more than 10% of all output, has fallen by just under 10%.  By contrast the sole area of private sector activity which has almost fully recovered is business services and finance.  This sector is now just 0.3% below its pre-recession peak.  This is shown in Figure 2 below.

Figure 2
13 04 30 Chart 2

The revival in the business and finance sector has only been possible because of the enormous subsidies to it provided by the state.  In the most recent public finances data (which is also to the 1st quarter of 2013) the total cost to the public sector of bailing out the banks has been £1,020bn.

Yet the net return on this subsidy to the private sector has been negative as the banking sector is still smaller than it was before recession.  It is arguable that without the state’s support the banking sector would have collapsed entirely.  But even on the most favourable comparison from the low-point of the recession the subsidy has been hugely inefficient.  A £1,020bn hand-out to the banks has yielded an increase in output over that time of approximately £40bn.  It would have been far more efficient if the state had directed its own capital into the production of banking services, via fully nationalised and controlled banks.

This same logic applies to all current government schemes to subsidise the private sector, and any that Labour might be considering.  Currently, it is estimated that the government has already provided £43.5bn in various subsidies including the National Infrastructure Plan, the Equity Loan and Help to Buy schemes, the Enterprise Finance Guarantee and the Regional Growth Fund, with nothing to show for it.  Far greater sums are in the pipeline, up to £310bn.

The state is generally a far more efficient provider of very large-scale goods and services.  But it is not necessary to accept that idea to recognise the fact the currently the private sector is a drain on the finances of the state.  State subsidies to the private sector are not working because the private sector’s investment decisions are determined by prospective profits.  If profits are not recovering, neither will private investment.  As the latest GDP data shows, currently only the state can lead a recovery.

Related Michael Burke posts:

BRIBING THE PRIVATE SECTOR TO INVEST ISN’T WORKING

GDP DATA SHOWS BRITAIN IS THE WEAKEST OF ALL THE LARGE ECONOMIES

PRODUCTIVITY CRISIS IN THE BRITISH ECONOMY

20 YEARS OF LOST OUTPUT

The Autumn Statement and long-term Austerity

Investment Slump Greater Than Whole Loss of British GDP

The new recession is directly made in Downing Street

The Logic of Privatisation of the East Coast Mainline

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First posted on Thursday, 28 March 2013 – Socialist Economic Bulletin

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.

20 YEARS OF LOST OUTPUT

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First posted Monday, 14 January 2013 at Socialist Economic Bulletin

20 YEARS OF LOST OUTPUT

By Michael Burke

The Office for National Statistics (ONS) reported the latest data on industrial production as:

‘Production rose by 0.3% between October and November. Within production mining and quarrying rose by 8.7%’.

Both statements are factually correct.  But this is very far from an accurate presentation of the data.  Economic data provide the main navigation data for conducting economic policy.  The ONS’ reporting of the latest production data invites us to admire the view while we are heading for the rocks.

The index of industrial production (IP) for November rose to 97.3 in November, from 97.1 in October.  In September it was 97.9.  The chart below shows the index of industrial production from 1992 to the most recent data.

Figure 1

13 01 14 Figure 1 Industrial production

The base date for measuring output is 2009 when the IP was set at 100.  This means that in each of the last 3 months, industrial production has been below the level seen in 2009, which was the deepest recession in Britain since the 1930s.

Prior to George Osborne’s Comprehensive Spending Review in October 2010 the IP index for in the 2nd quarter of 2010 stood at 102.7.  In the following Budget he promised a ‘march of the makers’.  Yet economic policy has overseen a complete reversal of the modest rebound in activity under Labour after it adopted a stimulus programme.  Output has fallen by 5.3% from the 2nd quarter of 2010 and is now 1.8% below the low-point recorded in the recession.

The startling fact is that, as the chart shows the last time industrial production was lower than the most recent reading was in May 1992.

According the National Institute of Economic and Social Research GDP shrank by 0.3% in the final quarter of 2012.  There will be much discussion about the unprecedented ‘triple-dip’ recession that the Tory-led Coalition has presided over.  The criticism is entirely justified.

But the medium-term picture is even more grave.  The British economy has slumped to levels of output last seen 20 years ago, at the depth of the ERM crisis.  That too was another failed Tory experiment in the necessary ‘disciplines’ to curb wage growth and so restore profits.

This is a chronic failure of economic policy. A radical reorientation is required to halt the crisis.

WHY MORE ‘AUSTERITY’ IS ON THE WAY

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First posted Thursday, 30 August 2012 by Socialist Economic Bulletin

Why More ‘Austerity’ Is On the Way By Michael Burke

The latest monthly public borrowing data, which show a large deficit in government finances, have widely been hailed as a ‘surprise’. However, SEB has previously pointed out that the deficit has been widening over the prior six months, so that the latest shortfall in government finances is simply the continuation of an established trend.
More fundamentally, it does not require very sophisticated economic analysis to assume that a renewed contraction in the economy will lead to both higher government spending and lower government tax receipts. Despite higher prices, the nominal level of taxation receipts has fallen since the beginning of 2012, and expenditures have risen. At the very least, the borrowing data should put paid to all the chatter that the GDP data showing economic contraction is somehow wrong . Of course, the GDP data is subject to revision, like almost all economic releases including the data on public borrowing. But it is in practice inconceivable that the economy could be expanding while a significant shortfall appears in government finances. In that sense, government borrowing data are some of the most reliable of all, as they represent real expenditure made and income directly received by the government, rather than survey evidence and estimates of activity in the private sector.
International Experience
If there is any genuine ‘surprise’ from the widening in the budget deficit it is a product of an entirely incorrect framework that assumes that the state is an obstacle to economic prosperity and that removing it will boost output. In fact, the performance of the British economy and government finances in response to ‘austerity’ supports the opposite contention; which is that the state should be the leading force in an economy because it is more efficient than the private sector in developing economic growth. Reducing the weight of the state in the economy therefore damages economic activity.
But anyone who has followed the trajectory of the crisis-hit European economies in the recent period would not at all be surprised by the outcome in Britain. In every case where severe ‘austerity’ measures have been put in place, economic activity has contracted. This has also usually been accompanied by no significant improvement in projections for government finances, and in some cases a deterioration. The table below shows the EU Commission estimates and forecasts for the budget deficits in selected EU economies. It should be stressed that these are the EU Commission’s forecasts (in the Spring 2012 Euro Area Economic Forecasts), and have in the past been subject to negative revisions.

Table 1

12 08 30 Table 1

Policy Response
The response to economic contraction and renewed widening in government budget deficits in the crisis countries of the EU is also instructive. In none of these cases has there been a reversal of policy, so allowing growth and therefore an improvement in government finances. Greece and Portugal largely had austerity foisted on them by the Troika of the EU, IMF and ECB. Spain, like Britain, initially had a mildly stimulative policy carried out by governments of the left, PSOE and the Labour Party respectively. However, while this partly reversed the slump it was wholly insufficient to provide economic recovery and they then switched to ‘austerity’ policies. This appeared to the electorate like an inconsistent and illogical zigzag on economic policy and ushered in parties of the right even more committed to an attack on the living standards of workers and the poor.
Ireland was a different case, as its ruling circles are wholly committed to the interests of foreign capital and their domestic agents (in this case, the speculators of Allied Irish Bank and its manly foreign bondholders). Therefore, without any external political impositions, the Irish government moved straight to an ‘austerity’ policy of its own. It later fell into the clutches of the Troika simply because this policy had utterly failed. The Troika then loaded the Irish state with even more debt in order to extend the policy.
Britain is unlikely to be any different and ‘austerity’ will be deepened. Reports of the latest deficit widening had headlines such as ‘Surprise deficit raises risk of more austerity , and ‘Tax slump threatens to set off new wave of cuts’ .
Even prior to the UK borrowing data, a series of business calls had been raised for further cuts in welfare payments in order to provide investment subsidies for firms. The Institute of Directors, the CBI and the British Chambers of Commerce have all been plugging deregulation and tax ‘reform’ as well spending cuts. This is actually an agenda for lower employment rights, safety and environmental standards, as well as tax cuts for corporations at the expense of labour and the poor.That is, a deepening of ‘austerity’.Rationale of Policy
Rhetorically, it is possible to speak of the classic definition of the ‘madness’ of current policy in Einstein’s sense; repeating an experiment and expecting a different outcome. But in truth the dynamic of current policy is not irrational at all. Just as in the rest of Europe, policy is not aimed at restoring growth at all, or even reducing the deficit, despite government claims to the contrary.
In any capitalist economy investment falls not because there is insufficient demand – the 1.8 million households on waiting lists for social housing in England could testify to that. Investment falls because capital cannot be invested for a sufficient profit. In Britain investment (Gross Fixed Capital Formation) began to decline in the 1st quarter of 2008, one quarter before GDP began to contract. It led the economy into recession and now accounts for 80 per cent of the total loss in output.
The purpose of current ‘austerity’ policy is to restore profits. Seen from the point of view of capital, there are two main current economic problems. The first is to reverse the adverse change in the profit share which takes place during recessions. The second is to create conditions allowing an increase in the profit rate.
1.In a recession the profit share falls. Company A produces goods which it sells for £1mn. It has wage costs of £0.5mn and other variable costs (raw material, energy, etc.) of £0.2mn. The surplus generated is £0.3mn. But in a recession it can only sell goods for £0.8mn as some are left unsold and some others offered at a discount. The costs of raw materials are almost entirely outside their hands. Faced with the same wages and raw material costs, the surplus falls to £0.1mn. This is exactly what has happened in the British economy since 2008. In nominal terms the compensation of employees had risen from £773bn to £816bn. Of course, in real terms, after inflation, there has been a marked decline in wages but in official data the distribution of incomes is presented only in nominal terms. But the gross operating surplus (GOS) of firms (akin to the surplus identified above) has risen from £503bn to just £508bn over the same period. Again, in real terms there has been a marked fall in the surplus. Crucially, the nominal rise in compensation has been greater than the rise in the surplus. Capital’s share in national income has declined as a result.
If Company A can lay off workers or cut overtime and maintain output it will do so in order to restore profits. But the complexity of the production process may not allow a significant reduction in wages with unchanged output. There is also the concern that a rival firm might increase its output and win market share from Company A, or even hire the workers it has trained. Instead, Company A will benefit if government can find a way to cut wages, say, by increasing the numbers of people unemployed in an attempt to force down wages, or cutting non-wage benefits to force those in work to work longer for less.
2.The cause of deep recessions is a decline in investment. Individually, firms are unwilling to resume investment until they can be much more certain of making adequate profits. In aggregate, they hoard capital and refuse to invest it. To make a profit Company A must deploy capital. This is in the form of both its costs of employment, raw materials and other input costs, as well as its costs of plant, machinery and so on. The rate of profit is the surplus extracted as a proportion of this total capital employed.
Frequently, boom precedes recession. This is not because economics is some kind of morality tale about excess, but because the boom includes an unusually high level of investment. In Britain, ‘unusually high’ is still weak by international standards but it meant the level of investment rose by 15 per cent in the four years to 2005, and by the same proportion again in the two years to 2007. This latter increase in the capital stock (plant, machinery, etc) took place while wages were growing but was not accompanied by an equivalent rise in the growth of the surplus. In fact, investment rose at a faster rate than the surplus. Since the profit rate is the ratio of the surplus versus total capital employed (both fixed capital and variable capital) and the surplus rose at a slower rate than investment, it follows that the profit rate fell.
But Company A is operating in a recession and sales are not rising and it cannot do anything about the costs of its plant and equipment. It is also at the mercy of market forces in terms of input costs such as raw materials. To restore the profit rate therefore requires a reduction in wages. 
Anything which indirectly supports the level of wages such as benefit entitlements, unionisation, national pay bargaining, employment rights and so, must all come under attack to achieve this. Meanwhile, it will demand from government both that corporate tax rates must be cut and that the government provides work, or at least subsidies to it in order to boost sales and increase retained (after tax)profits.
This is the content of all ‘austerity’ policies. It is why they will continue even while growth is at best stagnant and the deficit rises once more. Policy is not aimed deficit reduction or still less economic well-being via growth. The aim of policy is restore and raise profits. It is why these policies will not only continue but deepen in the face of both economic contraction and a rising deficit.
The alternative remains large-scale state investment which will produce economic recovery. Firms wishing to survive will be obliged to participate in the recovery by investing on their own account, even at the lower profit rate. 
Both resisting the impositions of further austerity and demanding the state lead the recovery through investment are the subject of a struggle between classes. Effectively it is a struggle about which major class will be forced to pay for resolving the crisis.

WHY INVESTMENT NOT CUTS IS KEY

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 Questions and answers: Why investment not cuts is key

Reprinted from Socialist Economic Bulletin  28.08.12

The debate on the alternatives to the current failed economic policy of the government has intensified. The renewed downturn in Europe, a British government Budget whose cut in the 50p tax rate underlined the class interests it represents and the slip back into ‘double-dip’ recession have all heightened interest in alternatives to ‘austerity’.Socialist Economic Bulletin has consistently argued that the appropriate response to the current crisis is investment, not cuts. A number of readers have expressed interest in a Frequently Asked Questions, addressing some of the main points of this. These are set out below.

What do you mean by investment?
What we mean by investment is investment in machinery, transport, technology, housing and hospitals and similar things. This is not the speculation, sometimes wrongly called ‘investment’, which is often spoken of in relation to the stock market and other financial instruments.All economic output is either consumed or set aside in the form of savings by households, companies or the government. This saving can sit idle in a bank, be used for speculation, or used for investment in building houses, infrastructure, transport links, education, health care, and so on. It is this latter type of investment which creates prosperity and jobs as well as improving productivity. It is what is meant by the term investment.

From a socialist point of view, investment is about ‘the means of production’. The question of who controls the means of production and how they are developed is the most important issue in the economy. Most of the time this issue appears abstract, but in a big economic crisis such as the present the question of who will control, or set the policy of the means of production, is an immediate issue.

Why has the question of investment become so important currently?

The fall in investment (gross fixed capital formation) in the OECD group of industrialised countries from 2007 to 2010 was approximately US$963bn in real terms. This is vastly more than the total decline in GDP, which was US$220bn. This was because other components of GDP, such as household or government spending as well as net exports to the rest of the world all rose. In order to reverse the slump, there must be a recovery in investment.

Is the same true for Britain?

It was. Until the Tory-led government came to office the decline in investment was the biggest contributor to the British recession and accounted for approximately 80 per cent of the decline in GDP. Declining investment also led the recession, beginning to fall before the economy as a whole contracted.

How has the recession changed since the Tory led coalition took office?

On the same basis as the OECD as a whole (US$ at Purchasing Power Parity), the decline in investment now accounts for the entirety of the British recession. The difference is that it has been joined and then overtaken by the decline in household spending. This is a result of government policy, where wage freezes, the VAT hike, benefit cuts and job losses have combined with higher inflation to push real incomes down. As a result household spending has also fallen. To get out of the recession therefore means that both people’s incomes, which determine consumption, and investment must be increased.

If there’s no money left, how can investment be increased?

There’s plenty of money left! If wages are held down and yet prices (for food, energy, rent, transport costs, etc.) are rising this means that the share of national income of companies or landlords or transport operators will all rise. Their share of national income is profits. But companies are refusing to invest this profit.
Where they can, companies are holding down wages and hiking prices but in general are refusing to invest.

As a result, they are sitting on a cash mountain (held in the banks) of around £750bn. Capital is plentiful. Currently it is in the hands of those who refuse to invest it. This refusal has led the economy into a double dip recession. The only way to reverse this is to raise people’s income, which means to stimulate consumption, and at the same time to embark on a major investment programme.

But is that enough?

It is more than enough to deal with the scale of the current problem. To restore all the lost output since the recession would require just £67bn. To restore the British economy to trend growth, so that it would seem as if the recession had never happened, would require approximately £225bn. Both of these totals are just a fraction of the cash holding of the corporate sector.

How could this cash mountain be accessed?

Government policy could easily claim it, through a variety of levies, windfall taxes and surcharges. The funds are already held mainly in British banks (as companies become increasingly concerned about holding them in overseas banks) and could be directed for investment purposes. RBS and Lloyds-TSB are already owned by the state and all deposit-taking banks operating in Britain can only do so because the deposits are guaranteed by the state. A substantial part of this investment should be launched directly by the state in housing, transport and other sectors. As regards private companies, a simple instruction could be issued that the banks must provide investment (cheap loans) to all the areas needed.

What are those areas?

The priorities would be investment in housing, in transport (especially much more energy efficient rail), in infrastructure (hi-speed broadband, non-carbon energy generation, port facilities, and so on), as well as
in education at all levels. These are the areas which have seen the biggest falls in investment during the recession, and yet have potentially the biggest returns on investment.

But once the bridge is built, or new broadband supplied, isn’t the money gone?

All the money spent has very large multiplier effects. This means the money continues to circulate in the economy long after the initial expenditure. In addition, there are very large boosts to productivity, making it possible to establish or expand businesses and services. The CBI now accepts that the average multiplier for large infrastructure projects is 2.84:1, meaning that for every £1bn initially invested, the economy is boosted by £2.84bn.

There has been a lot of recent talk from the CBI and others on the need for investment. Isn’t this the same as SEB’s policy?

No. The CBI and others represent the business interests that have participated in the investment strike which is the cause of the crisis. Now, because demand generally is falling once more (investment, household spending, government consumption and exports) they are suddenly concerned about current and future profits. They have also benefitted from lower wages and falling corporate tax rates. Yet they continue to refuse to invest.

Instead, they demand that they be given further subsides, handouts and guarantees (even guaranteed profits in the case of the nuclear industry) in the hope they will graciously deign to invest at some point in the future when profits are certain.

Worse, they also demand further cuts in wages and employment rights, and further cuts in government spending on welfare. This is indefensible morally but it also runs counter to the needs of the economy as whole, where falling household incomes is now also driving the recession.

But wouldn’t those business subsidies be worth it, if it led to a recovery?

Private businesses are driven by profit, and in aggregate they will make no large scale investments without an increase in profitability. As this is a generalised crisis in the industrialised countries, autonomous large scale private sector investment can be ruled out because no sufficiently large recovery of profits is in sight.

Therefore all attempts to bribe private businesses to invest, such as the government’s ‘credit easing’ are likely to prove extremely costly or fail, or both.

Then how can investment recover?

The state is not driven by profit and so has the capacity to make rational economic decisions, based on what is required to optimise sustainable economic activity. The mechanisms for the state to access the private sector’s cash hoard have already been identified. It is a relatively simple matter to achieve it.

If this were so simple, why hasn’t it been done already?

In Keynesian terms, this would amount to a ‘somewhat comprehensive socialisation of investment’. The state would be taking over functions that have been ceded to the private sector, such as house building, and would derive the surplus generated by it in the form of rent.

It would begin to reverse the decades of privatisations begun in earnest under Thatcher. In Marxist terms it would mean some portion of the means of production passing from private to public ownership. This is not therefore acceptable to the current owners, and the political forces which support them.

But surely this is Utopian, talking about the state taking over the means of production?

Across the world, the efficacy of all stimulus or bailout measures was in direct proportion to the involvement of the state, which is why China’s investment stimulus was the most successful of all. Even in the US currently, it is the state-owned agencies Freddie Mac and Fannie Mae which are keeping the housing market going as private banks have exited the US housing market. All across the world, including Britain, it was the state which supported the failing private sector banking system. It is the state, in the form of EU subventions, which is funding rapid recovery in the Baltic states and which allowed Poland to avoid recession altogether.

The state is a more efficient provider of many large scale goods and services. If its weight in the economy overall is sufficiently great it can also have the levers to regulate the level of investment, which is decisive for continued prosperity.

What about other alternatives, like taxing the rich?

Britain is a very unequal society, made more so by the Tory-led coalition’s policies of reduction in real wages and cuts in welfare entitlements. A more redistributive tax system, and closing tax loopholes to pay for it, would be beneficial. But tax increases alone are not sufficient for reviving the economy. In the last financial year the public sector deficit was over £124bn. Even the most ardent supporters of increasing taxes do not suggest that the full armoury of tax increases could match this total.

Other schemes, based on further monetary interventions or quantitative easing, or increased wages, while all useful in themselves, do not address the central issue that significantly increased investment is required to revive the economy and that the only agent that can lead an investment recovery is the state.

A leaflet version of this article Questions and answers can be downloaded here.

THE UK’S BUDGET DEFICIT IS RISING NOT FALLING

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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.

Figure 1

12 07 22 Chart

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

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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.