Common sense seems to imply that in an economic depression such as occurred from 2008-2009 onwards when deficits grow governments should live within their means as households have to. This, however, is wrong on so many levels. Cutting government spending when households and businesses are doing likewise merely forces the economy into a downward spiral, lowers economic growth and may actually increase the deficit as a % of GDP (gross domestic product).
The cause of the financial crash was the banks having insufficient capital reserves and being over-leveraged and making very risky loans eg subprime mortgage marks. From this, we seem not to have learned from history. After the 1929 wall street crash and subsequent depression, the glass Steagall banking act of 1933 was introduced separating commercial banking and investment banking along with further subsequent regulation be introduced during the Roosevelt era. This sought to prevent instability in banking. De-regulation of these rules by the new Labour government urged on by the Tories encouraged banks to indulge more and partake in more risky loans.
Due to poor loaning decisions, the banking system had to be bailed out by the government, in simple terms the banks had to be saved by the public sector and therefore the taxpayer. Private debt became public debt. Since then governments have imposed austerity and as a result, public sector workers have suffered a 15% real wage drop which is a little unfair considering they are essentially paying for private debt?
To add insult to injury, monetary policy, including quantitative easing and extremely low interest rates, has done little to stimulate the economy (due to the banks unwillingness to loan to firms) but it has pushed up asset prices: shares, gilts, and houses have all increased in value and subsequently the wealth of these owning assets has increased. Monetary policy has been ineffective in promoting growth, our deficit has only just been lifted despite the Tory’s promising to ‘balance the books’ by 2015 in their 2010 manifesto.
The problem with low-interest rates and monetary policy to increase demand is one that the great economist, John Maynard Keynes, explored. Even at very low-interest rates, entrepreneurs may be unwilling to invest as they will only borrow and invest if they see the possibility of an increase in consumer demand (this is known as the liquidity trap). This lack of investment is no doubt responsible for our country’s poor productivity and our very low economic growth and the stagnation in the economy.
In order to stimulate economic growth, we need to borrow to invest, such growth with consequently leads to us gaining enough tax revenue and public funding to pay off our deficit. The national audit office estimates that school cost 40% more and hospitals 70% more to build under private finance initiatives than if funded by government investment, so why would the government not build these services and offer a greater benefit to the rest of society?
The government can borrow very cheaply, we have our own central bank, the bank of England, which is in no danger of bankruptcy. We could, therefore, invest in a wide range of projects such as council house building with income from rents reinvested by councils to provide more much-needed accommodation. We could take the railways back into public ownership – we have recently bailed out Virgin and stagecoach which run the East coast main (railway) line this was a line which was renationalised in 2009 and became the countries cheapest rail fares and the line with the least customer complaints. Despite this, it was privatised in 2015 due to ideological reasons and since then has gone drastically downhill. In Germany, where a state-owned railway station is in operation you can travel anywhere in the country at any time for half the cost of a season ticket from Peterborough to London. Why can’t the British state-run our own countries railways? We could also invest much more in the NHS which is not receiving nearly enough funding and we could invest in education which is joint with health as the most important service our country provides.
Clearly, austerity has not worked. The privatisation of essential services has not worked and this government hasn’t really worked either – the IMF has identified lower growth as a result of austerity policies. Meanwhile, we still bang on about the deficit. Perhaps we should look at America. They have never been worried about their deficit, after the financial crash president Obama pumped 750 million dollars into their country after the financial crash and continue to invest in infrastructure, education and many other services. If the UK government invested in the NHS, education and infrastructure productivity would rise, the economy will grow quicker and businesses would start to invest much more meaning the government would no longer have to.
In this country nine years of austerity has lead to low growth, poor productivity, declining real wages, greater social divide and higher levels of poverty. Surely, it’s time to think again?