Austerity can never work – here’s why

Continuing down the path of austerity while ignoring straightforward - if politically difficult - solutions, will lead the UK closer to economic disaster

Desolate: An empty, derelict high street

 

Austerity Does Not Work

All our major political parties are committed to reducing the government deficit in the next parliament, but with our economy remaining as unbalanced as it is at present, there is very little chance that they will be successful.

The UK government deficit is one of the largest in the developed world – in 2014 it was only a little short of £100bn. At the end of 2013, gross government debt was 91 per cent of GDP, and once the figures are released, it will probably show about 94 per cent at the end of 2014.

If the rate at which the debt is accumulating continues as it is, it will go on rising at the rate of about three per cent of GDP per annum. This means that within 10 years, total government debt would be about 125 per cent of GDP, and heading to levels which are completely unsustainable

Austerity will only increase the downward spiral

For too long our political leaders have focused on reducing spending and raising taxes in order to tackle the deficit. Politicians, the civil service, the commentariat and the academic world all see this as the only solution. This view is, however, based on a fallacy of composition which fatally undermines its efficacy. What might well be sensible for an individual who is over-spending, and which has no measurable impact on the economy as a whole, does not work for the government which is a major player.

In our new book,‘Call to Action: Britain’s Economic Problems And How They Can Be Solved’, which is being launched on 16 March 2015, former Labour shadow minister Bryan Gould and I explain why we believe that continuing down the path of austerity while ignoring straightforward even if politically difficult solutions, will lead the UK closer towards economic disaster.

Lack of demand cannot be tackled with austerity

The reason why we have a large government deficit is mainly because we have a very substantial balance of payments shortfall, currently running at about £100bn per annum (£). This sucks demand out of the economy which has somehow to be replaced if the consequent lack of purchasing power is not going to cause our GDP to fall. It is the government deficit which stops this happening.

There are three, and only three, ways in which this lack of demand can be made up other than by the government. It can be replaced by households spending more than their incomes, the corporate sector spending more on investment than its retained profits or the government running a deficit.

Currently, there is a small amount of net borrowing by households coupled with an only slightly larger amount of net spending on investment by the corporate sector, leading to the government deficit being more or less exactly equal to our balance of payments deficit.

To get the government deficit down, therefore, requires either a large increase in consumer borrowing, a dramatic rise in business investment or a major reduction in our balance of payments deficit. Unfortunately, cuts in government spending or increases in taxation will not cause any of these things to happen.

The inevitable result will be that the government deficit will stay about the same size as it was before, or maybe become even larger, while the deflationary impact of government cuts will be to make GDP fall.

The outcome of austerity policies, therefore, is that we finish up in the worst of all worlds with falling GDP but still rising government debt, with an even weaker economy to service it than we had before. As the economy falters, welfare expenditure goes up and tax receipts fall.

The only solution is to get the exchange rate down

What can, therefore, be done to get the government deficit down? There is only one solution which will work and this is to tackle the balance of payments deficit. If this can be substantially reduced, the problem with the government deficit will disappear.

In order to reduce the balance of payments deficit we have to sell much more to the rest of the world than we do now. And since most world trade is manufacturing, we will have to sell more manufactured goods. To do this, we will need to get the proportion of our GDP which comes from manufacturing up from about 10 per cent, where it is now, to around 15 per cent.

There is only one way to get this done. We need to get the exchange rate down to a level which makes it possible for the UK to produce enough manufacturers to pay our way in the world again. It is no good our trying to rely only on high tech production. We will never produce enough of it. To sell a sufficient amount abroad to get our foreign payments back in balance, we need to be able to produce much more price sensitive low tech products as well. This is why we need a much lower exchange rate.

John Mills is an economist and chairman of consumer goods brand JML. He served as a Labour councillor almost continuously between 1971 and 2006, and his latest book, ‘Call To Action,’ is being launched at the RSA at 6.30pm on Monday 16 March. Admission is free, and you can register online: http://call-to-action.org.uk

41 Responses to “Austerity can never work – here’s why”

  1. LB

    Government debt. I see you only include the borrowing. What is it on the pensions then? Fuck the poor, we don’t owe them a penny. Sums up Labours attitude.

    So why are we in a mess? Borrow and spend and people not paying their debts. That’s screwed the banks.

    So why is the cure more borrow and spend?

    What the heck, put another pensioner on the bonfire.

  2. Charlie

    Austerity: not spending what you don’t have.
    Austerity: calling a halt to the ever growing debt mountain.
    Austerity: looking at what money you’ve got coming in and cutting your cloth to fit.

    Anti-austerity: running up even more and more debt for some promise of jam tomorrow that never seems to actually come, leaving the following generations to struggle with that debt, whilst telling them that we had to do it to “help them”. Kind of like how a certain army in a certain country had to destroy the village in order to save it.

    I despair.

  3. LB

    Quite. The really alarming part is that he’s in complete denial about the state owing people pensions. My bet is that the solution is not to pay them. Fuck the poor, silly buggers for trusting the welfare state for their retirement.

  4. littleoddsandpieces

    There is no national debt.

    UK has no debt mountain as the OECD rates UK national debt as as only a world average.

    A deficit is not a national debt. The UK has had a deficit for 300 years to no ill effect.

    Anti-austerity in a recession is what an elite’s role has always been in history, and elites have fallen throughout history, when they leave the people to starve.

    There has been nil austerity savings.

    The starving left without food money have gone onto the NHS budget from the massive rise in malnutrition hospital admissions and the rise of the hunger sympton in kids of Rickets, permanently effecting their bone development.

    Sanctions have caused premature births by taking away food money from heavily pregnant mothers, so giving long term health consequencies to the baby.

    The sanction then continues with a new baby with a stressed mother with no milk herself to give and no money for bought milk.

    Sanctions will be permanent under Universal Credit, as hardship payments will not be a reduced benefit as now but will be a loan and once benefit resumes will be compulsory deducted from benefit.

    So nil food money either way.

    From next year, the poorest new pensioners will see nil state pension, at a time when UC will mean nil food money, nil housing benefit, nil council tax benefit.

    See why under my petition, inmy WHY IS THIS IMPORTANT section, at:

    https://you.38degrees.org.uk/petitions/state-pension-at-60-now

    So more starving and more homeless.

    And after the general election
    with the most severe hung parliament in UK history,
    as so few will come out to vote,
    with the poor the majority of voters now,
    the UN will return to continue its investigation into early deaths and suicides being caused by welfare reform.

    Early deaths and suicides cause admin costs to police, NHS,
    HM Coroenr and pauper funerals by councils.

    Welfare reform that costs more and more by the billions in welfare admin, whilst the money to the starving reduces by the billions year on year.

    The rise in debt is because the people do not have spending money when the money supply in the community is reduced by the recession and austerity is heaped on top.

    So more money is hoovered up by welfare admin, with private contract firms even not paying corporation tax some years.

    Instead of the money in peoples’ hands and spent in the local community and on the high street, generating business, and creating youth jobs, as well as business rates for cash strapped councils.

    There is another way. See how at:
    http://www.anastasia-england.me.uk

  5. Guest

    No, austerity is “shrink GDP”.

    You deny a fiat currency.
    You demand spending slashes in the middle of a recession.
    You demand cutting the poor, spilling their blood, as you shrink what’s coming in.

    You jam people’s faces into the road, demanding they buy without cash, as the money dosn’t come because of your austerity, as you demand the higher debts which austerity causes, as you create the poverty you so love, that you want more of it. By using austerity.

    Meanwhile, inflation is plummeting. We’re headed straight for deflation, and yet all you want is more poor people bleeding out on the ground.

  6. Guest

    “What the heck, put another pensioner on the bonfire.”

    Yes, your policy. Thanks for that, as you fight paying pensions, as you blame the peons for your 1%’s actions and demand we bleed for your sins.

    You’re not the messiah, you’re a very naughty capitalist.

  7. Guest

    No, people are not in denial about workers existing.

    You want THEM not to be paid. You want to fuck people – you, personally, each and every last one. You want the money instead, and the workers to die.

    As usual.

  8. LB

    The money has gone Leon. You’ve pissed it away.

    Now fuck off foriegner.

  9. Cole

    You really don’t know what you’re talking about- and we could do without the bad language too, even though you’re a right winger.

  10. Mike Crosland

    Typically for the Labour “left” the one solution which might provide some respite is not mentioned. Instead of trying to get households to borrow more (ie go back to doing what we were doing before the crisis) we need to increase both take-home pay and benefits, and bring back the concept of the social wage. There are millions of hard-working people throughout Europe who are literally only just a pay-packet away from penury. Our incomes have plummeted and our living costs have soared to pay for a crisis we didn’t cause, and the outlook is bleaker still. We’ll pay the debts, not by household holds borrowing more, but by working them off.
    People need work, and there is plenty of work that needs to be done. The question is where the money comes from. The only logical way is is take back the loot from the Rich, pay people decent wages, reduce the prices of essential utilities by renationalising them and introduce rent-controls. The continued driving down of living standards in a mad, illogical race to the bottom was doomed from the start, and will eventually only deepen the crisis. Unless Labour and its sister parties throughout Europe start waking up to this reality they are going to end up the same way as PASOK.

  11. LB

    So lets ask you the obvious question.

    The state has taken pension contributions from people.

    The state has spent all the pension contributions

    The state owns no assets put aside for the pensions.

    But the state owes trillions for the pensions.

    That includes the civil servants pensions. The state’s not going to pay.

    So how much does the state owe?

    The welfare state is bankrupt. Now think through the consequences of that before you complain about right wingers.

    My bet is that you won’t say what’s owed. Fuck the poor eh being the mantra. Keep them in the dark, whilst the favoured loot the money.

  12. Guest

    No, your question is not “obvious”. Not is it a question.

    You scream “fuck the poor”, after justifying it to yourself. You loot and loot, as you admit, You’re frantic to stop pensions – the far from high burden by the standards of the first world – pensions being paid.

    You keep saying there are no more workers. The only way that happens is if you kill them. Why so genocidal, as you demand more and more cash at the expense of the 99%, even as we plunge towards deflation here in the UK.

    Is the weather nice in Monaco?

  13. Guest

    So you’re blaming me for your desires. You’re accusing me of being like you, a rich wastrel. So sorry, I’m not the mouse in your mirror, and the state can full afford to pay pensions – and should be paying a basic income. Because that would help the 99%, anathema to you…why, you might have to cut five minutes off the weekly gambling spree!

    Then you say that I’m a “foriegner”…because I’m a Jew, no doubt. But no – unlike you, I’m British, so sad for you.

  14. blarg1987

    Austerity is used as the trojan horse to take away many of the rights that workers have gained over the last 100 years.

    The tragedy is that we are using the same economic model to get us out of this mess that got us into it.

  15. LB

    Hi Leon, fuck off. We know your tactics.

    Take all the shit you’ve caused and accuse the person pointing it out as advocating it.

    You’ve looted the cash. Piss off to whence you’ve came, so we can fuck you out of your pension. The consequence of ripping people off. It would be justice.

    The state has fucked people. Spent 100% of their pension contributions. You have done this.

    You’re just an apologist for fraudsters.

    You’re frantic to stop pensions – the far from high burden by the standards of the first world – pensions being paid.

    Nope. Just pointing out that you won’t pay them because you spent all the money.

    That’s you being genocidal. But since you’re of the stalinist persuation, its not surprising.

  16. LB

    So sorry, I’m not the mouse in your mirror, and the state can full afford to pay pensions –

    ===========

    Like fuck it can. You won’t even admit to how much it owes.

    So fuck off. I don’t give a toss about your beliefs in imaginary things.

  17. Leon Wolfeson

    We’re not getting out of it though are we?

  18. Leon Wolfeson

    Only as and when the voting system is changed. Which you can bet Labour will resist here.

    I don’t agree renationalisation should be the default option, though. I suggest reading the NEF’s study on this – it may be better to look a models such as mutualisation or non-profit status.

  19. Guest

    Your personalities/usernames know the tactic of telling the truth as something foreign to you.

    You ARE advocating not paying pensions. Over and over.
    YOU want to fuck people, as you scream a taxpayer is a looter, as you demand I go back to Essex, that starving the Jew is “justice” for your far right, that you personally want to fuck me like your other thugs. Ohnoes!

    I don’t appologise for your fraud, get over it, as you scream you won’t allow workers to live and pay tax. YOU are the one screaming pensions must not be paid, as you say that following normal state pension practices – as happens across the world is “genocidal” – that in your world, billions are dying.

    They evidently are not, and you’re being as accurate as your PC bigotry which leads to your frothing random accusations of “stalinism” – as you show your lack of knowledge of well, anything outside “PENSIONS NO PAY”.

  20. Guest

    “Silence”, you squeek. As you talk nonsense about the imaginary things you believe in, as you talk endlessly about your obsession with fucking and your inability to read public figures.

    As you attack perfectly normal state pension practices, screaming over and over “I WILL NOT ALLOW PENSIONS TO BE PAID”. Again, and again. So many times.

    It’s an obesssion for you. When, again, back in reality the UK’s pension debt isn’t even very high at all by first world standards.

    But you need to stop people talking about facts like that. Especially Jewish people, of course.

  21. blarg1987

    Depends on which soci economic group you fall under, the very wealth are, the rest of us are not.

  22. Gary Scott

    About 90% of the voting public agree but neither party will implement anything but harsh cuts. Where is the socialist alternative?

  23. Gary Scott

    I agree wholeheartedly. Unfortunately the party has moved to the right and now there is, unbelievably, consensus between Balls and Osborne over the cuts!

  24. Gary Scott

    The state ‘pension pot’ has always been notional. No matter how they’d like you to think no such fund ever existed. The reason is that upon starting pensions for those over 70, as it was then, there had been no prior contributions with which to fund them. I take your point about it being a ‘liability’ which should, still, be included. However, there is nothing to compel government to operate such a fund. Since the 1980s under Thatchers rule, government has ‘strongly encouraged’ people to ‘opt out’ of state pensions. Back then they were telling people my age that there would be no state pension by the time we retired. Since then no government has changed anything.

  25. LB

    You’re illiterate.

    You cannot tell the difference between not being able to pay the pensions and not wanting to.

    A 9 trillion pension debt run up by the socialist scum like you means that the pensions won’t be paid.

    You’ve stolen all the money.

    It’s a fraud by you. It’s not on the accounts.

    So fuck off.

  26. LB

    You’ve stolen all the pension contributions, and now you will fuck the poor.

    But you will blame others. Typical response of a fraudster.

    So fuck off Leon. North Korea would suit a fraudster like you

  27. anonymous monday

    LB clearly does not understand how the UK’s state pension works.

    There is no ‘pot’. Current pension payments are funded by current tax receipts.

    The purpose of a pension is to secure some spending power for those who are no longer working. Pensioners consume output even though they are no longer producing any output themselves. Hence the state pension in effect transfers (via tax) some of current workers’ output to the retired.

    Private pensions deliver essentially the same outcome although they take a different route to doing so.

    So to repeat, there is no pension ‘pot’ under the UK state pension system. You would open up your mind if you made an effort to understand this and made an effort to understand how pensions in general work.

  28. Mike Crosland

    Nationalisation on the old models wouldn’t be desirable in the long run, but some form of public ownership and democratic control is essential, including a clawback of the cash that should have been spent on infrastructure, but was trousered instead.

  29. Leon Wolfeson

    No, they’re not either. It’s a self-destructive cycle which is cannibalising the very spending they need to sustain the economy as a whole. It can’t last.

  30. Leon Wolfeson

    No, it’s perfectly believable. Both neoliberals, both capitalists, both right wingers.

    The elecoral difference between the UK and Greece is they have PR, which has lead to PASOK – the Greek equivalent of Labour – being annihilated at the polls by leftists. And it’s why we need PR.

  31. Guest

    “Fuck” you scream, “Silence”.

    You can’t read, and then you say it’s MY Fraud, as you attempt to prevent pensions being paid, by murdering the workers. It’s the only way you can achieve it – genocide of the British.

    You accuse me of your theft. Of lives, in this case. Care to tell people how you’ll be murdering today?

  32. Guest

    Why would I like your kind of monocult, as you call not refusing to allow workers to live a “fraud”, as you scream I’m your kind of “fuck” man, you’re obsessed with that as you blame imaginary socialists for everything – you admit you’re a fraudster there, as ever.

  33. Leon Wolfeson

    There’s no point talking to him about it. He’s a genuine zealot, determined to prevent pensions being paid one way or another – purely on financial grounds. He’s a good old fashioned robber capitalist, not even a neoliberal.

  34. Leon Wolfeson

    I’m saying that the old hardline “socialist” models are not something which should be jumped to immediately. There’s time (I’m talking about months here) to look at the situation and see what works best, and in addition in many cases having it at arm-length actually makes it far harder for a future right-wing government to tamper with it!

    Take banking – the government shouldn’t be in the business of holding accounts directly for citizens. That’s one space where there absolutely should be credit unions and mutual providers providing banking options for people and SME’s, without casino “investment” arms.

    (And no, the Co-Op Bank is NOT actually a cooperative, sigh)

  35. sarntcrip

    AS THE TORIES BORROWED ORE IN THEIR FIRST 3 YEARS THAN LABOUR DID IN 13(FACT), BLOWS ANY IDEA OF TORY ECONOMIC CREDIBILITY OUT OF THE WATER THEY’VE TRIPLED THE DEFICIT.
    SOONER THEY ARE GONE THE BETTER CAS LOCK ERROR SORRY

  36. sarntcrip

    YOU WANT DESPAIR TRY BEING DISABLED UNDER THE TORIES IT’S HELL

  37. Antony

    this is economically illiterate, spending does not create sustainable growth, saving does.

  38. Itsdifficultno

    If the exchange rate falls the price of every import increases and the value of ‘the Pound in your pocket’ decreases. It might work for JML, but it will impoverish working people as surely as austerity.

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