To analyse the coalition government’s Comprehensive Spending Review (CSR) we have to understand its purpose. Was this the economic strategy to get "our country back from the brink of bankruptcy" as George Osborne said in the final rhetorical flourish of his Commons statement?
Let’s analyse that claim. As a sovereign country with its own currency bankruptcy is near-impossible – we can always print more money. But that technicality aside, Britain would have to be in unprecedented levels of crisis to become functionally bankrupt. The UK’s national debt is lower than that of Germany, France, the US – and about a quarter of Japan’s! Our debt, currently 56% of GDP is not high by historical standards, and we are able to borrow over long repayment periods at low rates. Our debt is nowhere near high risk.
Osborne and many monetarist economists would argue that the deficit – the annual gap between expenditure and revenue – is however a problem, wider than that of many nations and at an historically high level. He said in the Budget that the deficit was the result of Labour’s profligate public spending, amassed “from a decade of debt”.
A quick check of the figures proves this to be untrue. Labour inherited a national debt of 42% in 1997, which had been reduced to 29% by 2002, and rose slightly to 36% in 2008. Then the global banking crisis occurred and the deficit rocketed as unemployment rose, tax revenues collapsed and welfare spending increased.
But whatever the reasons, it is perhaps true that “tackling this budget deficit is unavoidable”. It is certainly desirable – as otherwise debt will increase and interest payments will eat further into spending and curtail useful expenditure.
If we accept that dealing with the deficit is desirable, that still does not make Osborne’s choices unavoidable.
There are three ways to deal with the deficit: I’ll characterise them as Marxist class war, Keynesian, and Osborne’s class war. Each could achieve the goal of closing the deficit, they are political choices.
The first is the ‘Marxist route’ – this is not deficit-denial, but debt denial – deny that we should pay. You either expropriate from the rich and big business to pay or risk the invocation of sanctions, embargos and even war by repudiating the debt and not paying at all. Argentina managed it a few years back, but it requires us to be in a revolutionary situation and we are not, yet, so let’s move on.
The next is the Keynesian path. This requires restoring revenues (rather than cutting expenditure) to close the deficit. It means deficit spending, public investment, job creation, probably aligned with redistributive taxation.
Of course what we got was the Osborne class war model: cutting capital expenditure, freezing pay, increasing VAT, cutting jobs and welfare, yet still expecting a private sector led recovery. It is not just anti-Keynesian, it is anti-logical.
It means rolling back the state, to cut expenditure to match reduced revenue. Growth is subject to a laissez-faire leave-it-to-the-market strategy, but public spending must be pared back.
*This is the first half of an article that appears in the November 2010 issue of Labour Briefing