Saturday, 8 December 2012

Cuts cost Growth

by James Wand



This week's Autumn Statement was possibly the bleakest outlook on the economy for more than sixty years. The economy is in an appalling state of stagnation and collapse, the foundations are failing and plans to secure its recovery are faltering at every turn. George Osborne has failed to heed the warnings from the IMF and the World Bank, and is placing ideology and addiction to public sector cuts before the necessity of supporting the weakest and most vulnerable in our society. This Urgent Statement addresses the horrifying Autumn Statement.

As we further move towards winter we must face the reality that what lies immediately ahead will be the twenty-first century version of the winter of discontent. Osborne, addicted to cuts, deeper cuts, and even deeper cuts admitted today that Plan A had failed and austerity would last until 2018 at the earliest. Average growth forecasts from the Office for Budget Responsibility, the IMF, EU Commission and Credit rating agencies have even suggested that such claims are unrealistic; with comparisons to the March Budget suggesting that confidence even within the inner circle of the Treasury has all but disappeared. We face a decade of decay and austerity – this is no less than a national disaster and one that we must address quickly.


As the roof of the economy is ripped off by Mr Osborne to make way for the torrent of benefit cuts and pay freezes, it is time he realized that growth does not come from pay constraint. The policy and notion of such constraint and limitations caused pain and misery for Barbara Castle and Michael Foot when they were ministers more than thirty years ago – and it still viewed by many, including former Chancellor Alistair Darling, as nothing more than “the last card in the pack that can be played”. If we intend for there to be growth, for more people to spend more money buying more items, something that we must consider the biggest factor: where is such money going to come from? It is a factor that has been overlooked by Mr Osborne who yet again announced pay cuts for public sector employees. With inflation expected to stay above the Bank of England’s target of 2% until 2014, then not only will family necessities have to be cut – but essential too. Benefit cuts symbolize that Osborne has moved away from the notion of ‘all in this together’ and more towards ‘every man for himself’. Mr Osborne is withdrawing support for those in need, rejecting key proposals and instead turning his head towards the belief that tax cuts, and only tax cuts, will be the saviour of the our troubled financial situation. History has proved that when times get tough tax cuts and public sector cuts don’t work, and when times get even tougher repeating the same old cycle of tax and public sector cuts still doesn't work. Osborne isn't listening, and is denying the clear facts that attempts of such ‘fiscal restraint’ fail every – single – time.

Lead by the ideology and the belief in a smaller state – Osborne has added tax cuts to his Christmas list. The cuts to Corporation Tax are intended to indicate that Britain is ‘open for business’. Nevertheless, Mr Osborne has failed to address the problems regarding that Corporation Tax simply isn't being paid. If big businesses are evading tax then the only message being sent out is that our tax system is ‘open for abuse’. With such a bleak economic picture, we also have to face the big concerns. If no money is being made, profit created or services provided – how is any rate of tax expected to work. The public sector sets the bar high in everything does – providing key services at good prices. Every part of the public sector is required from the ‘backroom’ form fillers, who without them would leave a back-log of work to the front line Bobbies and paramedics. Ideology comes first as the sector that has punched well above its weight, provided more than its fair share to the economy and is the bastion of quality and care is destroyed by a Chancellor whose home he would rather be in the pocket of big business than Number 11 Downing Street.


It is time for Britain to get to work. There is nothing stopping us from reaching our full potential – from producing more, inventing more and being more. Osborne is not a fighter – he is not fighting for Britain. Keeping pay low only goes to keep the power of the public sector and the productivity of its employees equally as low. We are constantly reminded that this is the worst economic situation for sixty years – then perhaps it is time to take lessons from history. To promote growth you invest more, spend more and think bigger. You do not pull back, you go further, reform further and push for more. To get more produced you empower people with increased spending to create a cycle of employment and increased tax receipts; never giving up. You never give up on the belief that opposed to cuts, growth in the public sector can lead to growth in the economy - and you never give up on anyone in society. Because we do have, and Britain has, so much more to give.


13 comments:

  1. I agree with a lot of the points that you made. However, I do have a little bit of a quibble with you saying that most of the cuts that Mr Osborne is making to public sector workers will stifle growth. And asking “where is such money going to come from?” Well, it certainly will not come from raising taxes on everyone just to make payments to people through a ‘leaky bucket’. It would come from tax cuts AND spending cuts which would allow for the economy to grow. Watch this video: http://www.youtube.com/watch?v=47_f6iFoqEk

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  2. Thank you for commenting. I don't believe, morally, that there is any necessity to cuts the size of the public sector. The video was interesting, but seemed to be advocating a race to the bottom. As has been the Republican policy in the United States - they lowered taxes when times were 'good' to fulfil, ideologically, their aim for small government - repeating this is when a recession arrived. This to me seems a black hole, bottomless programme that results in the endless shrinking of government and the removal of public sector money from the economy to a point which is dangerous. Arguably increasing government debt could be a further option. Increased stimulus packages and spending may increase growth and bring stability to the economy. As the economy would be growing, this would have little impact on the Government Debt as % GDP.

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  3. I would argue that it is immoral to increase the size of the public sector at the cost of other people’s tax money, whether they want it or not, however I don’t believe it will be easy for us to agree on this issue. We’ll just have to agree to disagree. Race to the bottom? I don’t believe so at all. It was not the tax cuts that caused a recession, but rather the outlandish idea that the government should (through government agencies such as Fannie Mae and Freddie Mac) make promises to the banks to make risky bets on people and mortgages and when it turns out that the banks responded to this incentive (which any person would) and the whole floor collapsed under this scheme, people blame the Republican Party for trying to put money back into the pockets of Americans? Increasing government debt? So when would you stop the debt? How would you go back to self-reliance and working hard to earn money once the government has been subsidising its citizens for such a long time. I guess even the failure of Greece does not make you second-guess your opinions. Obama’s stimulus spending has not worked the way it was expected to, and is only adding to the debt without doing anything to substantially combat it. We can argue all we want, but the fact of the matter is that I do not believe that the government should get involved in planning of the economy-which is what it is when stimulus is issued- whereas you do believe that such planning is necessary in order to grow the economy. Keynesian theory has been tried countless times, and fails every time, because the floor eventually collapses. Unfortunately, the floor only collapses unto another Keynesian mess simply because of the foundation that most governments and democracies are rested upon. That is, increased spending to constituents so that the politicians are re-elected because they got the most “stuff” from X politician. I refer you to another video: http://www.youtube.com/watch?v=tpAOwJvTOio hopefully this one frightens you more.

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  4. Firstly that video didn't really make me feel frightened. From what I gather the lady in the video was given a phone. Honestly though - if you're saying that in one of the most developed countries in the world, people on benefits do not and should not get access to such simply amenities as a phone - that is more frightening.
    I think that the use of tax money, and if necessary increasing those taxes, is important and the expansion of the public sector should be one aim of government, especially when it has to fill the gap where the private sector has failed in times of recession. I agree, tax cuts didn't cause the recession, but as this video points out http://www.youtube.com/watch?v=go2bVGi0ReE , it is the poorest which suffer most again. Those on little income and rely on the public sector the most are ultimately punished the most. The debt would not only go, to some degree, in paying itself off (like, for the sake of creating a crude image, solar panels on a home) by investing in infrastructure, creating more jobs, increasing salary and therefore increasing benefits, it would shrink more importantly as a proportion of GDP over time. You can always use the example of Greece, which has a much smaller economy to, some degree, scaremonger, but it doesn't matter what the raw figure of your debt is, to some degree, as long as your economy grows too. Although I would like to pounce on the phrase "subsidising citizens" - I believe that government doesn't subsidise anybody but offer necessary services that they demand, if not need, I would also like to highlight the fact that we have a had a deficit since at least 1900 (John Major and Gordon Brown managed to curb this). Yet still through those times in history our ability to work hard, increase our pay and produce more has not been floundered. It seems to be similar to the argument that introducing the minimum wage would create more unemployed, when in fact the levels didn't rise at all. I believe that the Obama stimulus could work well, and arguably has done in reducing the unemployment levels (whether in the private sector or public sector). Often stimulus packages are a lot like government doing one sit-up, noticing it doesn't work and then deciding exercise doesn't work. It needs to be continued with and invested in. I suppose the notion of getting re-elected with greater spending does little to make Gordon Brown feel better. His/Darling's plan to reduce to deficit by half over 5 years was rejected in favour of Osborne's view.

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    1. Well, MEDCs don’t get that way by governments taxing and spending like drunken sailors whether that be on cellular phones or whatever. Your definition of government and philosophy on what it is different to mine, so we may have to just agree to disagree and move on.

      Once again, we may have a different philosophical view on government and taxes so it may be very difficult for us to agree on this issue. However, I believe that recessions occur because of mis-allocation of resources that occur when the government tries to spend on certain areas of the economy. The only way to prevent this mis-allocation from occurring is to ensure that PEOPLE get to spend their own money to way that they deem in necessary, and private companies will provide services based on the perceived needs of the public and what they are spending their money on. The video is a well-preoduced one, and it does have several interesting points. But it seems to purposely leave out the back-story as to why the “cycle” as the professor calls is, occurs. It is because of the government involvement in the free-market which leads to this cycle occurring (Fannie Mae and Freddie Mac).

      As for the stimulus, it has worked in reducing unemployment levels, I cannot argue there. But the cost is extraordinary. According the the non-partisan CBO, each job that was create by the stimulus could have cost up to $4.1 million. A lot of money for one job created. More of this spending would have only increased the number of jobs, but not the cost associated with each one (more than it is worth). Osborne’s view of reducing the deficit compared to Darling’s is that Darling’s was essentially unachievable, and Osborne’s is much more achievable (although I must concede I would change a few points, such as increased VAT).

      Here is another video (since we seem to enjoy exchanging them) to prove that income mobility in America is alive and well, and the conclusion that the Professor comes to in his video does paint the whole picture.

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    2. Woops! Forgot the link: http://www.youtube.com/watch?v=UbueX92CKPk

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    3. Firstly I would like to address the whole Osborne-Darling point. Osborne will fail to succeed in eliminating the deficit in this parliament, and so far we are only about a quarter of the way through the planned austerity measures. Darling's plan was not going to starve the economy and would have gradually reduced the deficit. I would therefore suggest that Osborne's plan was unachievable - especially when he is now suggesting that austerity will continue to 2018.
      What I think the CBO neglects to consider is that tax cuts were not likely to improve the employment situation and would still increase the government deficit. I believe the stimulus is a necessity and the preferred option of, what could be considered, the two evils.
      I disagree with the points that the money is best spent when it is the people that are spending it. As with big businesses, that are sitting on millions of pounds of money afraid to invest, spend or build; normal everyday people are continuing to save because of the lack of confidence and the fear that they will have to tighten their belts further. To install that confidence therefore government has to take steps to spend money to sure, invest or back industry or job creation. If the government cannot create confidence or even look like it has adequately acting as a leader in times of recession then I don't think it is doing a very good job of being in power.
      The video is interesting, although it does little to address that although the rise in income could solely be down to inflation - modern technology has affected the growth of certain markets and job opportunities etc. It also doesn't take in to account that America in ranked 93rd in the world for income equality, a position it can hardly be proud of. The video also doesn't really touch on where the money that is being spent is being directed. The Top 1% still received 12% of the country's income - a disproportionate amount.

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  5. If
    History has proved that when times get tough tax cuts and public sector cuts don’t work,

    what has it proved will work?

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  6. The Marshall Plan and the expansion of government through the creation of the NHS and the implementation of the National Insurance as an additional tax proved that a giant influx of money, well spent, could secure recovery.

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  7. Osborne may not eliminate all of the deficit in this parliament, I agree with you there. However, by 2015 a large amount of it would have been dealt with, and there would be a much more robust backing for the Conservatives because of this. Darling and Brown hardly did anything to help with the deficit (http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data) even if you believe that government spending will grow the economy, eventually it does have negative unintended consequences, such as the government programs that brought about Fannie Mae and Freddie Mac, which guaranteed the risky investments that the banks were making, thus, in the banks eyes, there was no need for self-regulation. You seem to miss addressing this point in every one of your replies.

    You can talk about growth and how spending does increase growth (which it does). However, what you seem to be missing is that eventually this growth collapses due to the excess spending that the government has done. It is always best for stimulus to come from the hands of every day individuals, spending there money where they believe it should be spent, and not where a government bureaucrat believes it should be spent.

    The CBO was merely calculating the amount of money that each job that was created cost. Not the alternative methods for stimulus, or anything of the sort. The CBO is one of the most respected economic analysis organisations in the world to say that "the CBO neglects to consider is that tax cuts were not likely to improve the employment situation and would still increase the government deficit.” is quite silly. Because you are wrong, tax cuts do improve employment situations, and because the CBO is definitely more adept at analysing economic affects of various policies than you are.

    The video that I showed you had all of its statistics adjusted for inflation. So you’re argument is invalid. As far as rankings go, the United States is nowhere near 93. Where did you get that statistic? The Inequality-adjusted HDI (human development index) puts the USA at 23.

    The bottom 1% of the population get 80% of government services. A disproportionate amount.

    The top 1% (in the USA) pay a 3 times higher tax rate than middle class Americans. A disproportionate amount.

    The top 1% have a tax burden larger than the bottom 95%, a disproportionate amount.

    The Marshall plan funds was given to you by THE US GOVERNMENT! Not through the efforts to increase taxes on everyone and spend like hell.

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  8. I think that, given time, both Darling and Brown's plan would have resulted in a swift exit from what could now be a triple-dip recession. For the majority of the last century the government has had some sort of deficit and I don't particularly see a problem with that. Arguably greater government borrowing would only go to invest in stimulus packages and sure up the economy, and would be reduced when the country returns to growth. When you say "brought about" I haven't been entirely sure what you meant, but I will address what I think it is - the federal takeover. Without going in to too much detail at this stage, in case I've got the wrong end of the stick, I fully supported that. It was the only way to sure up peoples investment, and as one family's money/savings is invested in another companies buildings or staff you couldn't not bail out one (or as the UK government now does - back up people's savings to a certain amount in case a bank crashes) without their being dramatic consequences.
    I disagree with the assumption that somehow the spending would spiral out of control in to the ether because a bureaucrat. Increased government spending in every corner has a positive affect on the economy in the long run. Individuals are unable to look at the precise areas and the bigger picture of where money needs to be spent unlike politicians and so reject the notion that if we just leave people to spend their money how they wish - a recovery is almost guaranteed.
    The CBO's analysis is only as accurate or complete as the work that supports its models and predictions. But if we do use them as a reliable source, then I think it only fair to acknowledge that they recognised the American Recovery and Reinvestment Act had caused unemployment to drop by 0.5%, and predicts it could assist in the unemployment rate dropping to 5.5% by 2018. I believe getting that many people working, getting the unemployment rate that low and raising GDP by up to 1% is very much worth it. The CBO considered either cutting to create a balanced budget by 2018 or halving the deficit. Eliminating the budget deficit would cause a spike in unemployment and only reduce federal spending/GDP to 22% compared to option two of 24% and no such spike.
    The figure was from the Census Bureau. It also reported the highest number of people are officially impoverished, and over half (57%) of pupils are from low income families - the highest figures since 1950. Whatever the financial gain, it hasn't been big enough. This poverty is linked to unemployment and is costing America money. This article http://economix.blogs.nytimes.com/2012/07/10/richer-rich-and-poorer-poor/ agrees with your income rising points (which I believe can only rise further through higher government spending) but also points out that the poorest are losing net wealth.
    I didn't know the other comment was given me options of tax rises or spending cuts. Much like modern day debt of the US and UK, it was 'owned' and given by foreign investors, but was an example of where spending money does work

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  9. We’ll just have to agree to disagree on this issue, James. It seems to me that you are willing to settle for the government basically controlling the economy. I am not, and will probably never be.

    I would rather have had unemployment down to below 4% before 2018, which could have and would have been accomplished if the right measures were taken.

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  10. "For the majority of the last century the government has had some sort of deficit"

    Excellent observation! When you're the ISSUER of the currency, deficits are a virtue, not a sin. And, in fact, every economic recession/depression in history is preceded by deficit reduction. Modern money isn't convertible - it's tax driven. For any government that spends, pays interest and taxes in a currency that only it can create there is absolutely no risk of default.

    Ross, Greece and the other 16 nations that adopted the euro forfeited their sovereignty in doing so. The media and mainstream economists still refer to these nations as sovereign but they're not. It's like saying California is sovereign. My point is, Greece can go bankrupt but Great Britain, Japan, U.S., Canada etal cannot.


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