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Sacrificing to the fiscal god

The Hindu, 3 January 2009

It’s now been confirmed that Britain’s GDP fell by 4.75% over the last year, much more than the 3.5% shrinkage forecast by the Treasury as recently as March. Since the onset of recession, 8.5% of all manufacturing jobs have been lost and 3.8% of jobs in finance and business services. Unemployment is up to more than two and half million, some 8% of the workforce, with youth unemployment running at 18%.

But the headline grabbing figure has been the £178 billion deficit in the public accounts, amounting to 12.4% of GDP. Around this, a new consensus has congealed.

The three major parties, the mass media, think-tanks, pundits, the EU and the OECD all insist that large-scale cuts must be made, that they are the only way to address the projected gap between state revenues and spending, and that this gap is the number one problem facing the British economy.

It’s been a remarkably deft manoeuvre. In less than a year, a system-challenging global financial crisis has been channelled into a savage assault on public services. The problem has been redefined as an allegedly unsustainable public debt, rather than an economic recession brought on by what were proven to be unsustainable private debts.

The ‘hole’ in the public finances which has occasioned so much dread is the result, not the cause of the economic crisis. The public sector did not create the hole (that was the work of the banks) and it does not follow that cutting public spending is the way to fill it.

Nonetheless, it is the public sector that is being targeted. The government’s plans to halve the deficit in four years entail a 1% cap on public sector pay rises (a wage cut in real terms) and 15-20% cutbacks in most departments (including housing, transport, local government), with hundreds of thousands of jobs lost. Even those areas – health, education, policing – which are said to be “ring fenced” will be squeezed. This will be accompanied by cuts in welfare benefits and legal aid for the poor, a slowdown in capital spending and more privatisations, starting with Britain’s over-crowded prisons.

It’s no surprise to find New Labour opting for this course. They’ve acceded to the wishes of City of London (the financial centre) as readily and consistently as to the geo-political whims of Washington. The Conservatives and the Liberal Democrats have also promised to halve the deficit within four years, but they argue that to do so will require deeper cuts made more quickly. So the coming general election will offer no real choice on now the deficit is tackled, just as there will be no choice on British troops remaining in Afghanistan.

Yet there is most definitely a choice, or rather a series of choices, that are not even being considered.

There are some cuts that ought to be made. Britain’s Afghan intervention costs £4 billion a year (about the same amount “saved” through the cap on public sector pay). Cancelling the replacement programme for the Trident nuclear submarine would save at least another £17 billion over four years.

The independent Institute for Fiscal Studies suggests that the government could avoid cuts in spending if it implemented tax increases equivalent to 2.1% of national income – £29 billion. Reform of the tax system could generate a large slice of that total, while redressing the regressive regime installed over the the last 30 years, in which the poorest tenth pay 46% of their earnings in tax while the richest tenth pay only 34%. Even the modest measure of reversing those proportions would reduce the deficit by billions per annum.

A Trades Union Congress report calculated that tax avoidance alone costs Britain £25 billion per year. The Tax Justice Network, working with the civil servants union, PCS, has estimated the annual tax shortfall – taxes owed to the state but unpaid for whatever reason – as £100 billion, £21 billion of which is uncollected due to under-staffing at Revenue and Customs. .

Disturbingly, the new fiscal consensus leaves no room for green investment; no budget has been “ring fenced” for weaning the country off carbon, not to mention paying its climate debt to the developing world. The historic opportunity for a job-generating Green New Deal has been spurned. This foundational, life sustaining activity will be downgraded to a luxury we can’t afford. It seems the banks are “too big” to fail, but not the ecosystem.

The government’s plans all hinge on a resumption of a steady 3% per annum GDP growth in 2012-2013. If that doesn’t happen, all the spending cuts will be for nought.

The deficit is being treated as some sort of god demanding human sacrifice. In reality, it is a reflection of the rhythms of economic activity. Deficits are sometimes necessary instruments of economic stability and growth. The cuts in public spending may well undermine whatever fragile recovery is on the cards. Numerous economists, from the centre as well as the left, have warned that cutting precipitately will tip the nation into a deeper and longer recession. What is needed now, they argue, is stimulus, not deflation. The cost of unemployment benefits and the reduced tax base arising from the cuts may actually increase the deficit. The fact is that redistribution and recovery must go hand in hand. That’s not just a moral aspiration, it’s an economic necessity.

Public sector cuts will lead to fewer and poorer public services at a time when more people are in greater need of them. They will entail huge increases in unemployment and casualisation, which will weaken workers in the private sector. The cumulative impact on a country in which one-in-three children already live in households with incomes below the offical poverty line will be devastating.

What’s been involved in this manoeuvre is a massive transfer of responsibility, moral and fiscal, from speculators and manipulators of debt to the general public. Despite its flimsy intellectual foundations, it has secured widespread acceptance. The trick has worked because it accords not only with the political expediency of the big parties, but also with popular mythology, with a consciousness generated by three decades of neo-liberal ideology echoing in every corner of our culture. The cult of looking after Number One has bred a lack of empathy, a knee-jerk readiness to blame victims and a suspicion of appeals to solidarity. Defending the public sector means challenging not just three parties but three decades of moralistic neo-liberalism – a system that evacuates ethics from its functional core while setting itself up as some kind of moral categorical imperative.

The deficit has been turned into a looming natural catastrophe; and a political choice has been disguised as obedience to an ineluctable law. Tragically, the public sector as a whole has come to be regarded as an optional extra, a luxury, a form of charity, which as we all know can only be taken so far. Yet compare the public sector to the global disseminators of bad debt, and ask: who are the real parasites? We’ve been taught to worship the rich as “wealth creators” whose efforts are the bedrock of our economy. Surely, it’s the other way around. Public sector workers sustain the framework required for all economic activity. They are the essential social rock; the speculators are corrosive lichen.

However rock-like it may appear at the moment, the political consensus on the cuts is not mirrored by a social consenus. There will be strong popular resistance, especially from public sector unions, and increasing intellectual dissidence as the profound inequity of the whole exercise becomes apparent.