The (Economic) Madness of George

Giddy

Last night George Osborne’s Fiscal Charter was voted on and rammed through Parliament on the back of the Tory’s majority. Today, the media focusing more on the shambles that is the current Labour party and their confused approach to supposed Opposition combined with the rumbling rebellion in the ranks as the party tries in vain to come to terms with what their members actually want the party to stand for.

Consequently, as usual, much less has been said about the actual contents of the Bill and its effects on our economy.

The Bill states as its primary purpose that the UK deficit (which we were told would be eliminated by 2015) will be eliminated by 2020. Afterwards it will then be illegal for the Government to spend more than it receives in tax revenue in any given year
(Regular readers may remember a recent post on the howls of outrage caused by a certain other government being forced to budget in this manner).

This is bound to be cause for outward concern. For a start, it shall bind the UK Government into precisely the same situation as has complicated the budgeting for the Scottish Government. Without the ability to borrow to cover emergency shortfall, overrun or just plain error in cost estimation and without foreknowledge of what money must be spent on, the Government will be forced to cut far deeper than necessary to avoid running out of cash. If the UK Government is capable of budgeting as well as the current Scottish Government is and is able to run the UK budget to within a 1% “underspend” of revenue then, on current typical budget numbers, that would imply a loss to public services of around £5.1 billion per year, which is coincidentally close to the amount spent by Westminster each year on Enterprise and Economic Affairs. This would be an effective and permanent cut over and above the £90 or so billion Osborne intends to slash to eliminate the deficit in the first place.

The Fiscal Charter also, crucially and insanely, makes no distinction between current and capital spending.

(If you’re not sure what I’m on about here I’ll take a short digression. Current Spending is that which is spent year on year to pay for running a government and a country as well as public services such as education, health and social security. Capital Spending is that which is used to buy or build new assets such as actually building new schools, hospitals, roads and bridges. I know it’s not currently popular to equate Government budgets with household budgets but consider a debt in either to be the difference between a credit card bill for some groceries and a mortgage on your house.)

One can, to a degree, understand the desire to eliminate or, at least, reduce to sustainable levels, a deficit in the current budget.

To roll capital spending into this however is utterly beyond me. The whole point of capital spending is that you borrow to invest. Your prospective asset will cost a lot of money up front or over a short period of time but will pay back multiple times over usually on a longer time scale. As an example, it might cost you £100,000 to build a council house and it might take you a year to do it but that house will pay for itself over the next 20 years in the form of rent and then every year it is occupied after that is profit for the government (You’ve also saved a fortune in emergency aid, healthcare and temporary shelters by giving someone a house instead of abandoning them to the street or predatory private renting markets).

This inability both to plan and to build for the future will be disastrous for the long-term prospects of the UK and it has been warned by many prominent economists that it may lead to a liquidity crisis in the economy and the inability to quickly deal with changing circumstances. The UK is already holding the dubious distinction of being one of the developed countries taking the longest to recover from the 2008 crash (Our recent growth spurt has been less to do with Osborne’s genius and more to do with the UK simply playing catch-up with our neighbours). As we’ve seen in recent years. It is simply not possible to cut one’s way out of a deficit. Thanks to this Bill, we might not be allowed to grow our way out either.

That segues us nicely into the other disturbing point in the Bill. It defines “normal economic times” as “whenever GDP growth is greater than 1% per annum”. He evidently genuinely believes that the long term future of this country involves a return to the boom-and-bust days of the last couple of decades where Chancellors were unhappy when growth was less than 3% per annum. I’m sorry George, but those days are gone. As Thomas Piketty has noted: “There is no historical example of a country at the world technological frontier whose growth per capita has exceeded 1.5% over a lengthy period of time.” Growth rates beyond this are unsustainable and anomalous.

Growth per capita across the historical record for various countries and areas. Source: Thomas Piketty - Capital in the 21st century. http://piketty.pse.ens.fr/fr/capital21c

Growth per capita across the historical record for various countries and areas. Source: Thomas Piketty – Capital in the 21st century. http://piketty.pse.ens.fr/fr/capital21c

The root cause of the rapid growth seen in Europe until the 1980’s was the rapid rebuilding of the continent in the post-WWII years resulted in a flood of investment from the USA and the USSR. As former Greek finance minister Yanis Varoufakis has noted, one of the fastest ways to boost GDP figures is to have a disaster or a war which wrecks everything then rebuild it. It does a great job of bumping the numbers but it’s rather illusory growth at best.

It’s probably best to leave for another time a detailed explanation of the importance of shifting the global economy onto a low or zero growth model but suffice to say that even a 1% per annum growth still implies massive social change as it will caused wealth per person to increase by 35% over a generation or by almost three times over a century. Just consider how different a world we live in today compared to the early 1980’s.

A 3% growth rate, however, represents a doubling of the economy every 30 years and an increase by a factor of more than 10 every century. Clearly the logistics of such a growth (which would require massive capital investment, incidentally) have not been considered. Even just the energy requirements in this age of dwindling resources and the prospect of disastrous climate shifts will require a radical rethinking of how we consider the foundations of our economy and civilisation. Of course, Osborne will be long out of office by the time these accounts come to be assized.

Meanwhile, today, we’re still kept largely in the dark about all of this and those who should be taking these numbers apart and holding them to the face of their author remain largely paralysed by indecision and sensationalism.

I’m still not sure what the Tories are actually thinking when they come up with this kind of thing. Just what precisely is their endgame? Just what do they want Tory Britain to actually look like?

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