Attention: Deficit Disorder

December 14, 2009

At the moment, it seems as if there is only one issue in British politics. It isn’t the Afghan war, scandalous though that it. It isn’t poor hospitals, disgusting human rights abuses during the “war on terror,” the government’s hugely contradictory policies on climate change or the escalating costs of public works projects like the 2012 Olympics.

After the release of his “pre budget report” (pre-election report would be more accurate, it seems), Alistair Darling has brought the deficit into centre stage. Or, to be more accurate, two aspects of the deficit loom large. On the one hand, there is its size – £178 billion for 2009 alone, and counting. On the other, there is a debate about how much to cut public expenditure to reduce that deficit and, theoretically, the national debt.

But cutting the debt is a long way off if discussion is generally about getting that deficit down to size. The deficit refers to the amount that the public debt has grown in the past year. Hence, if you cut the deficit in half, the debt is still growing. Generally, this is seen as a bad thing. After all, on a personal level, such behaviour would be penalized (for most of us) by sanctions – letters from the bank, mounting bills, a court order, repossession – that sort of thing. We can’t really go through life accumulating ever larger debts and placating our creditors by cutting the amount we borrow – at least not forever.

Fortunately, however, governments aren’t people. And they aren’t corporations either. Companies are supposed to disappear if their business model falls into the red and they consistently deliver profits below the level needed to service and reduce their debt – in theory. In this respect, they resemble individuals. But the past few years have shown how far this idea departs from reality. The government has massively subsidised a series of corporations, allowing them to accumulate and then mitigate enormous deficits abd debts.

First, they deregulated the City – taking a hands off approach, declining to investigate irregularities (for the most part), slashing taxes on profits and investments, promoting neoliberal globalization at every turn and encouraging private debt to spiral via housing investments and credit cards. When this scaffolding of risk collapsed, as it did in 2008, the government transferred huge public resources to the major banks as part of its “stimulus” package.

This produced the “mountain” of debt that we are now faced with, although its important to note that the bloated military budget (some £40 billion) is part of the problem. In most commentary, the budget deficit is compared to the military budget, as if the deifict is reducing the quality of equipment sent to our boys in Afghanistan, but it is in reality all part of the same problem. And never, on any account, forget the cost of Trident (maybe £100 billion).

So the budget deficit is the product of a few important developments. Firstly, the financial crisis created by i) the government and its cronies within the financial system, who pushed for the retreat of government from overseeing their activity and ii) the military state which continues to fight expensive, unnecessary wars and pay for overpriced, useless technology.

The social demands of the British people – healthcare, pensions, education, roads, housing, benefits – none of these have caused the “crisis.” Yet money to satisfy those demands will now be diverted to servicing the national debt. The quality of healthcare for Britons will be sacrificed to maintain the profits of Lloyds and Boeing alike.

Neither the Tories nor Labour (or the Lib Dems for that matter) are willing to admit this. For them, the question is one of crisis management. “Who pays?” is not the question. The real problem for them is “how much of what ordinary people need and value must we sacrifice to ensure that the bailouts and wars do not bankrupt the nation?”

This debate is enthusiastically reflected and promoted by the mass media. Everyone agrees that the deficit has to be reduced. For example, William Keegan – one of the more Keynesian observers of the crisis – writes that although “the large deficit about which so many people fret is not the problem” and indeed “it is an integral part of the solution,” nevertheless, “Treasury control of public spending is back with a vengeance, and that is a healthy sign.”

The Telegraph is naturally more blunt, writing that “The nation’s finances are in their most parlous condition in modern times” and Britain is staring at “an unprecedented debt mountain,” barely concealing its distaste that “those “front-line” services so dear to Labour – schools, hospitals, the police – will have their budgets cocooned.”

Will Hutton, again a Keynesian of sorts, writes that “The public sector needs to get more from less in a way that it has not considered ever in peacetime…Britain may have to ask up to 20 of its new universities to become colleges again. To run a navy without aircraft carriers. Roll back its cherished overseas aid budget. Phase in the age when pensions kick in. Everything should be on the table and the challenge the government has accepted should be spelled out.”

Such language is common. This is a crisis, and crises need responses “across the board.”

But such hysteria is misplaced. All sides agree that there is a crisis and it needs to be solved by making ordinary people feel the pain. This is a mistake, and nobody is willing or able to recognise it.

Take a look at this graph. It shows the UK’s national debt as a percentage of its GDP (Gross National Product) which is a sum of all economic activity in a given year.

As can be clearly seen, Britain has in the past had far, far higher levels of national debt and avoided bankruptcy. And these debt levels were not just a result of the Second World War. A rise can be seen from the 1910s (the First World War) until peaking in 1950 when the national debt reached almost 250 percent of GDP. Only then did it begin to recede, yet debt did not reach current levels until the mid 1970s. It is, according to this graph, at a historically farily low level.

Nobody has made this point in the press, as far as I can tell. Indeed, history is largely used as an ideological weapon, rather than a sober illustration. Dominic Sandbrook, writing in the Daily Mail, is a case in point. The historian writes that Labour’s first chancellor, Philip Snowden, is something of a hero (relative to Alistair Darling and Denis Healey).

Sandbrook writes that, “as Chancellor during the banking collapse of 1931, Snowden defied his party critics and put financial rectitude ahead of short-term popularity” while “Slashing a then-record £70m (£20bn) in benefits made him few friends on the Left, and the Labour Party split over his economic austerity.” Yet as we can see from the graph, Snowden barely made a dent in debt-GDP levels.

Now, Britain was a poorer country in the early twentieth century. Yet in terms of growth rates, the 1950s (when borrowing was much higher than now) were a boom time while borrowing also rose during the 1920s (another growth period). Clearly high levels of borrowing did not prevent growth from occuring. Indeed, as Hutton noted, it is likely that debt and deficits promote growth by promoting increased demand. At least they did in the twentieth century.

Despite all of this, there is huge momentum towards cuts and “fiscal discipline.” Commentators are extremely unwilling to depart from this mantra, dangerously so given the implications for public services and, conceivably, economic growth.

Will Hutton is a case in point. Despite noting that the crisis is the product of deregulation and the profligacy of the banks, and also noting that “tax revenues are proportionally the lowest since 1960” Hutton calls strongly for more cuts in public spending. As he writes, “Brown as chancellor spent too much and hugely overestimated future tax revenues, believing his own propaganda that he had eliminated boom and bust and created a wonder economy.” Extraordinarily, he argues that while the government “needs to spell out that although it believes in an activist approach to public spending and borrowing and that a growing national debt in these circumstances is nothing to be frightened about…everybody has to tighten their belts and contribute, because the situation has to be brought under control” and, in this way, the nation can “create a wider economic base with innovation at its heart.”

One crucial element encouraging such hysteria is the fear of a debt “downgrade.” This refers to the rating given to government debt (and most forms of debt in which is it possible to invest) by private “rating agencies” such as Moody’s or Standard and Poors. The agencies strike fear into politicians and columnists alike with the threat of grading a government BBB – instantly raising the interest paid by taxpayers on governnent bonds.

The Telegraph’s Jeremy Warner calls these agencies “shadowy creatures that sit in judgment over the trillions of dollars of debt that swirl around the world’s money markets” and writes that “By assigning a top-notch, triple-A rating to many of the products that emerged from the boom in “structured finance”, the credit rating agencies played a pivotal role in fostering the mad dash into sub-prime mortgage lending which eventually triggered the worst banking crisis since the Great Depression.”

Moreover, “The sub-prime meltdown is only the latest offence in a serial list of failings, be it the Latin American debt crisis of the 1980s, the Far Eastern crisis of the 1990s, Enron, and just about any other major default you can think of in recent history.”

“In all cases, the rating agencies failed to see it coming.”

Yet we rely on these same agencies for information about whether to invest in government bonds. Governments fear them because they act as arbiters of whether their policies are good for investment or bad, and they invariably apply a powerful brake to public spending. But why believe a word that they say about government deficits, given their historical incompetence?

Governments are not corporations. They are (theoretically) sovereign institutions able to draw on the bedrock of credit supplied by tax receipts and to, if necessary, print money to stimulate the economy when credit is unavailable. Yet in practice, they are treated like corporations (or perhaps more accurately, like individuals) with the same discplines applied to their finances by people trained (we have to assume) in assessing corporate debt.

This is a huge anomaly in the global financial system, and one generated by the way that capitalism has become globalized, heavily dependent upon financial sectors and, many would argue, parasitic in its quest for profit over the past thirty years. But it doesn’t have to be like this. As Hutton writes, tax rates could rise to pay for further investment and – yes – borrowing.

Capital Gains Tax, for instance, was set by James Callaghan at 35 percent back in 1965. It now stands at 18 percent – for individuals and coporations whatever their income. This could be graduated or reformed (and be popular as well). It will hardly be lost on the public that reducing Capital Gains Tax provided a significant spur to financial speculation, for which we all now have to pay.

Shutting down tax havens across the world would be another popular policy, causing huge funds to be diverted back to national economies for public investment. Gordon Brown is keen on a “Tobin Tax” on currency transactions across borders. This would be better by far, hitting rich individuals and corporations, and helping smaller, poorer nations who continue see money bleed away into secretive parasitical tax havens.

The idea of a “non-dom” remains repellent – a hideous luxury for oligarchs and oil billionaires and an affront to human rights when poor asylum seekers are routinely sent back to lethal homelands and hounded for the pennies that they earn, when they can.

There are, in short, alternatives. Nationalising the banks would be another, and deploying their “expertise” to promote equitable, sustainable investment. There are alternatives, it bears repeating.

The truly dangerous deficit is not in the British budget, so much as within the minds of those who formulate, discuss, influence and grade it. We remain wedded to an orthodoxy which stifles public investment and protects, even subsidises the private profits of a tiny few.


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