The British government is continuing to pursue economic policies which benefit the old and wealthy whilst inflicting severe cuts on young working families, yet it is trumpeting a narrative which tries to persuade working people that it is on their side. This is flagrantly dishonest. The following chart shows how a young working couple might experience a drop in net income in the next few years:
This fall in income is the result of what was described in the Economist as
“a budget whose slick politics hid economics that were often wrong and sometimes dangerous. The flagship substitution of tax credits for wage floors is a bad mistake; cutting benefits to the very poor while reducing inheritance tax for the wealthy is indefensible.”
George Osborne’s speech at the Conservative Party conference on 5 October 2015 has confirmed his intention to continue with these policies, pursuing a path which has reflected a political cynicism that has been evident ever since he took the job of Chancellor in May 2010.
When he first took office, he skilfully persuaded the British people that the previous Labour government had been responsible for the financial crisis in 2008 – but its real cause was reckless behaviour by banks and financial institutions, especially in America, leading to a credit crisis when the housing bubble finally burst. He then persuaded everyone that austerity was a necessary medicine to correct the fiscal deficit, which was less than 1% at the time of the crash. His policy of cutting government spending worsened the depression caused by the credit crisis, as unemployment increased and the welfare budget predictably ballooned. He succeeded in increasing the fiscal deficit at the same time as trumpeting policies which he said would reduce it. His measures were criticised by prominent economists, and the economic recovery in Britain was much slower than in America, but the British public believed (wrongly) that cuts were necessary – and that belief enabled his party to emerge triumphant in the 2015 General Election.
If the public were better educated, people would be able to see his cynicism for what it is: a focus on winning elections rather than benefiting the population as a whole. He has ensured that the cuts fall on young working people whilst protecting wealthy pensioners. And pensions are the largest item in the welfare budget.
It is perhaps hopelessly idealistic to expect wealthy pensioners to vote against a government which so blatantly protects their interests at the expense of the next generation, yet if those with a social conscience were to join with the numerous victims of his economic policies they might yet demonstrate that a bad government can be replaced in a democracy.
What is good for the Greeks would also be good for Europe. Although some level of austerity was needed across Europe, to reduce fiscal deficits, it has been carried out in a very damaging way: it has depressed economic growth and has been inflicted on the poorest members of society. The widespread feeling that a country should be punished for past overspending has to be balanced against the need to look forward to the best way of recovering from Greece’s current predicament and Europe’s continued economic slump. The suggestion that Greece should leave the Eurozone – a ‘Grexit’ – is based on the assumption that Greece is the only country with a problem, yet this is far from the case.
Right-wing commentators have been arguing that austerity is the only way back to fiscal rectitude and that irresponsibility has to be punished. For example, a recent Spectator article argued that “austerity really is a virtue” and that “Greece is an incorrigible basket-case”; it also suggested that the IMF and the European Central Bank (ECB) agreed. On the contrary, the IMF has acknowledged that “Austerity is much worse for the economy than we thought” and a Wall Street Journal report suggested that the ECB “would like to do more to spur growth” but that Germany is holding it back. Studies suggest that austerity reduces growth. Paul Krugman and other prominent economists have argued that a Keynesian approach, of applying an economic stimulus during a depression, is more appropriate.
The application of austerity has been grossly unfair. In Britain, for example, wealthy individuals and corporations have not shouldered much of the burden of recovery; the government reduced the higher rate of income tax, and wealthy corporations moved their profits to Luxembourg to avoid paying corporation tax. Instead, the poorest members of society have been targeted with an artificial benefit cap and the ‘bedroom tax’ – which have been popular with the majority of the electorate, who are unaffected and who dislike ‘benefit scroungers’, but which have been a very blunt instrument for cutting the benefit budget. A large portion of the benefit budget now goes to the working poor, not to the unemployed and those who are unable to work; an adjustment to the minimum wage would have been more effective – simultaneously giving people more money to spend and reducing the government’s benefit payments. The minimum wage could also be a tool for addressing economic imbalances within the UK and between countries of Europe: its level should be set regionally, or even locally, to attract jobs to areas with a low cost of living.
Robert Skidelsky, in this week’s New Statesman, wrote: “I agree with Syriza: the way back to prosperity insolvency is not debt collection and austerity but debt relief and public investment. This is Europe’s choice.” This article, which was mostly available at eiranews.com, also reminded readers that some of Germany’s debt was forgiven after the Second World War and enabled its economy to recover. It cannot be denied that Greek politicians overspent, but the pain experienced by their population has been sufficient punishment to avert any temptation to repeat the mistake. Politicians now need to move forward in the best way for both Greece and for Europe as a whole – with some debt lightening and with less austerity.
The New Statesman this week noted that the major political parties are in a “conspiracy of silence”: failing to describe the impact of their proposed policies. Cynical politicians know that many people will vote without clearly understanding what is on offer. They also know that voters have short memories and that pre-election promises can be broken without apparent damage to their parties. Democracy, though, suffers as people become disillusioned with politics and many, if they vote at all, use their votes to protest – for example by voting for UKIP.
George Osborne’s Autumn Statement offered to cut taxes, whilst nevertheless promising to close the deficit. That is dishonest unless he explains where the corresponding cuts in expenditure would fall. Neither has Ed Balls clearly described what alternative he could offer. Detailed election manifestoes need to be available very soon, so that the Office for Budget Responsibility can cost them before May 2015.
Politicians are clearly nervous about going into an election campaign with promises of more austerity, but there are alternatives to further cuts:
Several economists, including the IMF’s chief economist and Oxford’s Simon Wren-Lewis, have pointed out that austerity programs increase deficits and reduce economic growth.
Others have pointed out the benefits of ‘middle-out economics’: the economy would grow faster, and the deficit would shrink more quickly, if people on lower incomes were to earn more. Tax receipts would be higher, benefit payments would be lower and the aggregate demand in the economy would be higher.
And wealthy pensioners could afford to pay more, as pointed out by The Economist: “Britain’s fiscal problems are partly the result of over-generous spending on the old. They should pay off some of the debts instead of passing them all on to the young.”
The creation of the OBR was potentially of great benefit to British democracy. Politicians have a duty to voters to paint a clear picture of the future they are offering before the election, and that includes allowing the OBR to project the economic impact of each election manifesto. It would be very cynical to go into next May’s election without being honest with the public.