William Bain MP (Labour, Glasgow North East) is a shadow Scotland Office minister
George Osborne has been described as a political chancellor, occasionally as a submarine in terms of his public conduct, and serves as David Cameron’s principal strategist.
His 2011 budget aspired to put fuel in the tank of the British economy, but having achieved last year not even half of the 1.7% growth predicted by the Office for Budget Responsibility, that budget forms part of a troika of Great Stagnation Budgets which have left Scotland’s economy running on empty in the slowest recovery from recession since the 1870s.
Consumer confidence in Scotland has slumped to levels last seen in the depths of the 2008-9 recession, and retail sales fell in February.
Small wonder credible economists are queuing up to argue the risks of inaction on fiscal policy now threaten to cause a prolonged slump which would see rates of youth joblessness (already at near one in four in Scotland), and inequality – predicted to rise by the Child Poverty Action Group by a record level by 2020 – soar.
Osborne’s so-called emergency budget in June 2010, imposing immediate in-year cuts in public spending of £6 billion and setting the scene for that October’s comprehensive spending review (pdf) which took a further £81bn out of the economy over four years, was accompanied by the OBR predicting growth for 2012 of 2.8%.
Osborne’s ideological choice to choke off demand through aggressive fiscal tightening has instead led to a downgrading of that forecast to a paltry 0.8% for this year, a third downgrade of 2013’s growth forecast to only 2% from an initial 2.9% in June 2010, and a slump in forecast tax receipts for the last year of 2.7% as unemployment rockets above 2.6million.
The chancellor once claimed that expansionary fiscal contraction would see the “crowded-out” private sector generate hundreds of thousands of new jobs to replace the 730,000 jobs he is axing from the public sector, then that low long-term interest rates would be enough to provide a monetary stimulus, but in repeating the same mistakes of over-reliance on monetary policy made by governments in Japan in the mid-1990s, Osborne’s expectations of a manufacturing-led recovery are melting away as quickly as the snow he blamed for the downturn last winter.
• Another day, another downgrade 28 Mar 2012
• Budget 2012: The “dead man’s hand” of slasher Osborne 25 Mar 2012
The social costs are stark. Seven million people need to use their credit cards to meet their monthly rent or mortgage payments, nearly three million people are in fuel poverty – according to the Hills Report (pdf) – and four million people are in food poverty, either doing without meals or relying on food parcels to feed their families.
With collective under-employment as high as 6.3million, working hours are falling in many parts of the UK, and as they do, families slide towards huge losses in income via tax credit cuts, hitting some families with a part-time earner to the tune of £3,870 per year from April 6th.
As identified by the ACEVO report (pdf) earlier in the year, inaction leaving youth unemployment at around current UK levels of a million or more could cost taxpayers £29bn over the next decade, and strip more than £10bn from the economy in lost output each year. The human price paid in the quiet despair of poverty, thwarted ambitions and lost hopes is of course incalculable.
Keynes once argued: take care of unemployment, and the deficit takes care of itself. The stance of this Tory-led government is that the unemployed can take care of themselves, even as the wealthiest 3% receive more than a little helping hand from the state through Osborne’s largesse.
Osborne’s policy fails Scotland’s economy in four major respects.
Firstly, the Budget makes zero impact on aggregate demand, and by skewing wealth and opportunity further in the hands of the top 10% rather than the bottom 40%, as established by the Institute for Fiscal Studies (pdf), has a flatlining effect on growth for the next two years, at the cost of throwing an estimated additional 10,000 people in Scotland onto the dole.
The IPPR showed (pdf) that restoring the cuts in tax credits due to take effect on April 6th would have done more to help jobs and growth than any other fiscal tool available to the chancellor, but he chose not to do so. The Resolution Foundation have found (pdf) that 70% of the burden of the 2012 tax credit cuts is shouldered by people in the bottom half of the income scale, while 70% of the cash benefit from the uprating of the personal allowance is enjoyed by people in the top half of the income scale.
As Brad DeLong and Larry Summers conclude in a recent Harvard study (pdf), loosening fiscal policy can boost growth in circumstances where real interest rates are at or approaching zero, as in the UK at the moment.
OECD figures on real total domestic demand show how abject Osborne’s failure have been – in 2011, his policies caused total demand in the economy to fall by 0.8% at a time when it rose across the eurozone by 1%, and contracts demand by a further 0.2% this year, while the United States sees demand increase by a forecast 1.9%.
Scotland’s economy is still to fill the chasm of 3.3% of GDP remaining from the 2008-2009 recession, and the Fraser of Allander Institute predict (pdf) it will be 72 months until it has done so, longer than the Depression in the 1930s.
As Keynes rightly concluded in the 1930s, making the poor poorer – Osborne’s position – is ludicrous economics, as well as destructive of social cohesion. In a depressed economy, with real wages predicted to fall by 7% in the next few years, and disposable incomes by 4% year-on-year – the biggest sustained drop since the 1970s – people are eroding their savings to make ends meet.
Cutting the real value of wages in a crisis of low demand worsens the slump rather than hastening a recovery. Yet the Tories believe that the minimum wage for young workers under the age of 21 should be frozen, that people can afford the national minimum wage to decline in real terms, and that regionalised public sector pay is essential to drive down wage demands.
TUC figures show the idiocy of this last notion, estimating that even a 1% reduction in public sector pay in Scotland would strip £162 million in demand from the Scottish economy, and £1.7 billion across the United Kingdom. It would also increase the gender pay gap, with particularly harmful effects in Scotland. In short, regionalised public sector pay is a continuation of the ideological attack on the public sector masquerading as evidence-based economic policy making by the Tories.
Secondly, there is no plan to tackle youth unemployment, which at more than 22% is higher than the UK average. Labour’s Jobs Guarantee for the long-term young unemployed, funded out of fair taxation of bank bonuses, would immediately help more than 4,000 young Scots into jobs, and help boost the building of 2,500 affordable homes for rent to make a start on dealing with what Shelter has called Scotland’s social housing crisis, worsened by the Tory Bedroom Tax.
Our Employers’ National Insurance Contributions holiday for small business would help create more than the pitiful 1,400 Scottish jobs under the Tories’ poor excuse of a scheme. Our temporary cut in VAT would bolster consumer confidence and get people spending again. And in Scotland, given the extent of the crisis of opportunity for young people, it was a dereliction of duty for the SNP Scottish government to make college cuts in the order of 20%, forcing more than half of colleges to scrap courses, and closing doors to talented young people in need.
Thirdly, there is no plan to reform the provision of finance to businesses starved of capital by a still-weakened financial system. A forecast gap of £190bn in required capital for businesses will hardly be addressed by the National Loan Guarantee Scheme, which may lever in at most £20bn in existing, not new, finance.
With business investment projected only to increase by 0.7% compared with the 7.7% predicted in the November 2011 OBR report (pdf), below the 1% for the eurozone, and the 4.9% jump in the US, but net bank lending to SMEs having fallen in every quarter of 2011, urgent action is required.
With as much as £325bn being made available by the Bank of England through its quantitative easing programme, this money could work better to aid the supply of capital to business through innovative ideas such as those proposed (pdf) by Will Hutton of the Ownership Commission with securitisation of accumulated bank business loans, these being indemnified by the Treasury and able to be sold to the Bank of England under its asset purchase scheme, therefore allowing money to flow more quickly and directly from the central bank into small and medium sized businesses.
The case for a National Investment Bank able to lend directly to manufacturers and other strategically important industries has never been stronger, given the chancellor’s unwillingness to budge on the borrowing powers of the UK Green Investment Bank before 2016. The Left in Britain should explore the case for introducing a series of intermediate financial institutions whose role would be to grow local firms and regional industries in the way the Sparkassen do in Germany (pdf).
Fourthly, there is no plan for social housing, construction or for boosting infrastructure investment. Forty five per cent of the additional capital investment transferred from revenue spending by the chancellor in the autumn statement (pdf) is back-loaded towards the end of the Parliament. In Scotland, construction output has fallen in four consecutive quarters. The SNP made a poor situation worse by cutting capital spending too quickly in the last two years.
Shelter in Scotland say there are 156,200 people in Scotland on waiting lists for new homes, but only 7,667 vacant council houses, and less than 6,000 homes built by councils or housing associations in Scotland in 2011. Bringing forward capital spending now would have beneficial effects on jobs and growth, and secure lasting benefits in transport and other necessary infrastructure.
There are alternatives to the austerity policies which are manifestly failing in the eurozone and here at home. A plan for new jobs and growth is the most credible way to reduce the deficit over the medium term, and repair lost tax revenues, not the destruction of demand and economic output being left to waste by the chancellor.
This is a crisis of demand made in No. 11 Downing Street and Bute House, for which governments in London and Edinburgh must assume their respective share of responsibility. It will need boldness, optimism, and new thinking from the Scottish and British Left to end it.