Conservative Fiscal Policy
What kind of society do we all want to live in? A society full of inequalities that leaves a large number of people at the edge of exclusion and, thus, ferments instability, or a society which enables people to live fulfilling lives and contributes to a prosperous world? A recent report published by the International Monetary Fund (IMF) and entitled Causes and Consequences of Income Inequality: A Global Perspective condemns the politics of austerity and states that ‘trickle down’ economics do not work. A major reason for the slide is weak unions. It adds that economies would perform much better if government policies increased the incomes of the poorest 20% of the population. This could be done through investment, redistribution and progressive taxation, but none of this is on the UK government’s agenda.
With weakened unions, the UK workers’ share of the gross domestic product (GDP) has shrunk to a record low of 50.5% of the wealth produced. Income and wealth inequalities have increased and the modest gains made in tackling child poverty since the 1990s are being lost. The government could boost the economy by tackling the tax gap (which consists of tax avoidance, tax evasion and arrears and runs at around £120bn a year) or by reducing the £85bn handed out to corporations each year in subsidies and grants. It could introduce a living wage to support workers on low pay, or invest in new green industries. But the government is not doing that. However, it is devoted to eroding workers’ right to withdraw labour and has promised further legislation to that effect.
Regardless of the social consequences, the UK’s Conservative government is pushing ahead with austerity cuts of about £12bn year, which will hit the poorest the hardest. Not only that the Conservatives also want to tie the hands of future governments. The government plans to introduce legislation requiring future governments to secure permanent budget surpluses. Borrowing will only be permitted in ‘exceptional’ circumstances, whatever they may be.
The obsession with reducing national debt needs to be seen in a broader historical context. The current national debt of 80% of GDP is not exceptional. The UK welfare state was built against the background of high debt as that facilitated redistribution of wealth and investment in industries and improved people’s purchasing power. The net result was higher economic prosperity and lower national debt. In times of recessions and economic turbulence, only governments have the capacity to bailout companies and stimulate the economy.
Currently, the UK national debt is about £1,500bn. Despite sustained austerity cuts, the debt has actually increased by £83bn, compared to a year ago. There is also economic illiteracy. Every household and business knows that borrowing for investment purposes in good. People borrow money to buy a house and businesses borrow money to finance productive assets. Businesses and normal people distinguish borrowing for investment purposes from mere consumption. However, the government lumps both together. This fundamental accounting error is preventing investment in social infrastructure.
The government’s austerity obsession will not lead to a reinvigorated economy. Places like China, India and even the US have higher economic growth. This has been facilitated by government investment, often funded by borrowing, in crucial sectors and infrastructure. The UK private sector has not always been adventurous in its investment. It took the post-war 1945-1950 Labour government to invest and rescue railways, gas, water, electricity, mining, steel and shipbuilding industries. Private sector showed little appetite for risks in new industries, such as telecommunications, biotechnology, computers and even airlines, and the state had to bear the risks. More recently the government, not the market or the private sector, bailed out banks. This government policy will not help in incubating new industries.
Over the last fifty years, neoliberals have restructured the state. One of its major purposes is now to guarantee corporate profits. This is done through a variety of mechanisms. For example, the Private Finance Initiative (PFI) has permitted private companies to build and/or run schools, hospitals, prisons and roads. Private sector has invested about £88bn and is guaranteed repayments of about £310bn from the government, which is a profit of at least £222bn. There are vast subsidies to the railways, farming, telecommunications, energy, sugar, automobile and other sectors. The government has no plans to clampdown down on any of this.
The government’s austerity policies will inflict further damage to public services and drive down wages of the public sector workers. Cash starved public services will inevitably not be able to deliver the required quality of public services, and this will provide the cue for further privatisation – a key ideological obsession of the government.
The UK government’s policy trajectories deserve closer scrutiny because they are part of an ongoing project to redefine the nature of the state, citizenship and society. The state is less interested in tackling income and wealth inequalities. Citizenship is increasingly equated with the ability to buy things in the market place. Universal free access to higher education and dental treatment has disappeared. Employees concerned about unfair employment practices can only go to tribunals, if they are able to incur costs of up to £1200.
As government borrowing to stimulate the economy is becoming taboo, it is encouraging citizens to borrow, even if that runs up a massive imports bill and a balance of payments crisis. The UK household debt is about £1.5 trillion, the highest per capita in Europe, and is expected to rise to £2.251 trillion by 2019. There is little thought about how this may be repaid and what the consequences for the financial system may be. The government has introduced legislation to enable retirees in defined contributions pension schemes to get hold of their pension pots. This change would be welcomed by many, but poses questions about what happens after the pension pot is spent.
Overall, the government policies are less about financial responsibility and more about social engineering to deepen and extend the neo-liberal project.
Prem Sikka is Professor of Accounting at the University of Essex
