Every household and business knows that borrowing for investment purposes is good
In his Mansion House speech last night, George Osborne announced a major shift in the UK government’s fiscal policy. The plan is to introduce legislation requiring present and future governments to secure permanent budget surpluses. Borrowing will only be permitted in ‘exceptional’ circumstances, whatever they may be.
The obsession with reducing national debt needs to be seen in a broader historical context. The current national debt of 80 per cent of GDP is not exceptional. Indeed, the UK welfare state was built against the background of high debt as that facilitated redistribution of wealth and investment in industries and improved people’s purchasing power.
The net result was higher economic prosperity and lower national debt. In times of recessions and economic turbulence, only governments have the capacity to bailout companies and stimulate the economy. The self-imposed fiscal straitjacket is a recipe for social instability.
The government is selling its policies through homespun Victorian narratives. Under these, borrowing is bad and running surpluses is good. Actually, every household and business knows that borrowing for investment purposes is good.
People borrow money to buy a house and businesses borrow money to finance productive assets. Businesses and normal people distinguish borrowing for investment purposes from mere consumption. However, the government does not.
Currently, the UK national debt is about £1,487 billion, but the government does not explain the amounts that relate to investment or consumption. Both are lumped together. This fundamental accounting error can lead to curtailment of social investment.
The government policy will not lead to a reinvigorated economy. Places like China, India and even the US have higher economic growth. This has been facilitated by government investment, often funded by borrowing, in crucial sectors and infrastructure.
The private sector prioritises narrow self-interest and cannot act in the interest of wider society. The UK private sector has not always been adventurous in its investment. It took the postwar Labour government to invest and rescue railways, gas, water, electricity, mining, steel and shipbuilding industries.
Private sector showed little appetite for risks in new industries, such as telecommunications, biotechnology, computers and even airlines, and the state had to bear the risks. More recently the government, not the market or the private sector, bailed out banks. The government policy may well preclude above interventions. It is not clear who will fill the vacuum.
Over the last fifty years, neoliberals have restructured the state. One of its major purposes is now to guarantee corporate profits. This is done though a variety of mechanisms. For example, the Private Finance Initiative (PFI) has permitted private companies to build and/or run schools, hospitals, prisons and roads.
Private sector has invested about £88 billion and is guaranteed repayments of about £310 billion from the government, which is a profit of at least £222 billion. There are vast subsidies to the railways, farming, telecommunications, energy, sugar, automobile and other sectors. There is no indication that the government’s new fiscal policies will clamp down down on any of this.
The government’s intention is to inflict further damage to public services and drive down wages of the public sector workers. Cash-starved public services will inevitably not be able to perform properly, and this will provide the cue for further privatisation – a key ideological obsession of the government.
The government policy may be dismissed as political posturing to embarrass the Labour Party, which believes that borrowing for investment is acceptable. In any case, a future government can reverse the Conservative fiscal policies.
However, the policy trajectories deserve closer scrutiny because they are part of an ongoing project to redefine the nature of the state, citizenship and society. The state is less interested in tackling income and wealth inequalities. Citizenship is increasingly equated with the ability to buy things in the market.
Universal free access to higher education and dental treatment has disappeared. Employees concerned about unfair employment practices can only go to tribunals, if they are able to incur costs of up to £1200.
The state’s prime concern is now to appease markets through pursuit of economic growth. It is encouraging citizens to engage in borrowing and consumption, even if that runs up a massive imports bill and a balance of payments crisis.
The UK household debt is about £1.5 trillion, the highest per capita in Europe, and is expected to rise to £2.251 trillion by 2019. There is little thought about how this may be repaid and what the consequences for the financial system may be.
The government has changed legislation to enable retirees in defined contributions pension schemes to get hold of their pension pots. This change would be welcomed by many, but poses questions about what happens after the pension pot is spent.
Overall, the government policies are less about financial responsibility and more about social engineering to deepen the neoliberal project.
Prem Sikka is professor of accounting at the University of Essex
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8 Responses to “The fundamental accounting error in Osborne’s budget plans”
david Crowther
Osborne has the arrogance of the simple minded. He thinks that it is ok to determine the policies of future governments regardless of what the circumstances might be at the time. So clearly his purpose is ideological rather than economic.
Cole
The right pretend to be concerned about the deficit. In reality very few of them care about it (assuming they actually know what it is). Bleating on about borrowing is largely an excuse to slash government spending and taxes (especially on the wealthy who pay for conservative politicians). The rest of us believe in having a sensible level of state spending, a decent NHS and education system, proper defence, good quality infrastructure, a streamlined welfare state and so on. It’s common sense. And it probably involves higher taxes on the wealthy and corporations who, by most international standards, get away lightly n the UK.
davidnmurray
Prem Sikka uncovers Osborne’s waywardness comprehensively, but looking at an ONS record of UK government debt going back to 1830 in light of Osborne’s determination to resurrect Gladstone’s Committee of Commisioners the following struck me.
You can certainly argue about the efficacy of reducing debt but regards the effectiveness of different ways of doing it history can be helpful.
Osborne, possibly prompted by an old Tory friend the Institute for Economic Affairs calling in 2012 for fiscal rules that would bind government spending, champions Gladstone’s notion that running budget surpluses is best. But history is not on their sides. From 1860, the last time the Committee of the Commissioners met under Gladstone, the budget surplus regime took 55 years to reduce the national debt by about 80%. By contrast Atlee’s approach, ‘spending the debt away’ to build houses and start the NHS, took only 6 years to reduce the national debt by about 60%; far more effective and efficient and less painful for the less wealthy.