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.
51 Responses to “The UK’s “maxed out credit card” myth”
Daniel Pitt
EXPOSED: The UK 'maxed out credit card' myth http://bit.ly/eAKzE3 #ConDemNation
Anon E Mouse
Mr.Sensible – What happened over the Irish Sea has nothing to do with the cuts that country made, early or otherwise. To suggest so is almost as stupid as claiming the economic cycle had been abolished – an end to boom and bust?
All this childish article is doing is taking a single comment “maxed out the credit card” and then going to the nth degree with the criticism on that one remark. It’s all the left can do being devoid of any strategy for governance.
Labour supporters just cannot see the big picture – you yourself for example Mr.S refuse to condemn the Guardian Newspaper and it tax avoidance scam on the British people or the fact Labour councillors in Nottingham are wasting £thousands of tax payers money on their own personal pet projects.
Until the Labour Party actually apologises for the economic devastation it has inflicted on this country it will never be taken seriously as a potential government again.
Tell me Mr.Sensible. Are you seriously saying that this country will take any lessons on the economy from a political party that is almost bust (£24 million in debt is it?) with a shadow chancellor who doesn’t pay his bills and a leader who is a tax fiddling property multi millionaire who has not done a single days work in his life?
Whilst all the Labour group thinkers read sites like this one and snigger over supposed “gaffes” like not sending rescue aircraft to Libya in time I remember Dr David Kelly and the lies over the Iraq war that cost the live of thousands.
Labour need to grow up – having a leader only elected by the unions who is totally helpless in the commons and looks like a school child doesn’t help – but to continue to publish non stories like this one serve only to confirm ex-Labour voters like myself that I won’t vote for the party for a long long time.
And neither will anyone else in middle England…
Cahal
@Anon E Mouse
It’s amazing that people are blaming Labour for a GFC that has its roots in the deregulation and tax cuts of the 80s. No doubt, Labour could have done something but to be honest the entire world was blind, and things would not have been any different under the Tories (they actually wanted more deregulation).
As for the whole deficit thing, the government is not a household. Take a look at some facts before you assert that Labour ‘spent and spent and spent’ and we were ‘living beyond our means’:
http://www.tmmblog.co.uk/?p=1627
We are missing a huge opportunity to invest in our economy.
Adam White
Exposing Osborne's "maxxed out credit card" myth http://bit.ly/dGuG7N Superb article! A definite must read!
Paul Sandars
RT @theday2day: Exposing Osborne's "maxxed out credit card" myth http://bit.ly/dGuG7N Superb article! A definite must read!