On a collision course with austerity

By Ann Pettifor
June 22, 2010

Today the public, and particularly the Liberal Democrats, appear nonchalant as George Osborne steers the ship of state straight towards the Austerity Iceberg. The foolhardy captain of this ship has recruited the most vulnerable sectors of society – children, mothers and the elderly – to act as his crew – while removing their life boats.

It’s horrible to watch – for a number of reasons. Not only because it is gross cowardice to place the weak and vulnerable in the frontline in this way. But also because the 'iceberg' towards which Osborne is steering Britain is not a lone one. European countries are hell-bent on synchronising austerity across the eurozone. Icebergs are popping up everywhere. And like the chancellor, all the OECD economies cutting back on public spending hope to compensate by increasing exports – into shrinking markets.

China and Japan are set to follow suit, and are aggressively increasing exports. Last month, the rise in China’s exports was the highest in six years. One has to ask about the quality of advice the chancellor is getting from Mervyn King and Treasury mandarins, if he has been led to believe that Britain’s terminally declining manufacturing sector can compete with China. That exports can help substitute for the collapse in public investment that will now follow the collapse in private investment – itself a function of Britain’s malfunctioning banking system.

The huge increase in VAT to 20 per cent will clobber the poor and hit the high street. But it will also hit the services sector on which the economy is becoming increasingly reliant: financial services, advertising, public relations, design and management consultancy.

Watch as the ballast of high-end private-sector jobs, as well as public-sector jobs, are thrown overboard just as the ship steers straight for the iceberg. These jobs will not be saved by the chancellor’s concessions on corporation tax. We know, because of research undertaken by the IMF.

Those high priests of neoliberalism have found that corporate tax incentives are the least effective of all possible fiscal stimulus measures examined. According to their research, stimulus equivalent to one per cent of GDP comprised of corporate tax cuts show up as an increase in GDP of just 0.5 per cent of GDP over five years. By contrast, government investment yields the highest return, up to 4.5 per cent of GDP over five years.

Their key conclusions are worth quoting more fully: “There is a robust finding across all models that fiscal policy can have sizeable output multipliers, particularly for spending and targeted transfers.”

The authors’ sole caveat is that the fiscal stimulus should last years, not decades. But if fiscal stimulus has not worked even over that timescale, then a “somewhat more comprehensive socialisation of investment” would be on the agenda.

Watch out as, in a year or two, taxpayers are once more called upon to bail out the sinking ship – and expected to “comprehensively socialise investment”.

© Ann Pettifor is a political economist, author and analyst of the global financial system. She writes regularly at http://www.debtonation.org/ - from which this budget response is adapted with grateful acknowledgements. Her Ekklesia blog is here: http://www.ekklesia.co.uk/blog/306 Ann is co-author of the Green New Deal (http://www.neweconomics.org/projects/green-new-deal). She predicted an Anglo-American debt-deflationary crisis back in 2003, and is known for her work on sovereign debt and international finance, including Jubilee 2000. Ann is currently a fellow of the New Economics Foundation (http://www.neweconomics.org/), director of Advocacy International (http://www.advocacyinternational.co.uk/), and campaigns director of Christian climate change campaign Operation Noah (www.operationnoah.org).

This article is adapted from one that also appears on Debtonation and Guardian Comment-is-Free, with kind acknowledgments.

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