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

 

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

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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.

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