Monday, 22 November 2010

No Money Left, unless....

After the General Election, an unfortunate private joke by Liam Byrne, the outgoing Labour Chief Secretary to the Treasury, was to provide the incoming Con Dem Coalition with all too easy a weapon. On the desk of his successor, the short-lived appointee from the Lib Dems, David Laws, he left a note saying starkly, "Dear Chief Secretary, I am afraid to tell you there's no money left."

In the weeks and months that followed, first Laws and then his own successor Danny Alexander as well as a host of other Ministers repeatedly used this to justify the cuts they proposed to everything from welfare to education funding, jobs creation and transport. The Lib Dems especially cited this as they pleaded not guilty to reneging on their promises to avoid cuts this year and protect services beyond it.

As with much of their project, this was not true. The deficit is lower now than predicted at the start of the year. But the Con Dem propaganda continues apace. Much of the public seems convinced, with a poll taken yesterday showing 49% supporting the cuts to some degree.

But today perhaps changes that and blows away for good the claim that Britain is nearly bankrupt.

Because today, with the Irish economy in turmoil, Eire finally accepted a loan from the EU totalling nearly £80 billion Euros. As a member of the EU, Britain is making a contribution. But then on top, we are making a further bilateral loan, bringing out total commitment to Eire to £7 billions.

Now, there is a lot of sense in this - although at the same time the terms of the loans unnecessarily rob Ireland of its financial and economic independence and seem likely to affect public services rather than the banks. But Britain depends heavily on exports to its smaller neighbour - the average Irish citizen spends £3,500 p.a. on British goods and far outranks anywhere else in the world for purchasing imports from the UK. On top of this, British banks, including state-owned  RBS, are heavily extended in loans to the collapsed Irish construction industry and others - to the tune of £140 billion. So needless to say the total collapse of the Irish economy would damage them further. It is also a loan as opposed to expenditure - one day, it should come back to British coffers.

But how can the Government square this with their claims that we are ourselves pretty much bankrupt? During the election, Nick Clegg, the Lib Dem leader, apparently underwent a secret conversion to massive expenditure cuts when he saw Greece in turmoil and feared that in a few weeks we would be in the same condition. The Tories characterised the closing days of the Brown Government as akin to "bankrupt banana republic" all but out of cash and credit. George Osborne supposedly was ashen faced when as the new Chancellor he went through the books in late May and realised things were far worse than anyone had feared.

The truth of course is that, although our deficit has risen substantially because of having to bail out the banks and pay for the Afghan war, it is far smaller in proportion to Greece's and Portugal's. Moreover, our national debt is barely a third of what it was for the bulk of the post-war period, when Britain's economy expanded and great public services like the NHS were born.
National debt as a share of GDP since its inception in 1692 

The veracity of Mr Osborne's claims has been under strain for several weeks. Now Dublin has blown it apart. Cuts are a political decision driven by Tory ideology for a smaller state. They are not an economic necessity - an investment led recovery along the lines of the Green New Deal could have preserved jobs and developed a sustainable future for our country without such dreadful austerity and the impact it will have on the most vulnerable in society.

Not that that the lie being exposed will change things - nor is it likely that, as we bail Ireland out, the Government might reflect that the Republic has got into this recessionary mess at least in part as a result of following precisely the slash and burn, tight money plans the Con Dems are now merrily enforcing on Britain.

But there again, we're not bankers. We just live here.

1 comment:

  1. If you haven't heard of it already, you should check out Modern Monetary Theory. It has some intriguing consequences for progressives which you might be interested in. Here's a rundown:

    The British government is sovereign in its own currency. It can't go bankrupt - government cheques never bounce unless the treasury specifically requests for them to bounce. That's why it's a joke - saying the government is broke is like saying a football stadium doesn't have enough points left to keep score. The government can afford anything for sale in pounds because it's the monopoly issuer. (Note, this isn't the case for eurozone countries, so comparing debt levels to them is meaningless.)

    The whole idea that taxpayers or their children have to "pay for" government spending is obsolete gold-standard thinking. Taxes keep inflation down (not a problem with the current state of affairs!) and bond sales keep the interest rate from falling. Government constraints on spending are entirely voluntary.

    The government should offer a minimum wage job to anyone who wants it doing community or environmental work. That would solve most of our current economic problems from the bottom up.