READ IAIN ON TUESDAYS, THURSDAYS AND SUNDAYS IN THE HERALD AND SUNDAY HERALD
Live within your means. Balance the books. Fix the roof while the sun is shining. If these cosy household financial cliches have an antiquated ring to them that’s because they refer to an essentially Victorian approach to personal and public finance. We would never have had mortgages, hire purchase or credit cards if we’d stuck to those old virtues.
There is of course a lot of sense in individuals and households living within their means. There is nothing worse than becoming chained to debt servitude, as has happened to so many people since the financial crash. There is a fine line between credit and usury, and the way in which rapacious financial institutions have tried to entangle poor people in a web of financial obligation is a national scandal.
But we shouldn’t make the mistake of confusing the nation’s finances with our own. They are very different. Governments must avoid runaway debt interest too, but that does not mean abandoning the obligation to keep the economy in work and productive and maintaining public services. Every government, Labour and Tory, since the Great Depression has accepted this –
until yesterday. In his Mansion House speech to the City of London last night, Chancellor George Osborne plunged Britain back to the Victorian age of financial orthodoxy by promising to impose upon future governments a legal obligation to run economic surpluses, at least outside times of crisis.
He’s already put this and future governments in fiscal handcuffs by promising to make it illegal to increase income tax, national insurance or VAT. Now he is putting government in the stocks by trying to outlaw government borrowing. We can only hope that this is all empty rhetoric but, with this Government, you can never be sure.
It is, of course, impossible to cut your way out of a recession. Austerity economics is self-defeating. By cutting government spending the economy shrinks, and as it shrinks government tax revenue declines as unemployment rises. Yes: austerity actually makes the debt problem worse, as has been demonstrated time and time again, most recently in Greece.
There, austerity madness has led to the economy shrinking by 25 per cent and placed half of all young people out of work. Yet after five years of this EU hair shirt, Greece’s debts have become bigger and bigger and now everyone agrees they can never be paid.
Trying to promote growth by cutting spending is like trying to lose weight by cutting off your legs. Yes, you’ll lose two stones; but you’ll also lose the ability to move about and work.
This is such an obvious proposition when you think about it that it might seem extraordinary that anyone could seriously propose anything else. But many do.
This very Tory Government learned the austerity lesson the hard way after 2010. George Osborne’s attempt to impose the most dramatic cuts since the “Geddes Axe” of the 1920s plunged the economy back towards recession. It was the removal of this Government’s financial straitjacket that allowed the economy to recover after 2013, not the straitjacket itself.
Of course the “austerions” – as conservative economists and politicians are called – claim that, on the contrary, austerity worked. They say the UK Government “cut its way to recovery”. But this is quite wrong. Mr Osborne abandoned the plan after two years because tax revenues were falling.
It was, first of all, the 20 per cent devaluation of sterling combined with near-zero interest rates that helped ease the UK economy out of the longest recession since the 1870s. Britain benefited from the even more wrong-headed austerity-recession imposed by the European Central Bank during the sovereign debt crisis. Hundreds of thousands of people left warmer climes to come here to dig us out of our economic recession, paying taxes and producing value.
And how did we thank them? But calling them “migrants” and saying they shouldn’t have been here in the first place. There’s gratitude for you. Even Labour are saying the Tories aren’t being tough enough on immigration.
But to repeat: the main trigger for Britain’s economic recovery was the abandonment of the Chancellor’s promise to balance the books by 2015. Had he stuck to austerity, there would have been a triple-dip recession and we’d still be suffering the consequences.
The irony is that Mr Osborne pursued almost exactly Alistair Darling’s 2010 Labour manifesto pledge to half the deficit in five years. But such is Labour’s loss of confidence following their election defeat that they’ve swallowed the Tories propaganda. Labour leadership contenders are running around saying: “Yes we spent too much. We did. Why don’t we admit it?”.
The only way to cut a serious deficit is through economic growth; the only way. That’s how America did it in the 1990s and is doing it again today. It is how the Scandinavian countries dug themselves out of a banking crisis in the 1990s.
It is how we did it after the Second World War when Britain’s debt was more than 200 per cent of GDP; more than twice what it is today. And a Labour government introduced the welfare state and slum clearance programmes while Britain’s debt was at those unprecedented levels.
If the austerity enthusiasts had been in charge back then, we would never have had the National Health Service. They would have said we couldn’t afford it. We must live within our means. Never a borrower or …
This is, of course, the main reason that conservative economists like austerity: it cuts the state. Public spending is demonised as waste and bureaucracy. If you just get rid of the state, they say, except for defence, then the economy will boom because people will be liberated from paying taxes.
But we know from bitter experience that this is not the case. The Victorian age of balanced book-keeping and low tax was defined by deep and damaging recessions. And the Great Depression of the 1930s was made much worse by austerity economics in the early years.
After the war, the capitalist world experienced its greatest ever boom on the back of colossal government debts we can hardly comprehend today. Since growth is good for business, you would think that capitalists would welcome this liberation from austerity. The fact that they don’t probably tells us more about the psychology of the business class than it does about economics.
You would have thought that global capitalism would have had the sense to avoid a delinquent banking system that manufactured speculative financial products, like mortgage bonds, that it didn’t understand and knew were unstable. But the party goes on just as long as people are sill making money.
As Chuck Prince of Citigroup famously put it: “When the music is still playing you just gotta dance.” No one was able to take the long view – except governments, and they had largely been bought by the banks by that stage.
It was the financial crash, built on over-lending and market greed, that caused the recession, not governments “spending too much”. How extraordinary that, within five short years, even many in the Labour Party have come to believe precisely the reverse.