Mark Anderson analyses the current financial situation and explains why devastating, savage Tory cuts are the last thing we need.
One argument given by the government for its vast programme of public sector cuts is that the UK has “maxed out its credit card”. This crude analogy bears no resemblance to the reality of Britain’s financial situation, yet it goes largely uncontested in public debate and serves to legitimise the devastation that is being wreaked on public services, the welfare state and public and private sector jobs and working conditions.
Far from the UK being no longer able to borrow money on the international financial markets, the interest that the UK pays on its debt is currently at a historically low level, as is the UK’s debt-to-GDP ratio.
UK ten-year bond yields are marginally higher than those for the US and far healthier than those for Australia and New Zealand, for example. In the run up to last year’s general election, amid scaremongering about a potential debt crisis and the dangers of a hung parliament, yields on government bonds remained stable.
In a September 2010 article: ‘Can bond yields fall even further from these historic lows?’, Ross Watson, portfolio manager with Securities and Trust of Scotland, told the financial journal Investment Week that:
“For the taxpayer, it is excellent news that the Government can fund its deficit at such low returns.”
Such sentiment hardly denotes a country close to bankruptcy.
Another argument the coalition government gives for frontloading public sector cuts is that it’s unfair to saddle future generations with a mountain of debt. This argument is a perversion of the realities of private sector induced deficits on several counts.
Firstly, it fails to take account of the fact that over 70 per cent of interest payments on government debt remains within the UK, going into savings and pension schemes – yours and mine.
Secondly, it bypasses what any economist worth his salt knows to be the case, which is that you can’t cut your way out of a private sector created budget deficit.
Trying to do so simply condemns an economy to years of low growth as seen in Japan over the last decade. The Japanese government cut its stimulus too soon after recession, before Japan’s private sector had had a chance to recover. It was also evidenced in the UK in the 1930s (the last time that a post-recession public sector cuts programme was implemented in the UK on such a scale). Economic slowdowns make it harder to address structural deficits and repay government debt.
Thirdly, taking demand out of the economy when the private sector has not fully recovered risks a double dip recession – as was glimpsed with the fall in UK GDP of 0.5 per cent in the last quarter of 2010 – which serves only to inflate government debt.
Despite the coalition’s best efforts to mislead the public, the UK’s structural deficit is a product not of Labour overspending, but of the collapse in output of the private sector following the financial crisis initiated by the fall of Lehman Brothers in 2008.
Fourthly, at a time when the economy is already on its knees, it leaves the economy ill-equipped to compete against its healthier, better educated and better connected, more meritocratic international competitors.
The ending of the previous Labour government’s fiscal stimulus, the public sector cuts, the contraction in UK GDP at the end of 2010 and the rises in unemployment and associated welfare payments, combined with the damage that the prospect of deeper cuts have done to business confidence and investment, have all exposed the continued weakness of the UK’s private sector. This has led to a rise in government bond yields, further increasing the amount that the UK has to pay to service its debt.
Austerity is doing the opposite of what we are told it is aimed at achieving, and all this before the cuts have really started to bite.
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