David Cameron’s reaction to yesterday’s budget was chilling: “We need to move from an economy of borrow and spend to an economy of save and invest. … we need spending restraint now, and an Office of Budget Responsibility for the future. … If they don’t have the courage to deal with the debt and take the difficult decisions, why don’t they make way for a team that can”
Of course the conservatives are feeding on the mass popular revulsion against the fat cat bankers, and disquiet at the huge bail outs that have been necessary to prevent the banks from collapsing. The Tories are clearly pitching their stall on very tight monetarist ground of massively reducing public services to seek a balanced budget in the medium term.
Justin Tomlinson, Tory candidate for North Swindon says that the Tories will pursue a balanced budget at all costs, even if this costs millions of jobs. In response to the budget Justin says: “The amount of debt Labour are building up means Britain’s books won’t balance for at least ten years. ” One area where the Tories are saying they will make savings is by a huge attack on public sector pensions.
Last week, Tory Shadow Chancellor George Osborne was explicit that the Tories would seek public expenditure cuts, rather than increased taxes or borrowing, as their primary tool for deficit reduction. He also confirmed that no areas of public expenditure would be safe, and cuts could be expected both on the schools budget, and the defence budget which would hit manufacturing jobs hard.
Swindon Tories are all at sea with this. Robert Buckland, Conservative parliamentary candidate for South Swindon, says: “”The much-vaunted car-scrapping scheme will make very little difference in the car industry which is such an important part of Swindon’s economy. The thousands of workers at Honda who’ve been hit by Labour’s recession have a right to be angry that this Labour government has forgotten them.”
But what are the Tories promising to do differently? Obviously the car scrapping scheme will persuade some people to buy a new car, and that can only help UK based car manufacturers like Honda here in Swindon. The Tories are promising to dampen demand and pursue fiscal prudence – the very last set of economic conditions that would help the car industry.
Exploiting the luxury of unaccountability that goes with opposition, the only detailed policies in the Conservative’s alternative proposals for the budget are ALL tax reductions! They say:
If the Conservatives had given this Budget, we would have got a grip on government spending, and used the savings from cutting waste to introduce real help now for families and pensioners:
– Freezing council tax for two years, worth over £200 for the typical family
– Abolishing income tax on savings for all basic rate taxpayers, worth up to £7,200 a year
– Raising the income tax threshold for pensioners, worth up to £400 a year
– Help for the unemployed to upskill and reskill during the recession
– and tax breaks for companies who create new jobs
Let us look at these proposals. Freezing council tax might actually be a progressive measure reducing the burden on pensioners and those on lower incomes, but the effect on local government services and jobs would be steep, particularly as councils have limited ability to cut statutory services, and the cuts may fall disproportionately on the voluntary sector, which would actually leverage the cuts to have worse impact as services only partially funded by the local authority may become non-viable. Already Swindon’s Tories have forced the closure of Help the Aged, what services would be left if their income was frozen for two years?
Abolishing income tax on savings and raising the tax threshold for pensioners are regressive changes that would give greater benefit to those with more money. Incentivising saving rather than spending would decrease retail demand, further deflating the real economy. Helping the unemployed with training and tax breaks for job creation are Motherhood and Apple Pie policies, hardly distinguishable from what Alistair Darling announced.
But the Tories main sleight of hand is in disassociating themselves with the public debt in the first place. David Cameron says: “[Gordon Brown] will never bring in the changes required because he doesn’t accept the economic model he’s run for 12 years – based on government debt, consumer debt and housing debt – is fundamentally bust.”
Swindon Tories are banging the same drum about debt. Robert Buckland says “They’re saddling future generations with a mountain of debt”.
In fact the huge debt crisis flows from the deregulation of the City of London under Margaret Thatcher; the so called Big Bang in 1986 that saw an explosion in the trading of UK based equities from an annual turnover of £161bn in 1986 to £2.5 trillion in 2005. This was the cornerstone of subsequent economic policy, and both Tories and New Labour have over-valued Sterling to sustain the City’s role as a major global financial centre, at the estimated cost since 1997 of a million British manufacturing jobs in the real economy. And if it had not been for the growth of personal debt fuelling a consumer spending boom, the recession would have taken grip much earlier. As respected economist Graham Turner explains:
“The growth in lending was a necessary antidote to the pernicious effects of globalisation. Shipping jobs abroad to cheaper locations, from China, to Eastern Europe to Turkey and India, has been a fallacy. The median wage has been relentlessly squeezed, not just in the UK, but in the US and other European countries too. If there had been no credit boom, GDP growth would have been almost negligible after the collapse of the dotcom bubble. Deflation would have become entrenched.
“Led by their obsession with free trade, politicians in the West were happy to preside over the resulting housing bubbles, believing that low inflation would sustain the extreme house prices. For a while, it did. But it is perhaps ironic, that when inflation did eventually accelerate, it was never likely to last precisely because of globalisation. Wages were being squeezed even during the boom, and as oil prices rose, there was not the slightest chance that inflation pressures would become embedded, as seen in the 1970s and 1980s. Tragically, central banks in the West could not see that. They kept interest rates too high for too long. They misjudged, because they did not understand the forces of globalisation that gave rise to the credit bubble in the first place.”
In any event, we are starting from where we are, not from where we wish we were. Last year the government had a stark choice of allowing the failure of major retail banks, or of using the government’s ability to borrow to stabilise the banks. Had the banks failed we would have been precipitated into a disastrous economic catastrophe, with massive write off of asset values, and an irreversible decimation of manufacturing, retail and construction sectors. The relatively decisive action taken to prevent that melt-down is the current reason for the high levels of public debt. The clear implication from the Conservative Party and Tory press complaining about the current level of debt is that they would have allowed the banks to fail. This would have led to huge job losses in Swindon, not only in the financial sector, with employers like nationwide and Zurich, but also in the manufacturing and retail sectors.
Sadly, there are some very real problems with the government’s current approach. Having effectively taken state ownership of the banks, they have been too shy to actually take control of the financial sector and run it as a public utility. So just when the banks should be cutting interest rates as far as possible, they are seeking to maintain them high to maximise their profits. Bizarrely this anti-social policy that is detrimental to the overall economy is necessary to bring them back to a position where they could be sold off. So government policy to pursue low interest rates is undermined by its own dogma of insisting the banks be returned to private ownership.
They are also constrained by their ability to directly generate demand in the economy because of the very limited economic footprint that the government now enjoys. Decades of privatising the state owned corporations has left the government with few levers of direct influence. In an uncertain economic climate it is rational for each individual corporation to avoid risk, and defer capital investment, even though if they all invested it would benefit everyone. Only social ownership can overcome that unwillingness of private capital to invest, so to really reflate the economy, the government needs to return to a model of direct social ownership.
It is certainly true that Alistair Darling’s budget reveals huge strategic difference between the approach of the Labour government, and the Tories. But although the beast of neo-liberalism is effectively dead, it doesn’t yet know it is dead, and the budget includes very unwelcome commitment to pursue further privatisation of the Royal Mint, and partial privatisation of Royal Mail. Generally there is too much caution in providing the stimulus for real jobs for real people that we need. The biggest problem is that Alistair Darling is far too optimistic. His budget would actually make sense if the recession was likely to be short lived, and recovery next year sustained and robust. But the crisis is likely to be both deeper and more prolonged. TUC General Secretary Brendan Barber’s judgement is about right:
‘But it is does not bring the same boldness and vigour to getting the real economy right as the Government showed in dealing with the banking collapse. The biggest drain on the public finances will be continuing mass unemployment and we needed a bigger and better targeted stimulus to the economy today. A half per cent boost in public spending is not enough this year. Next year’s tightening is too much, too soon and is based on an optimistic assumption that the recovery will start this year. ‘In particular cuts in public spending – and these are cuts, not efficiency savings – are absolutely wrong at a time when there is a collapse in demand in the private sector. ‘So while we can welcome some significant changes in direction and good individual policies, this is still some way short of what was needed to maximise the fight against unemployment and ensure that we emerge from the recession as a fairer, greener and better balanced economy.’
Elsewhere Gregor Gall argues that the current government policy is not really Keynesian, which may well be true, and that even full bloodied Keynesianism would not fundamentally solve the current crisis. He makes some very sensible observations about the need to argue for public trusts that concentrate on service provision not profits.
But we need to be very clear where we are in terms of political development. The Tories look like they will win the next election, possibly with a landslide, and certainly on a highly reactionary economic policy. It is time that people woke up to the danger.