Pain with­out gain: the truth about aus­ter­ity

The Con­ser­va­tive project has left pro­duc­tiv­ity and pros­per­ity in tat­ters while plung­ing us into ever more debt, writes Phillip In­man

The Guardian - - FINANCIAL - A protest in White­hall, cen­tral Lon­don, on Satur­day Pho­to­graph: Chris J Rat­cliffe/ Getty Images

There are few peo­ple in the de­vel­oped world who still cling to the maxim that “home life ceases to be free and beau­ti­ful as soon as it is founded on bor­row­ing and debt”.

Th­ese days we can’t af­ford to take the same view as Helmer, the hus­band in Ib­sen’s A Doll’s House, one of lit­er­a­ture’s most cau­tious bud­geters. It’s a nice idea to be debt free and just spend what you earn. But when a home costs many times the av­er­age annual in­come and life’s run­ning costs of­ten ex­ceed the monthly in­come, bor­row­ing is not some­thing that can be avoided.

The gov­ern­ment knows this only too well. This week sees pub­li­ca­tion of the pub­lic bor­row­ing to­tal for May and it is not ex­pected to make pleas­ant read­ing. To­gether with April’s shocker, when gov­ern­ment bor­row­ing was higher than the same month last year, the first two months of the fi­nan­cial year are fore­cast to show the bor­row­ing re­quire­ment for the year is on track to be higher, not lower, than last year.

When David Cameron and Ge­orge Os­borne were in Down­ing Street, bring­ing down the deficit was the main aim of do­mes­tic pol­icy. Un­til just last year, the plan was to cut the deficit to zero by 2020 and start bring­ing down the debt to GDP ratio from this year.

The ref­er­en­dum vote and Theresa May’s ar­rival at No 10 changed all that. Once she adopted a hard Brexit stance, the econ­omy be­gan to turn. Her chan­cel­lor, Philip Ham­mond, was forced to loosen the purse strings.

It meant that both of the main po­lit­i­cal par­ties went into the elec­tion with plans for the deficit to re­main around 2.5%. In­de­pen­dent fore­casts for GDP growth over the next five years are be­low this fig­ure, mean­ing that far from cut­ting the over­all debt to GDP ratio, both par­ties were con­tent to push it to­wards 90%, and higher than any gov­ern­ment has ex­pe­ri­enced in 50 years.

That’s why so many head­lines fol­lowIn ing the elec­tion have de­clared aus­ter­ity dead and why the deficit was the dog that didn’t bark at the elec­tion.

And the pres­sure on the deficit has only wors­ened since then. It has be­come clear to many of May’s ad­vis­ers and close col­leagues that the Tory party might not sur­vive a sec­ond elec­tion this year with­out steal­ing some of Labour’s clothes. There is the pos­si­bil­ity May will sanc­tion scrap­ping or dra­mat­i­cally re­duc­ing tu­ition fees to nul­lify one of Labour’s most pop­u­lar pledges. The health sec­re­tary, Jeremy Hunt, hinted that the cap on nurses’ pay might be re­laxed. And lo­cal au­thor­ity spend­ing may need to in­crease in the wake of the Gren­fell Tower dis­as­ter.

Mean­while, house­hold debts are ris­ing. Credit card debt, car loan debt, stu­dent debt and bor­row­ing us­ing that most per­ni­cious of loans, the sec­ond mort­gage, have all risen sharply in the last cou­ple of years. Mak­ing mat­ters worse, the pro­por­tion of sav­ings in the econ­omy is at rock bot­tom lev­els. It all adds up to an econ­omy run­ning on empty, with ev­ery­one, in­clud­ing min­is­ters, bor­row­ing ex­tra each year just to keep the wheels turn­ing.

At a time when the of­fi­cial fig­ures show that em­ploy­ment re­mains at a record high, the work­force should be en­joy­ing wage rises of at least 4% or 5%. Work­ers should be build­ing up their sav­ings and re­ject­ing over­tures to bor­row.

It is a con­stant re­frain from min­is­ters that the mark of a suc­cess­ful econ­omy is full em­ploy­ment, and Bri­tain passes that test with fly­ing colours.

But in Bri­tain, as else­where in the de­vel­oped world, work­ers are pow­er­less to bid for higher wages.

In the US, there is an army of peo­ple, many of them women, who make no claim on the state for ben­e­fits, but stand ready to take well-paid jobs should they be­come avail­able. In France, Italy and across much of the con­ti­nent hordes of young peo­ple are kept like cir­cling aero­planes, ready to land when­ever a slot opens and a job be­comes avail­able.

the UK, we have colos­sal num­bers of work­ers on zero-hours con­tracts and in part-time work who would like more hours and se­cu­rity should it be of­fered.

The com­bi­na­tion of all th­ese trends al­lows em­ploy­ers to keep wage rises at around 2%. Th­ese are the same em­ploy­ers who, de­spite en­joy­ing a cut in cor­po­ra­tion tax rates from 28% since 2010 to 19% to­day un­der the Con­ser­va­tives and the promise of 17% by 2020, are hoard­ing prof­its and in­vest­ing lit­tle to ex­pand out­put.

With­out strong in­creases in av­er­age wages now that in­fla­tion has re­turned, work­ers must bor­row to main­tain their stan­dard of liv­ing. It also means in­come tax rev­enues have failed to rise as ex­pected, hurt­ing the ex­che­quer and forc­ing the gov­ern­ment to bor­row more than it be­lieves pru­dent.

Far from be­ing the strong econ­omy of Os­borne’s imag­i­na­tion, sobered up by aus­ter­ity and bol­stered by dereg­u­la­tion of the labour mar­ket, Bri­tain stum­bles to­wards the end of the decade, and more im­me­di­ately the Brexit talks.

Os­borne’s plan to re­duce the deficit in­di­cated Bri­tain’s weak­ness be­cause it could only suc­ceed once con­sumers ac­cepted the need to bor­row and spend again like they did be­fore the crash. And they could only per­form this task with the help of zero in­ter­est rates, kindly sup­plied by the Bank of Eng­land.

That the econ­omy now needs the gov­ern­ment to match the ap­petite of house­holds for ex­tra bor­row­ing shows it is not only weak but in a par­lous state.

The Nor­we­gians, un­like in Ib­sen’s time, no longer need to worry about debt. Nor­way has a sur­plus of sav­ings to GDP ratio of around 280%, the largest in the world. The pres­sure is to stop its pop­u­la­tion from be­com­ing idle as its care­fully man­aged oil­fields spew more cash than any­one can legally spend.

Bri­tain, on the other hand, con­tin­ues in the other di­rec­tion, its oil money al­ready spent, with No 10 plan­ning to cause even more harm by ne­go­ti­at­ing a hard Brexit that dis­turbs the op­er­a­tions of al­most all large em­ploy­ers. Ham­mond said on the BBC’s An­drew Marr show he wants a softer land­ing, by which he means a free trade agree­ment with Europe. He might be the chan­cel­lor, but the is­sue is whether he has any power.

As else­where in the de­vel­oped world, Bri­tish work­ers are pow­er­less to bid for higher wages

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