I’ve been infuriated in recent days by the BBC’s simplistic and utterly biased acceptance of the Coalition line that its spending cuts are necessary.
The problem is that it’s a very easy idea to sell to a public already fed a diet of economic stupidity by large sections of the media.
We’ve got a deficit of £156bn, goes the BBC’s new mantra, so if we find £156bn in spending cuts, all will be fine and dandy.
As long as no-one mentions things like loads of unemployed public sector workers claiming benefit and massively reduced demand in the economy leading to an INCREASED deficit, then the BBC journalists and editors can go home at night, safe in the self-deceit that they’re just doing a public service by bringing the scale of the deficit to attention……
……but I can whinge about this kind of thing all day. That won’t change the fact that it’s happening.
The challenge is to develop an alternative ‘story’ of the economy, which challenges the crap the BBC and their mates at the TPA come out with, in a way which is readily understandable to the public.
My litmus test on this challenge is whether I could put such a ‘story’ in one of my local newsletters, and get it read.
So here, as concise as I can make it, is my challenge to ‘the cuts are unavoidable narrative’. Clearly corners must be cut, but cutting the right ones is part of that challenge.
At 660 words it’s too long even for my 12 page newsletters, but it’s a start. Let me know what you think, and help me hone it down.
Why the cuts are senseless
A lot of residents will have read the mantra from the Tories at the council that service and job cuts are necessary because of the ‘debt crisis’.
This is wrong, and deliberately misleading, and ignores simple economic realities.
Sadly, this misleading information is also being peddled by the national press and even the BBC, and I have therefore agreed with Labour colleagues all over the country that we should set out our case against the Coalition cuts in local newsletters and leaflets.
At a local and national level, it is simply wrong to cut services and jobs in the way set out by the Coalition.
By cutting services, whatever they are, jobs are also lost, and those people often end up on benefits.
Unemployed workers are not able to buy as much as they did, and this leads to more job losses, leading to lower tax revenues and higher welfare spending.
Thus cutting spending like this is self-defeating, and ends up increasing the deficit.
This is exactly the policy which is being pursued in Ireland, with disastrous results, including the recent further downgrading of its credit rating status and the threat of increased borrowing costs.
The best way to curb the deficit is not to cut spending, but to use it to grow the economy.
Here some basic figures may be helpful to illustrate how feasible this is (for simplicity inflation is not factored in).
1) GDP (the whole value of the UK’s economic output) was £1,400 billion (£1.4 trillion) in 2009.
2) The deficit (the difference between tax revenue and government spending) will be around £1,600bn in 2010. Current interest repayments, around 60% of which are repayable to ourselves, are around £35bn per year.
3) The government thinks GDP may go up by 2.3% in 2010 to around £1, 432bn.
4) Tax revenue tends to fall more sharply than GDP when that is falling, and to rise more sharply when GDP is rising.*
So tax revenue in 2009-10 fell from £439bn to £397bn in 2008-09 (a 9.5% drop) even though GDP fell 4.9%.
5) In the mid 2000s, when annual GDP growth was between 2% and 3%, tax revenues overall grew by around 6% to 8% per year, because firms, domestic and foreign, were doing well and paying more corporation tax, and because people were doing well and paying more higher rate income tax, for example.
6) So if the UK economy did grow at 2.3% this year as planned (though the coalition’s stupid cuts make this unlikely now), and tax revenues grew by 7%, an extra £27.8bn would come into the public purse. If this was repeated over four years, then the government would be generating an extra £34bn per year to pay for its outgoings.
7) Alongside this, the growth in the economy would reduce unemployment and other welfare bills by something in the order of £10bn per year (based on how much it increased in the recession).
This means the annual deficit would come down by around £44bn overall to around £116bn.
8) Of course the outstanding overall debt would have to be serviced with interest payments, but it should be noted that around 60-70%% of all these payments are made to ourselves anyway in the form of pension funds etc. buying safe government bonds as part of their overall portfolio. A certain level of domestic debt is actually useful for pension holders, as it is a risk-free investment.
These figures are simplified for illustrative purposes, but show clearly that public spending cuts of the scale now ordered by the Coalition are not only self-defeating because they increase welfare spend and reduce tax revenue; they are also unnecessary because even mild growth of 2.3% per year would be enough to ensure the deficit is managed without any cuts.
More active government policy of the type advocated by Labour to create jobs and reduce unemployment would further increase GDP growth by up to 5% , with government revenue increased by a greater margin e.g. 10%, and lead to massive reduction in the deficit over a four year period.
Even without the benefit of post-recession Labour economic policy, though, the BBC and other media outlets are simply wrong to say that there is ‘no alternative’ to spending cuts.
(Please see the electronic version of this piece at www.bickerstafferecord.org.uk to click on links to all the sources.)
* When I passed this post via Duncan Weldon for a quick ‘howler check’, Duncan pointed out that the way tax revenue grew at a multiple of GDP in the 90’s/00’s, might well have reflected booming assets prices, which aren’t directly captured in GDP data but do add up in terms of CGT, stamp duty, higher corporation tax from the city etc..
While this is accepted, it’s probably a bit too esoteric for a local newsletter aiming to establish the ‘scale of things’ and challenge the ‘no alternative’ orthodoxy being peddled locally.