Oisín Mac Giollamóir responds to a debate on whether UK capitalism ‘needs’ to make the cuts
First, does it matter whether the cuts are necessary or not? Some might say “No. Everyone knows that Labour would have introduced them as well. The point is to show how they are necessary regardless of who is in power and to argue that the only real solution is revolution.”
I disagree: it is not the task of revolutionaries to merely point out the limitations of Labour and situate ourselves to the ‘left of Labour’. Rather, we should fight for anything that increases the power, confidence and autonomy of the working class. We should support wage-workers and their dependents making demands for themselves independently of the needs of capitalism.
Part of that fight today is against cuts to social services and the attacks against public sector workers. That fight is not a fight for revolution, but it is a fight for the satisfaction of the basic needs of the working class.
The question then is, can the working class win this fight? Can the working class prevent the implementation of these cuts, or is this a futile fight where the only possible positive outcome would be a revolutionary one? This question revolves around the question, then, of are these cuts necessary for Capital? Does the government need to cut the deficit? The short answer, I argue, is yes. The long answer is no.
Why the deficit needs to be cut
Let’s take the short answer first. First thing’s first, we need to understand what a government deficit is: it is when a government spends more than it takes in, when expenditure is greater than revenue. So how does a government spend more money than it takes in? By borrowing in financial markets. It sells government debt (i.e. bonds, or as they are sometimes referred to in the UK, gilts). The larger and longer lasting the deficit, the more in debt a country becomes.
What do we mean when we say ‘debt’? When people talk about debt they are normally referring to the debt-to-GDP ratio. The reason they refer to this ratio is reasonably obvious: the nominal amount of debt a country can take on is by itself unimportant, what is important is how much debt is taken on relative to the size of the economy, i.e. the GDP. (The GDP is a measure how much is produced in an economy in a year.)
There is a limit to how much debt country can take on. Exactly what the limit is to how much debt a country can take on is unclear. But eventually the debt ratio becomes a problem for an economy. For that reason, running up a deficit forever is impossible. Therefore the deficit needs to be cut. But the simple question arises: do we need to cut the deficit now? This brings us to the longer answer, No.
The UK is not in too much debt
Let’s consider for a moment the UK debt level and whether the UK is approaching the upper limit to how much debt it can take on. Some, including George Osborne, say that once an economy’s debt ratio goes to above 90% of GDP big growth problems arise. But this is a tendentious claim without substantial evidence. Furthermore, the debt to GDP ratio in the UK is 68.1%, still well below 90%.
The real problem that governments face is as the debt level goes up, investors become less and less willing to buy that country’s debt (i.e. by lending to it). This means that it becomes more and more expensive for the government to borrow. This happened this year with Greece.
Does the UK face the same problem? The answer here is about as big a no as possible. Not only are investors not becoming less willing to lend to the UK, they want to lend more! The interest rate on UK debt is determined by how willing investors are to buy UK debt. A simple way of thinking about this is if an investor is worried about the creditworthiness of a countries debt, they will only lend to the government if the government pays the debt back at a higher interest rate.
So we can see how willing investors are to lend to the UK by looking at for example the interest rate (called the yield) on a 10 year UK government bond. Over September the yield on 10 UK bonds was around 3%, whereas before the crisis in 2006-2007 the yield was between 4.5-5.5%. In other words not only are investors not worried about current debt levels, they want more debt. They want to lend more money and are willing to accept a very low return in order to be able to do so. Investors are more than happy to lend to the UK government. According to the bonds market, there is no need to cut the deficit now.
How to get the debt ratio down
Nevertheless, while there may be no urgency to cutting spending, the level of debt cannot go on increasing forever. So why not bring in the cuts now so that the UK debt ratio doesn’t keep increasing?
In order to answer that, it’s worth thinking once again about what debt is. As described above, debt is incurred when a government’s revenue is less than its expenditure. So thinking about the debt to GDP ratio we need to take three things into account: government expenditure, government revenue and GDP. However, most of the focus in the media currently has been on expenditure, to the point of confusing the debt to GDP ratio with expenditure.
So what does this mean, and why does it matter? It means that there are three aspects to cutting the debt ratio: 1. cutting spending, 2. increasing tax revenue, 3. increasing the GDP. There is therefore an argument that the best way of reducing the debt level is by encouraging growth. Higher GDP growth would increase the denominator, GDP, and by increasing economic activity and income it would increase government revenue.
The question then is can GDP be increased? And the answer is of course it can. We are living through one of the worst recessions in the entire history of capitalism, the largest since the great depression, the economy is operating well below capacity. The GDP can be increased through the use of expansionary monetary and fiscal policy i.e. by the Bank of England printing more money and keeping the interest rate low and by the government borrowing money and spending it.
It’s worth stopping to ask here, is this always true – can the government always increase the GDP in this manner? I don’t think it can. In situations when the economy is operating more or less at full capacity (an indicator of this would be unemployment being at or below 4%), then the economic consensus would be that the best way of reducing the debt ratio would be to either cut spending or increase taxes. But the economy is today far from operating at full capacity.
Why does this matter? – part II
The point here then is not that capitalism can be managed in the interest of workers. To make an analogy, under capitalism we can push for higher wages and capitalism can accommodate this. It would be wrong to confuse the fight for higher wages as one that can only be resolved in revolution. Likewise, we can push for equality legislation, greater rights at work with regards to health and safety, breaks etc. We can push for longer holidays, shorter working weeks etc. And it would be wrong to think that capitalism can’t accommodate these demands and that we can only make them as impossible revolutionary demands. So why do we make them?
Firstly, because by winning on issues like this we, as a class, improve our lives. Secondly, by struggling as a class we assert our demands independently from the needs of Capital and this empowers us to struggle for more and ultimately to struggle for everything. Likewise with the issue of cuts. It is important to realise that this is a struggle in which we can prevent the deterioration of our living conditions. It is a struggle that Capital can accommodate and it is one that need not end in revolution. But it is one worth fighting nonetheless.
the commune 
So is it OK to make cuts to the majority of the country – i.e. the middle classes – as long as the working class don’t suffer? On your logic abolishing universal benefits is fine.
Why, also, do you consider that GDP can only be increased through printing more money? How about increasing GDP by producing more value (i.e. producing more stuff rather than just focusing on the financial sector / credit gained from Chinese banks, where manufacturing is still taking place)
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As an old sympathiser with the politics of Solidarity and with what I can gather are the commune’s politics, I agree with Oisin’s general argument: that “we [I assume he means socialists] should fight for anything that increases the power, confidence and autonomy of the working class” and that “we should support wage-workers and their dependents making demands for themselves independently of the needs of capitalism.”
And although I am not in a position to discuss the details of the economic argument, especially in view of the fact that I write as an outsider from “Down Under”, I think he’s right to argue that “by winning on issues like this we, as a class, improve our lives” and that “by struggling as a class we assert our demands independently from the needs of Capital and this empowers us to struggle for more and ultimately to struggle for everything.”
In solidarity,
Paul R.
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Hi Rand1. There are two definitions of class commonly used. One is sociological (working class, middle class, upper class) and the other is political-economic (working class, capitalist class). I’m using the latter definition as does everyone on this site and almost all socialists.
Under the political-economic defintion of class, we understand class as being a division based on your relation to the means of production. So all people who don’t own the means of production but work for a wage are working class and all people who own the means of production and live off the profits made from selling the goods and services made by their employees are capitalists.
So, under our definition of working class, the vast vast majority of people in the UK are working class, including almost everyone who is sociologically ‘middle class’. I know this is confusing and I’d love for the termininology not to be so confusing but there you have it.
As for GDP being increased through printing money. I didn’t say that was the only way of increasing GDP. Very often printing money (increasing the money supply) will only result in inflation. However, in the case when the demand for money is high enough, and the supply of money is low enough, then increasing the money supply won’t cause inflation but can cause GDP growth.
One easy way of thinking about this is if for example I want to set up a coffee shop, I know I can make money from a coffee shop, I know how to do it and nobody else is doing it, all I need is a loan. If there is not enough money in the economy then banks will be more choosy about who they lend to and will not lend me the money, if there’s loads of money in the eonomy, then it will be easier to get a loan. I’d set up a business and thereby ‘produce more value’, as you put it.
Another way of thinking it, would be, joe produce kitchens, I want to buy one. I have a permanent job and know I can meet the payments. However, because there is not enough money in the economy, I can’t get a load in order to buy the kitchen. Therefor, the amount of kitchens that joe produces are fewer and joe earns less. In other words less value is produced.
so there are two possible situations, one where printing monet just produces inflation, another where printing money improves the economy and doens’t cause much inflation. What situation are we in at the moment? Well the answer can be seen in three places, firstly, in the inflation figures, are w experiencing high levels of inflation? No, inflation is at 3%, above target but not by much. And inflation in the eurozone and in the US is well below target. And there are fears that the UK faces deflation not inflation. Secondly, on the interest rate, if the markets are worried about inflationary pressures they will price these into the interest rates they charge on lending to the government. As noted in my article. Interest rates are extremely low. Investors and financial experts are not worried about inflation. Thirdly, unemployment, are there loads of unemployed resources (people and capital), if so this might be a sign that there isn’t enough money in the economy. And the evidence suggests that this is a one reason for the continued recession is because of there not being enough money in the economy.
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I agree with most of the Economics of this piece, but:
1. Its not just debt to GDP that matters. The make up of the GDP, and the nature of the debt also matter. From the late 80’s western Governments encouraged debt to finance consumer spending. That Consumer spending increased GDP, so the debt to GDP figure is accordingly reduced. But, as Joan Robinson pointed out a country that borrows to finance consumption is not the same as a country that borrows to finance investment, just as a company that borrows to stay afloat is not the same as a company that borrows to expand its production. The Asian Tigers borrowed heavily during the 80’s and 90’s to finance investment. Additionally, it matters who buys the debt. Japan has a huge deficit, but most of its debt is bought by Japanese savers. That is significantly different to say Greece where most of the debt is bought by foreign banks and institutions. In Britain a lot of debt is bought by British pension funds, and they have a requirement to buy a certain percentage at the Long End of the Yield Curve up to 40 years.
2. Traditionally, the way Governments have overcome debt is by inflation. That was what the US did in the 70’s to pay off its debts, which led the dollar to fall significantly and caused DeGaulle to demand payment in Gold, which in turn caused Nixon to end convertibility of the dollar to Gold, which in turn sparked an international currency crisis and Gold to increase 30 fold. Inflation is already rising, and as we enter an increasing currency war with much more money printing, inflation will rise much faster.
3. This is clearly NOT the worst recession Capitalism has faced since the 1930’s. The US emerged from recession remarkably quickly given the depth and suddeness of it. Most European economies too. Germany is growing remarkably quickly given the problems in peripheral Europe. China, the world’s second largest economy is growing at over 10%, otehr Asian economies are growing rapidly too. Brazil is growing at 8% p.a., and other Latin American economies are growing rapidly. Emerging economies in Africa are also growing quite significantly. Huge amounts of Surplus Value had been built up around the globe in Sovereign Wealth Funds, and on the Balance Sheets of Big Capital, only some of which was mobilised to finance the Keynesian stimulus programmes of 2008. China has just announced that it will back Euro stability, and invest in Greek Bonds. This is the point, and why Big Capital does not support the austerity measures, its most pressing needs is for economic and social stability because for it Capital Accumulation is all about Long term planning, to justify the huge Capital outlays it makes. Only in times of real crises such as the 1930’s or 1980’s, where there is no large pool of Surplus Value to mobilise, and where condiitons mean that no early resumption of growth is likely, does it once more resort to the measures of extracting Absolute Surplus Value, because the consequences of such measures are to create the very conditions of economic and social instability it wants to avoid.
3.Yes, as socialists we have to support the Economistic struggles of workers for higher pay, to defend jobs, to oppose Cuts in the Social Wage and so on, for the reasons Marx set out in his debate with Weston. But, we also have to bear in mind the main thrust of Marx’s arguments in those debates, and of Engels comments in his “Condition Of the Working Class” too. Marx said that in 99 cases out of 100 workers only manage to defend what they have not to increase it. Engels commented that the history of Trade Unions was one of continual defeats punctuated only by the odd victory. Engels comments
“The history of these Unions is a long series of defeats of the working-men, interrupted by a few isolated victories. All these efforts naturally cannot alter the economic law according to which wages are determined by the relation between supply and demand in the labour market. Hence the Unions remain powerless against all great forces which influence this relation. In a commercial crisis the Union itself must reduce wages or dissolve wholly; and in a time of considerable increase in the demand for labour, it cannot fix the rate of wages higher than would be reached spontaneously by the competition of the capitalists among themselves.”
Engels Condition of The Working Class in England p243
The reason that workers living standards rise, actually has little or nothing to do with “Class Struggle” as it is wrongly termed, because in almost every instance it is only a matter of Trade Union, sectional, not class struggle, and everything to do with what Marx called “Capitalism’s Civilising Mission”, that is the Accumulation of Capital itself not only drives up the absolute demand for Labour-Power, but it also results in the need for Capital to expand into ever increasing ranges of Use Value production, which increases the range of wage goods bought by workers who become the most important consumers. It is precisely the ability of Capitalism to do this which provides the material basis for the ideology of Economism, for reformism, for bargaining within the system, and in doing so reinforces bourgeois ideas within the working class and Labour Movement itself.
4. Its for that reason that the programme of Marx and the First International attempted to break out of that Economism, whilst not adopting the Maximalist position of Leninism that, because nothing significant can be won in the short term other than building the party incrementally out of such strikes, the only solution was the Revolution. The solution that marx and the International came to was precisely to focus on building that working class autonomy, and “self-government” as he describes it. It was to oppose vociferously the extension of the Capitalist State, and instead to posit working-class self-reliance. That is why marx opposed fiercely the attempts of the State to get its hands on the Workers Funds in their Friendly Societes designed to cover periods of sickness, unemployment and old age. He would have poured scorn on those socialists who today fetishise the Welfare State, which imprisons workers in that reliance upon it, and on bourgeois ideology.
5. Its for that reason that socialists cannot argue for working-class autonomy whilst at the same time arguing in favour of a simple defence of State Capitalist provision and the Welfare State. We have to oppose the Tories cuts as an attack on our living standards, but that does not mean we have to form a Popular Front with the representatives of Big Capital within the Capitalist State. It means we should propose the establishment of truly autonomous, workers Co-operatives as an alternative to State capitalist provision, and the Welfare State, and the transfer of the money we currently hand over to the Capitalist State in taxes, to worker owned funds to finance them.
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Question from someone i forwarded your article to. ”Would be interested to know what Oisin thinks the upper limit on debt:GDP ratio is for the UK and how he goes about calculating it – aside from simply saying that debt levels become a problem when the market begins to feel uncomfortable buying UK debt – whatever the yield.”
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Ois,
As I set out in my blog Who Are The Middle Classes, for Marxists the question of class cannot be reduced to the dichotomy you set out. The marxist definition of class is much more complex than that.
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I agree with a lot of this – but one small technical question – shouldn’t we be comparing the spread between the base rate and yield on 10-year bonds, rather than just the yield itself? In which case, I think, borrowing would have become more expensive for UK government since 2007.
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I don’t think Base Rate is significant in this respect. What is significant is the Yield Curve, which shows the different yields on Boards of varying duration. The other consideration would be the cost of insuring against default. This latter has risen, but one Bond Trader interviewed on TV some months ago about that argued, in my opinion quite reasonably that the market had that wrong, for the simple reason that such insurance is only relevant where there is a material risk of default. No serious person believes that the UK is going to default on its debt!
There is a further indication, and that is that a few weeks ago, National Savings and Investments withdrew its series of Inflation Protected Savings Certificates, because, paying 6%, they had pulled in more money in savings than could be used!
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@Taimour
Your friend wrote ”Would be interested to know what Oisin thinks the upper limit on debt:GDP ratio is for the UK and how he goes about calculating it – aside from simply saying that debt levels become a problem when the market begins to feel uncomfortable buying UK debt – whatever the yield.”
I don’t think there is a clear upper limit on the debt GDP ratio for the UK. How much debt you can take on is dependent on how capable you are of paying it back and more importantly how capable lenders think you are of paying it back.
From a very long historical perspective UK debt is not at a high level. http://bit.ly/9Ku8AO (UK debt is increasing fast though). And UK debt is considered very safe, the UK has never defaulted. The only threat is inflation and currency depreciation.
@David Bailey
I don’t think we should be looking at the spread between the base rate and the 10 year bond yield. That said I could be missing something. Why do you think we should be looking at that spread.
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@ Boffy
Thanks for your comments. There’s a lot there, too much to respond to. So I will just say where I think I disagree, where I don’t understand and in one case where I know you are wrong. All my comments relate to your first post.
I may as well start with the worst. On point 2. you have the history wrong, the conflict between DeGaulle and the US was in the 60s not the 70s, and America went off gold in 1971, to the 70s couldn’t have lead up to it. As for US debt, it was decreasing comfortably during the 60s and indeed into the 70s. http://bit.ly/aDrPzd The US went off gold in the 1970s in response to a Balance of Payments crisis ala Krugman (1979) not in order to inflate away its debts.
On point 1. what matters when you borrow is can you pay it back. It doesn’t matter what you spend it on. Obviously, if your borrowings don’t help you get into a situation where you can payback your borrowings then its a problem. And for that to happen requires investment but I can see no reason why investment should be financed by borrowing and not consumption.
On point 3. I don’t understand this:
“Only in times of real crises such as the 1930′s or 1980′s, where there is no large pool of Surplus Value to mobilise, and where condiitons mean that no early resumption of growth is likely, does it once more resort to the measures of extracting Absolute Surplus Value, because the consequences of such measures are to create the very conditions of economic and social instability it wants to avoid.”
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Great article, I find all this economics stuff pretty hard to grasp, you explained it really well.
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I have a question. As I understand it, the UK deficit is particularly big, in Europe second only to Ireland. Why does the UK have such a relatively large deficit?
As I understand it, net debt fell under Labour until around 2002, before heading upward again – http://www.statistics.gov.uk/cci/nugget.asp?id=206, obviously at the same time as the deficit appears – http://econ.economicshelp.org/2009/01/uk-budget-deficit.html. What happened to make it head upward?
Possibilities:
– increased spending caused by either increased fiscal commitment to social welfare, war, inefficient transfers to the private sector via PFI etc. But which?
– tax receipts fell, or were below projections for some reason – but why?
btw, from March – Tories play Keynesians to the EC: http://news.bbc.co.uk/1/hi/8569418.stm
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@communard
I’m basing this reply on suspicions and impressions more than elsewhere in the article.
On the increase in debt circa 2002
Well there were budget surpluses in the late 90s, caused by the economic boom. Then in 00/01 there was a recession, the recovery from this recession lasted 02-04ish but the recovery was not a great recovery for a number of reasons. So the government went back into deficit and the debt started increasing slowly again.
On the deficit
You are right the UK deficit is up there with the Portugal, Ireland, Iceland, Greece, Spain, Lithuania, Latvia etc. The reason for this is relatively simple, the UK’s economy is structurally very similar to those economies. Think Anglo-saxon/neoliberal versus continental/social democratic etc. Think large financial sector, think service and light manufacturing (software, pharmaceuticals etc.) oriented, and also during the the recovery from the 01/02 recession a large construction bubble. So when the crisis happened the UK was hit as bad as the other economies. The question then is why has the UK not suffered as much as the other economies, and the reason for this is two fold, firstly its not in the eurozone so it was able to depreciate against germany. Secondly, the Brown government dealt with the crisis better than probably any other government in an ‘anglo-saxon’ economy. Through the use of quantitative easing, fiscal stimulus and not cutting they prevented unemployment from reaching the levels it has in the US, the Baltics and the PIGS. However, by doing so the also drove up the deficit.
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Oisin,
I posted this comment yesterday, but it failed to appear. I have tried reposting it, but keep getting a message saying its a duplicate post. So I am adding this opening statement in the hope it will overcome that problem.
The US debt began to accumulate during the 1960’s as a result partly of Vietnam. The US used its position of the dollar being Reserve Currency to simply print dollars to pay for its imports. I think that you will find that my history is correct. It was DeGaulle’s demand to be paid in Gold that led Nixon to close the gold window in 1971. See here. Having, ended convertibility the US was then free to simply print as many dollars as it chose. Prior to that date, the dollar’s value was fixed against Gold at the 1944 rate established at Bretton Woods. The consequence was that a currency crisis arose during the 1970’s prior to the establishment of new international arrangements. The other consequence was that freed from the artificial dollar price Gold began to play its traditional role of international Money, and rose within the decade 30 fold to reach its height of $800 an ounce in 1980. The huge money printing of the 1970’s led to stagflation, as traditional Keynesian stimulus proved incapable of bringing about an economic revival.
I don’t understand your comment in relation to Point 1. The point I was making was that borrowing to finance investment creates the conditions for economic growth, which facilitates paying back the debt. Borrowing to finance consumption, which is what the US and UK did in the 80’s and 90’s, especially where that Consumption comes largely from the purchase of imports, does not. If the increased consumption, promotes investment then, yes, that would create the conditions for sustained growth – that is why Keynesian intervention can work during some conditions and not others – but, the problem for the UK and US was that the increased consumption was of Chinese Imports, and the investment stimulated was in China!
I’m not sure what you don’t understand on the last point so let me try to elaborate it. The basic condition is related to the phase of the Long Wave. At the peak of the Long Wave Boom, conditions have led to a squeeze on profits. Typically, the falling rate of profit has also led to an increasing amount being wasted in speculation. When the Long Wave decline begins it soon becomes apparent that no sustained recovery is likely, that any recoveries that occur, will be shortlived, and capital generally seeks to take advantage of them to clear stocks, raise prices etc. rather than to engage in sizeable investment. If it does invest it will tend to be to replace existing machinery that has worn out with any new labour saving machinery it can introduce to reduce its costs. As Engels pointed out by the latter part of the 19th Century Big Capital had abandoned the penny pinching methods of trying to extract Absolute Surplus Value, such as extension of the working day or intensification and speed up. It relied instead on the extraction of relative Surplus Value by the reduction of the Value of labour Power through the increased use of technology, and introduction of more efficient work systems.
But, during the 1930’s for example, faced with the prospect that no economic recovery was likely for the foreseeable future, Capital in general does not seek to invest in the kinds of development that could achieve that end. With plentiful Labour it once more resorts to the extraction of Absolute Surplus Value. Even then that is not at all universal. In the 1930’s the new industries emerging of cars, chemicals and electrical goods did develop on that same basis in the Midlands and South-East. The workers employed in them enjoyed quite good standards of living despite the mass unemployment elsewhere in the country. But, these sectors were too small given the general economic conditions to lift the whole economy out of recession. It is only when a series of such industries create the basis for exchange that such a recovery can occur.
The point is that neither Monetary Policy nor Keynesian fiscal policy can drag an economy out of recession during such a period of Long wave decline. The intervention has to be repaid out of Surplus Value at some point. Capitalists will be prepared to do that during a recession within a Long Wave Boom, because they will believe that cutting the recession short to return to growth is worth it. The additional profits they will make will recompense them for the Surplus Value used for the intervention. But, during a Long Wave decline that is not the case. I set this out at more length here.
In short, the crises that occur within the context of the Long Wave decline are not the same as the recessions that occur within the Long Wave Boom. In the former the options for Capital are constrained. It can only proceed on the back of defeated Labour Movements. That was also true in the 1980’s. But, it is notable that in the 1980’s, no sooner had the working class been subdued, after the defeat of the Miners, that Capital’s strategy changed. In place of the Hayeckian constraint of Money Supply in both the UK and US, came Friedmanite Monetary expansion as the cure for the recession and low rate of profit. It meant that Capital could raise prices, whilst workers were too weak to respond to demand higher real wages.
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On the question of how much debt is manageable as a percentage of GDP, I came across some interesting data covering the last 300 years for the UK – a period of course when Tories and Liberals have mostly made up the Government. For 200 years between 1700 – 1900 the figure was higher than today’s in every single year. In fact, during that period the figure was on average 150% of GDP compared with today’s approx 60%. At the height of the Industrial revolution just after 1800 the figure was actually more than 250%. So much for it being a drag on growth! For 50 years from just before 1914 until the early 1950’s it was also higher than today in every year, again reaching almost 250% around 1950.
As I point out in my blog UK debt Facts, at £0.7 trillion pounds, Public Debt is only half current private Sector debt at £1.4 trillion. But, the Tories are not saying that people have to sell their house to be able to pay off their mortgage and credit cards, because they are paying more in interest on their debts than they spend on food or clothes for their kids. On the contrary, the Bank of england’s Charlie Bean appeared on TV recently saying they needed people to use their savings to keep spending, and one reason for keeping the interest rate so low was to punish savers, and persuade them to spend their money.
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Another point you say that that debt to GDP is 68%. But that is including the “costs” of the bailout, principally the nationalised banks Lloyds, RBS, Northern Rock etc. These financial assets are now earning the UK exchequer around £7bn a year income. So they are not really debt at all. The Banker magazine estimated that the UK would make at least £28bn from these bail outs. After deducting them then debt to GDP is around 54% (from memora) in other words much lower.
QE has boosted inflation this matters for debt, as it is measured against nominal not actual GDP.
Let’s say the UK budget deficit is 8% this year. If GDP growth is 2% that gives a gap of 6% or around £84bn. But if you add on inflation say 3% then that produces nominal GDP growth of 5% so the gap is only 3% or £42bn.
Its no surprise that the Bank of England is allowing inflation just at the moment. It radically reduces national indebtedness.
What’s more we could expect that gap to be closed pretty quickly without any cuts at all, just through the normal improvement of finances through the business cycle.
So in answer to the question do they have to cut? The answer is no. Both in the short run and the long run.
They are not cutting in the USA, Japan, or China.
But do they “have” to cut as neo-liberal ruling class politicians who sense the opportunity to smash the welfare state. Then of course they do. But that’s not really the same thing at all now is it?
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Bill,
You are quite right to point that out. You are also correct about inflation. I’ve been arguing for more than a year that this would be how the State would cover the debt. In fact, the real inflation rate is much higher than the stated figures, and I would not be surprised to see it go to 10%. Bernake is arguing for ignoring inflation in the US, as Paul Mason says in a recent Blog.
But, its for all those reasons, for the fact that the US and all those other countries are not cutting that I don’t think you can see this as a Government simply acting in the interests of the ruling class to smash the welfare state and so on. That Welfare State was created by the Ruling Class for a reason. The same reason that Big Capital has been pressing for the costs it bears for health care and so on in the US to be socialised. Big Capital might look for a more efficient form of Welfare State as Aglietta argued, more akin to socialised Healthcare and so on in Europe, but simply dismantling it is not in its interests. It needs economic and social stability, it needs a healthy, educated workforce, and it needs a Big state to provide economic and social stability.
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Federal government in the US has borrowed but not at the state and local level, here cuts have been implemented on similar levels to Europe.
Heseltine was arguing for the necessity of cuts from a competitiveness point of view. Capital basically moves around the world looking for the best places to invest, so nations compete for this investment and that creates a race to the bottom. (My conclusion not Heseltines!)
So capital may want this or that but in reality it invariably looks at the bottom line. So here you get a contradiction between reduced incomes from taxes on corporations but increased cost burden on the state for the benefit of this capital.
On the motives of the Tories, I don’t think it is about just reducing the deficit but more to do with increasing the role of the private sector and reducing the role of the public sector. They hope the private sector will fill the gap left by some of the cuts. They want the private sector to increase its role to smash the unions and reduce benefits for workers, which must be in the interests of capital. The main issue seems to be over the speed of this process, some Liberals have raised concerns that if the economy is threatened the pace of cuts will have to slow down.
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Its true the problem in the US is at the State level where Right-wing populism amongst the Republicans is playing a part, and is retarding the effectiveness of the fiscal stimulus. But, the reason for that as in the UK and other parts of Europe is Right-wing populism responding to its base within the ranks of the petit-bouregoisie and small capital, not the needs of Big Capital.
The ideologists of Big Capital from Roubini to George Soros are pointing out that austerity will lead to a deflationary spiral. The FT a few days ago ran a story that the Cuts in Britain were to be rescheduled to avoid them damaging growth potential, and Chris Huhn has made similar comments as has Micheal Portillo. yes, Capital seeks out the lowest cost areas for production, but it developed the Welfare State of various types, precisely because this was the cheapest means of reproducing those lements of Labour Power required for a modern proletariat – Health, Education, Social Security.
The Tories may have ideological motives of wanting to smash the unions etc. but as Engels pointed out in the quotes I have previously given this is NOT the posiiton of Big Capital. Big Capital as early as the 19th century realised how useful organised Trades Unions, and Social demcoratic ideology were to it. They act to constrain workers struggles to bargaining within the system, rather than rebelling against it, they socialise the working class, and act as channels to infuse the class with bourgeois ideas. They act to provide longer term stability, which is what Big capital requires for its long term investments and Capital Accumulation. The last thing it wants in normal times is to smash the unions, or the other aspects of the Social Democratic consensus.
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