Coalition cuts

The new coalition government of the Conservatives and Liberals is getting ready to impose the biggest cut in government spending since 1980s (under Margaret Thatcher’s regime).   Already, David Cameron has been preparing public opinion with the claim that Britain’s government finances are much worse than the previous New Labour government had claimed and that the former Chancellor Alastair Darling had deliberately hid the truth.

The bosses union, the Confederation of British Industry, has demanded that, in getting Britain’s government deficit back into balance, that for every £1 in tax rises, there should be £4 in spending cuts.  And it seems that ‘frontline services’ in education and the health service, supposedly ‘ringfenced’ from cuts, are going to be so narrowly defined that broad swathes of services in even those sectors will dropped or reduced.

The coalition government has also published the numbers of civil servants at the top who earn more than the prime minister.  It is scandalous that these huge salaries and bonuses are being earned by people who can then retire on ‘final salary’ pensions forever.  But these ‘fat cats’ have mushroomed in the public sector (and that includes local government and various government agencies or so-called ‘quangos’) because of the Conservatives’ and New Labour’s ideological acceptance that only people with ‘business experience’ or in top jobs in the corporate sector can do a good job of managing our public services.  So the public sector has been inundated with executives from the likes of Tesco, BP, RBS and various management consultants who only came to ‘help’ if they got paid mega salaries.

Now it is apparently a scandal.  Of course, for decades nobody complained about the grotesque ‘compensation’ that top executives gleaned from the profits of the big banks, until the banks nearly brought down the whole capitalist system with their risky investments.  Now the financial crisis is over, the bankers can go back to ‘business as usual’.  But public sector employees must suffer the consequences in job losses, salary cuts and reduced pension entitlements.  And it won’t be these ‘fat cats’ in public services that will suffer.  It will be those at the bottom, on the ‘frontline’, that will take the hit in frozen or reduced wages and entitlements.

The depth and severity of the spending cuts in the UK cannot be underestimated.  The previous Labour government made one of the biggest bailout packages for its banks of all the OECD capitalist economies.  And it introduced a fiscal stimulus package designed to avoid a deep recession larger than most.  As a result, Britain’s public sector debt as a share of GDP will rise from about 50% in 2007 to nearly 100% by the end of next year.  And the annual deficit of revenues against spending will be 10% of GDP next year, the largest in the OECD – bigger than that of Greece or Ireland.

Why not keep running a deficit and let public debt rise?  For the capitalist system that would be bad news.  First, more and more of the surplus-value created in the capitalist process of production would have to be devoted to financing government deficits and debt by buying government bonds.  So less would be available to invest in new production.  Sure, there would be interest earned on those bonds.  But that rate of interest would have to rise to make it worthwhile, especially if many of the lenders (buyers of bonds) came from abroad.  As the rate of interest rose, it would have a ‘snowball’ effect by adding more to the deficit and overall debt.  The deficit would have to rise to pay for the interest on the debt.

And if the rate of  interest on government debt rose, it would drive up all interest rates int he economy.  So that would make it even more difficult for households to borrow to buy houses and consumer goods and for business (particularly small businesses) to borrow to invest.  Also businesses would have to be sure that their profitability was greater than otherwise.

So the deficits and debt levels must be cut to get profitability for the corporate sector moving up by keeping the cost of borrowing and taxation down.  You can cut deficits by raising taxes.  But taxing the corporate sector (and the rich) would be self-defeating for the capitalist system, as it would reduce profitability after tax.  Indeed, over the last 20 years in particular, the share of tax revenues that have come from the corporate sector as opposed to the household sector has fallen, even though profits have grown as a share of output in Britain.

So the only way for capitalism is to cut public spending.  How much needs to be cut?  It partly depends on how strong you reckon British capitalism can grow over the next few years.  If it grows fast, then tax revenues will rise strongly even if there is no change in the tax rates; and spending on benefits will not rise so fast.  Thus the deficit will narrow.

The previous New Labour government reckoned that the UK could grow at a 3% pace next year and at 3.25% a year after that.  Yet most economists reckon growth will be closer to 2% next year and that long-term growth potential is no more than 1.75% a year.  That’s a big difference.

And the big problem in the UK is that its deficit is mainly structural (meaning that faster growth does not reduce the deficit much).  It’s structural because many of our public services are designed to improve the conditions of the sick (NHS), the old (pensions) and the young (at school) and faster economic growth won’t change that spending (unlike unemployment benefits).   In other words, the structural deficit is a sign of better public provisions for the people.

But the coalition government is aiming precisely at this ‘structural deficit’.  And it seems to think it needs to make about £70bn of cuts to halve that deficit by 2015 (not even get back to balance).  But if the annual growth forecast is closer to 1.75% than 3%  through 2015, then the overall deficit will not fall so much even with structural cuts of £70bn.  The government will have to cut into the heart of public services even more, perhaps by as much as £120bn, or something like 8% of GDP spread over four years.  That is huge, taking government spending as share of GDP in the UK down from 53% now to about 45%, a reduction never seen since the 1930s.

We are entering a world of ‘austerity’, at least for the majority, in order to allow prosperity for big business to resume.

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