Midwife to a double dip?
The comprehensive spending review (CSR) announced by the Tory chancellor, George Osborne, on 20 October will be a high-voltage charge of shock therapy for the British economy.
It’s based on blind faith that ’fiscal consolidation’ – slashing the state deficit – will spark off a surge of growth led by big business and the rest of the private sector.
In fact, the CSR is more likely to provoke another recession (a so-called ’double dip’) or at best condemn the country to years of near zero growth.
British capitalism will stagnate as a result of the Con-Dems’ reckless policy experiment, described by the New York Times as an "austerity overdose".
Needless to say, working people will suffer most from the brutal deficit reduction. The soaring deficit, 11.5% of GDP (gross domestic product), is being blamed on the low-paid, the unemployed, those with disabilities, and so on, who allegedly claim ’excessive’ welfare benefits.
Shamelessly, government ministers have ’forgotten’ that the deficit is primarily due to the slump in tax revenue that came with the ’great recession’ that began at the end of 2007.
That was provoked by the real excesses of the banks and other financial speculators, not the poorer sections of society now lined up for punishment.
The scale of the Osborne cuts is truly savage: £81 billion over four and a half years. £18 billion will come from welfare spending.
It is now estimated that 725,000 public sector jobs will be wiped out and another 900,000 linked to public spending will also go.
71% of the public sector debt reduction, totalling £114 billion, will come from spending cuts and about a third from tax increases.
The increase in VAT to 20% next January will especially hit working-class consumers. Banks and the ultra-wealthy will escape largely unscathed. The Osborne shock-therapy is going to be applied before British capitalism has achieved a real recovery from the 2008-09 slump, the most serious since the 1930s.
Incredibly, the third quarter figures for GDP (total output of goods and services) were hyped up in headlines as "stunning", showing "breakneck growth": "Sun breaks through the clouds."
This was on the basis of July-September growth of 0.8% (3.2% on an annual basis). This was a marked slowing from April-June, when GDP grew by 1.2% (4.8% annualised), leaving GDP way below its 2007 peak.
Britain’s peak-to-trough fall in GDP was 6.4% (even bigger than the US fall of 2.5%). In the first half of 2010 GDP has grown by 3.2%, making up less than half the loss in the downswing.
Moreover, a lot of that growth depended on New Labour’s stimulus package (eg public sector building projects, the vehicle replacement scheme, the temporary VAT cut, etc) which is now played out.
Current GDP growth is about 10% below the average rate of economic growth of 1990-2010, and the output loss will never be made up.
British capitalism will be permanently poorer than it was.
Osbourne with David Cameron and Liberal Democrat leader, Nick Clegg
Yet even before any signs of sustained recovery (and with a shaky world economy), the Con-Dems are hell-bent on implementing the most brutal cuts since the Geddes axe of 1922.
It is estimated that Osborne’s package will cut real demand for goods and services by 8% of GDP and cut GDP by 4% over four years.
If carried through, this will mean widespread business bankruptcies and another surge of job losses.
No wonder the Financial Times described the spending review as "a gamble, given the continued weakness of the recovery".
What do they think they are doing? Osborne and Cameron, with Cable and the Lib-Dems tagging along, are convinced that drastically shrinking the state will trigger dynamic private sector growth.
Cameron told the conference of the bosses’ organisation, the Confederation of British Industry, that there will be "a relentless focus on growth", that will more than compensate for the reduction of the public sector.
But this policy is based on blind faith rather than any visible economic trends.
Consumer spending is weak (it actually fell in September). Unemployment, part-time working, squeezed incomes, the debt-hangover from credit-fuelled spending, and fear of worse to come are dampening household spending.
Business investment fell 20% in the downswing and so far this year has only grown 4.5%. Many small and medium companies are going bankrupt because they cannot get credit from the banks.
At the same time, some big businesses are sitting on piles of cash which they are deploying in global financial speculation rather than investing in new technology and production facilities.
Business investment will not provide the 40% of new growth envisaged by Osborne. Nor will exports provide a way out of stagnation. Despite a 20% devaluation of the pound since 2007, exports have not accelerated, and Britain’s chronic trade gap and payments deficit persist.
Moreover, all the world’s major exporters are simultaneously trying to boost their economies through export-led growth.
But there is not enough money-backed demand, and exporters are more and more protecting their home markets, further restricting the global market.
Meanwhile, the US, still the world’s biggest market, slowed to a sluggish 0.5% growth in the third quarter (2% on an annualised basis).
Osborne’s cuts package, not surprisingly, delighted the City financiers, who are pathologically hostile to ’excessive’ taxation of the wealthy and social spending on the ’undeserving poor’.
But many of the strategists of big business are more than sceptical about the Con-Dem cuts. They fear the Osborne axe could provoke a double dip recession.
The New York Times, for instance, dismisses the claim that running a 10.7% (US) or a 11.5% (UK) deficit for a few years means catastrophe.
Economies like the US and UK "can afford to run fiscal deficits in times of weak private sector growth. In fact, they cannot afford not to."
Martin Wolf, the Financial Times columnist (and no woolly Keynesian), warns that Osborne’s plans may be "the biggest fiscal blunder since the early 1930s" (when the National Government under the Labour renegade, Ramsey McDonald, imposed savage cuts on the working class).
"What is your Plan B?" Osborne and Cameron have been asked. Their response is that even if there is another downturn – a double dip – fiscal austerity will still be necessary.
They reject any suggestion of a Plan B! They are ready to plunge British capitalism into an even deeper slump than before, inflicting untold suffering on working people.
Privately, they appear to be pinning their hopes on more quantitative easing (QE) by the Bank of England.
QE means creating more credit by, effectively, printing money.
But this will not guarantee growth. Banks and speculators are already flush with cheap credit, while small businesses and working people are over-burdened with debts.
Osborne boasts that after his cuts package, the rating agency S&P restored Britain’s top AAA credit rating.
His message was that a bond-buyers’ strike has been averted, allowing the government to go on borrowing on the bond markets.
The threat of a boycott of British government bonds (as opposed to Greek bonds) has undoubtedly been exaggerated at this stage.
With near-zero interest rates and huge pools of liquid capital swilling around the world economy, the cost of borrowing money through the bond market has never been lower.
Nevertheless, in the future, the bond market vigilantes will move against governments carrying out policies of which they disapprove.
They are market anarchists, their only loyalty to the unfettered pursuit of profits by the super-rich.
Yet even Osborne may find the credit rating agencies to be fickle friends. If Con-Dem measures provoke another slump or prolonged stagnation, threatening the stability of the system, even these credit market parasites, like other sections of big business, may turn against Cameron and company.
The present crew, or a replacement crew, could be forced to change course and resort to renewed state intervention to prevent economic collapse.
Above all, the course of events will depend on the strength of the organised resistance of the working class.