Yesterday’s revelation by the Office for National Statistics that Britain was indeed back in recession, confirmed the announcement made earlier this month that growth had stalled and gone into reverse, but added the sting in the tail that things are worse than previously thought.
It might seem that the jump from two tenths of a percent to three tenths of a percent contraction is no big deal, but it is very revealing of the failure of the government’s economic strategy. The oft repeated aim of things is to “reduce the debt”, or it used to be, lately, it’s been “reduce the deficit”, which is a different thing. Debt is the accumulated borrowings of successive governments over the years, whereas the deficit is the difference between the Exchequer’s receipts and the amount of money a government spends in the year. A deficit adds to debt, but it isn’t the same.
Anyway, the government wants to reduce the deficit, but it isn’t happening. If you want the full figures, the Guardian has generously provided a spreadsheet on their Datalog. The important thing to remember is the financial interventions have distorted the figures, and comparisons of indebtedness should not be regarded as an absolute, but expressed in terms of ability to finance the debt. So, while a figure of £111,856,734,7658 is meaningless in real terms, a figure of 45% of GDP lets us understand the real position. So if you want to understand where the government is going, you need to look at Net Debt as % of GPD (excluding financial interventions).
The simple fact is that despite the government reducing the deficit from £104.9 billion to £92.8 billion between 010 and 2011, net debt (exc. financial intervention) has increased from 59.4% of GDP to 65.5%. Remember under the previous government, net debt was 41.7% in 1997 when they took office and they reduced it to 30.9% by 2001. It then gradually increased to 37.2% in 2007, then the financial typhoon hit and it went through the roof.
So, they’re not reducing our overall indebtedness, which is why they’ve switched to talking about the budget deficit.
There are two ways to reduce a budget deficit. One is to slash services (this is called “efficiency savings”) and increase taxes, which is what this government has done, or at least this is what they “say” they’re doing (except they’ve reduced taxes for the very rich by cutting the 50% tax band to 45%).
Alternatively, you can increase receipts – again there are two ways, increase taxes or increase tax revenues – these are very different. If you increase taxes you place an additional burden on the British people and they spend less, because they have less. This is the effect of the 20% VAT. The buying power of the pound in your pocket is reduced by an increase in VAT.
Government dogma is that you can’t increase receipts by stimulating the economy because that would involve piling up more debt and it probably would not work anyway. Yet the ONS, in their full statement say:
"The decline would have been steeper were it not for a 1.6pc quarterly rise in government spending, which was the biggest increase in four years and contributed 0.4 percentage points to GDP.”
In other words, things would have been worse if the government not made the biggest increase in government spending in four years.
This brings to mind three things:
1) The government is lying. They have introduced a stimulus to massage the growth figures while telling you they are cutting the deficit. Remember this is the BIGGEST increase in government spending in four years – that includes two years of a Labour Government in the middle of a global economic storm.
2) As I have said in successive articles, if you want growth an important component is Government spending. This statement proves that fact conclusively. There can be no further argument about it. Government increases spending by the largest amount in four years, it has a positive impact on growth and yet the deficit has reduced. Game, set and match for the Keynesians.
3) Why have the media not been trumpeting this? Why have they more or less ignored it, in fact? Because the real agenda is not deficit or debt reduction – it is the privatisation of the state. This is what the government really, really wants to do.
The bluster about deficit reduction and getting Britain out of debt is just male bovine excreta. What this is really all about is creating the conditions for a low wage economy where the ordinary people are too scared to fight back in case they are placed in dire financial straits. Reducing benefits makes people happy to take low pay jobs just to live, even those who are really too sick to work. They will just do themselves harm. It’s better than starvation.
There is another way of increasing taxation with depressing demand and that is applying capital gains tax on asset growth. Michael Meacher pointed out in his blog that “Last year average real UK incomes fell 1.6%, yet in the same year the wealth of the richest 1,000 Britons, according to the Sunday Times Rich List, rose £18bn – an average increase per person amounting to £346,155 a week!”
He goes on to say that if you taxed the capital gains of the richest 1000 people at 28% over the last fifteen years, it would have generated eighty-eight billion pounds, which is roughly equivalent to seventy percent of the budget deficit. As a one-off windfall tax this has merit, but it is as a long term fiscal strategy that it really comes into its own.
This is a well that will not run dry. Even in bad times, the wealth of the richest 1000 has increased dramatically – by £155 billion in the last three years. That’s fifteen billion off the deficit this year and every year if they were taxed properly. Alternatively, it is £15 billion that could be invested in infrastructure or other growth stimulating projects.
We know this works, it has been proven demonstrably in the last quarter. Apply it seriously over a longer period and Britain will grow. It is a bit of cliché, but if you want something to grow, you feed it. If you want it to die, starve it. Austerity does not work.