Dash to austerity
The government has a range of new economic policy options, says Phil
Murphy: it can cut, or cut, or cut again
'I feel more uncertainty about the real state of our economy than at any
time I can remember', somebody said in November. Coming from the man in
the street, this view would be a revealing enough comment about the current
crisis and the anxieties it is causing. What makes these words more significant
is that they were uttered by Robin Leigh-Pemberton, governor of the Bank
Leigh-Pemberton's candid expression of doubt says something about the extent
to which British capitalism is now out of control. When the country's No1
banker is reduced to a sigh of despair along with the rest of us, the economy
really is rudderless. The Tories and their allies have no ideas about how
to cope with the slump.
'Dash for growth'
This sense of impotence in senior establishment circles is the backdrop
against which to view the Tory cabinet's fabled economic U-turn and new
'dash for growth' policies. The fact is that the possibilities for any government
to intervene and kick-start an economic recovery are extremely limited today.
Across the capitalist world, governments are trying all kinds of conventional
economic policies: cheap money in America, a strong currency and high interest
rates in Germany, fiscal expansion in Japan, etc. Yet everywhere the world
is sliding deeper into slump.
It's not exactly the same the whole world over: matters are much worse in
Britain. In the two countries with the strongest productive base, Germany
and Japan, the governments can at least try to manage the impact of the
crisis, and use their greater economic resources to give a boost to recession-hit
However, in the more decayed and weaker economies like Britain, government
'strategies for recovery' are as effective as blowing in the wind. About
the only thing in their power is the capacity to make things worse. It is
quite conceivable that John Major could do something stupid to trigger off,
for example, a financial collapse in the banks; or that Norman Lamont could
keep interest rates higher than is necessary and help push more indebted
businesses to the wall. But this ability to make the slump worse is not
matched by any capacity to influence things in the other direction.
Over the past 20 years British governments have tried just about every policy
in the economics textbooks: interventionist and free market; monetarist
and fiscal; supply side and demand side; floating currencies and fixed exchange
rate systems. Some of these policies did a little to slow down the pace
of economic decline for a while, others were just ineffective, and some
could never go beyond the stage of rhetoric. The end result is that Britain's
real economy is weaker than in 1970, both in absolute terms and relative
to the rest of the industrialised world.
Today many experts are calling upon the government to revive one or another
of those past policies. But yesterday's economic doctrines were not just
retired to the shelf, ready and waiting to be picked up and used again at
some future date. They were dropped because they weren't working any longer.
Keynesian policies of state-financed expansion were tried in the Tories'
short-lived 'Barber boom' in 1972 and later by the 1974 Labour government;
they failed to regenerate the economy and were abandoned. Next, monetarist
policies of tight financial control were tried, first by Labour premier
James Callaghan and chancellor Denis Healey from 1976, then by Margaret
Thatcher and her chancellor Geoffrey Howe between 1980 and 1982. They also
failed and were abandoned.
Nigel Lawson's 'do anything' pragmatism came next. He reduced sterling,
raised sterling, cut interest rates, raised interest rates; this ended in
the ignominy of another recession from 1990. Then the Tories tried to hitch
a ride with Germany by joining the Exchange Rate Mechanism (ERM) of the
European Monetary System in 1990. September's sterling crisis and Britain's
withdrawal from the ERM represented the latest reversal in the long list
of failed and abandoned policies. Each time a government policy collapsed,
the remaining options were more restricted, and policy became more reactive
and more desperate.
Nothing has happened to stabilise the British economy so that the old policies
could somehow work more effectively now. On the contrary, the slump means
that such attempts to tinker with the workings of capitalism will make even
less of an impact. So if all the traditional economic policies have failed,
where does the Tory government go from here?
The dynamic duo of Major and Lamont will be more circumspect than the governor
of the Bank of England about admitting their helplessness in the face of
slump. But after the experience of the past few months, they must sense
that they have no real policy choices left. The Tory leadership would prefer
not to mention the economy at all, but to prattle on about Maastricht or
something else instead.
However, with everybody else talking about the economy, the government has
to say something. Hence the Tories pontificate about new 'policy' plans
and even admit to supposed U-turns. In other times this would be a big embarrassment
for a government. Today they would rather get people to think they are changing
course on the economy than come clean and admit that they cannot really
control or determine anything.
More importantly, all of this talk of U-turns and new policies represents
a rhetorical device for implementing cuts and other austerity measures at
the expense of working people. When the Tories promise new policies, they
are giving notice that the screws are about to be turned. There will be
no U-turn when it comes to attacking jobs and living standards - especially
through cuts in state spending.
Here is a brief guide to what the Tory government's recent economic pronouncements
really mean for those on the receiving end.
'Going for growth' This means that the government wants people to
know that it shares their aspirations for a stronger economy - but it wants
them to understand that austerity has to come first. In November, when trade
union leaders had their first meeting with a chancellor for five years,
TUC sources said government and unions were now starting to 'talk the same
language'. As they talk the common language of growth, it is certain that
one thing which won't be growing as a consequence is our standard of living.
Up to now, living standards for those in work have generally continued to
rise. Even some welfare benefits have been index-linked to inflation. The
authorities have maintained public sector employment and some state-backed
private employment to prevent a return to unemployment of 15 or 20 per cent.
All of these hangovers from the postwar era are now set to go. The abolition
of the wages councils for two and a half million low-paid workers, a few
days after the TUC/treasury 'meeting of minds', is a sign of what is on
the cards. Much worse is to come.
'Controlling public spending' This means reducing the burden which
state spending imposes on private capitalists. Government spending is financed
either from taxation, which comes out of company profits, or by borrowing,
which will have to be repaid with future taxes from future profits. The
government cannot take positive action to revive the profitability of British
capitalism. But it can take the negative step of axing a few billion from
welfare spending, to reduce the drain on corporate profits.
'Curbing the rise in the public sector borrowing requirement' (PSBR)
On present plans the PSBR will easily exceed £30 billion this year
and will be in the region of £40 billion next year (this time last
year their projections were for only £10 billion and £19 billion
respectively). To limit the soaring national debt, and the government's
interest payments, the Tories will have to raise taxes. And they will do
their best to ensure that it is the employees rather than employers who
pay the extra.
The government may raise national insurance contributions and, despite previous
pledges, it is conceivable that it will raise income tax and VAT again.
In normal economic conditions, an increase in the tax which workers pay
is usually passed on to the employers by way of higher wage settlements.
But in today's climate of austerity, wage freezes and pay curbs, things
will be different. Higher personal taxation will hit our pockets rather
than business profits, and help to fund state expenditure at the expense
of falling living standards.
'Safeguarding capital spending' This means that the government
may throw a few billion into construction contracts which boost private
businesses. More importantly, it is a way of saying that some public spending - capital
spending - is okay. But a lot of it - current expenditure - is a luxury that
must be cut back. This little 'luxury' just happens to encompass the bulk
of government spending: the running costs of the health and education services,
the public sector wage bill, social security and welfare payments.
So far the government has got away with presenting talk of an economic U-turn
as if it means an early Christmas for us all. But in this sort of Christmas,
we have as much interest as turkeys.
Reproduced from Living Marxism issue 50, December 1992