In the name of balancing the public purse we are witnessing the dismantling of the welfare state. What we need is the rebuilding of our industry…
The net debt of the public sector stands at £900 billion – and rising. This is a shocking figure, but hardly surprising. Debt has always been a feature of modern economies.
Up until the 1690s, the British state raised new taxes to fund its war debts, but the Nine Years’ War with France left government finances in ruins. The war spurred government to recognise the need to rebuild a powerful navy in order to compete for power globally.
As there were no public funds available, a group of money lenders offered to supply money to the king, and £1.2 million was raised in 12 days. The terms of the loan were an astonishing 8 per cent interest per annum plus a £4,000 per annum service charge for the management of the loan.
This was the birth of the Bank of England. Interestingly, the massive industrial effort involved in rebuilding the Navy began to transform the economy. It was this industrial (and agricultural) transformation, alongside the power of the Navy, which combined to make Britain the dominant world power of the late eighteenth and early nineteenth centuries.
And the national debt rose: from £12 million in 1700 to £850 million by the end of the Napoleonic wars in 1815. The First World War brought another increase, from £650 million in 1914 to £7.4 billion in 1919. After the Second World War the debt had grown to £24.7 billion, a staggering 250 per cent of Gross Domestic Product.
Some 150 years ago, in his great work Capital, Marx made the following observation. “…The system of public credits (national debt), whose early beginnings can be traced in Genoa and Venice before the close of the Middle Ages, spread all over Europe during the manufacturing period. The colonial system, with its seaborne commerce and its trading wars, served as a forcing house. National Debt, i.e. the sale of the State, gives the capitalist era its characteristic stamp.”
Born out of the need for debt: the Bank of England.
Presciently, Marx went on to say “… The only part of the so-called national wealth that actually enters into the possession of the peoples is their national debt. Hence, logically enough, the modern doctrine that a nation grows richer the more deeply it is in debt. Public credit becomes the credo of capital. With the rise of the system of national debt, want of faith in this institution comes to be regarded as the unpardonable sin, the sin against the Holy Ghost.”
And how the chickens have come home to roost, as we see a generation of young people who have been conditioned to see debt as natural, a part of everyday life.
If we take time to digest Marx’s challenging assertions, particularly when he attacks the prevailing wisdom that scepticism about national debt is a sin, we hear a distant echo of the ever-present mantra of today.
Now it is financiers or “the markets” that are guilty of that sin, speculating that nations may be unable to pay their debts. And unlike them we are required to be believers. How many times have we been told that we must cough up to restore confidence in the system? Bail out the banks to restore confidence. During the present crisis, this has been the cornerstone of government policy – to shore up the system at all costs.
And the cost as we speak is punitive. In the name of balancing the public purse we are witnessing the dismantling of the welfare state. The attack on pensions, the onslaught on health and local government, are all necessary, we are told, to staunch the haemorrhaging of public spending. “We have been living beyond our means” cry politicians of every side, with no room for discussion. It pays us to examine this proposition in a little more detail.
The Thatcher period was characterised by the destruction of swathes of British industry, which in past has always enabled us to pay for the things we needed and wanted. This loss of national earning power was the price the government at the time was prepared to pay to attempt absolute control over British workers.
When we finally repudiated her and her ilk in 1997, we should have demanded a programme of reinvestment and rebuilding of industry, much as happened after World War Two. What we got was the Blair/Brown years, when manufacturing continued to slide, and Britain borrowed massively to preserve the appearance of normality.
The problem with this kind of borrowing is that it simply postpones the day when the debt is called in. Fine when your lenders believe they will have no difficulty in recovering their loan. But when you borrow further to pay the interest on the loan, your creditworthiness comes into question. Then the cost of borrowing goes up and government finances spiral further and further out of control.
This is a direct consequence of pinning your faith in speculative finance and its promise of fast bucks today, instead of generating wealth the old fashioned way, by making things and selling them.
We have seen the same sorry spectacle being played out across the Atlantic these past few weeks, with Republicans locking horns with Obama in a game of brinkmanship over whether to cut public spending dramatically or raise the previously agreed ceiling for borrowing. A rock and a hard place that one, since neither will restore dynamism to America’s becalmed economy.
The decision by the aptly named credit ratings agency Standard & Poor’s to downgrade US creditworthiness from AAA to AA+ (below that of the Isle of Man) has rocked corporate America. Many feel betrayed by an unpatriotic American institution and seek to blame the messenger. They would do well to reflect that it was the decision of credit rating agencies such as S&P to slap AAA ratings on dubious sub-prime mortgages that precipitated the present crisis.
Back to Britain and what we know best. It cannot be denied that we have been spending more than we can earn. Present government policy seeks to redress that imbalance by reducing spending. Hence the proposals to cut state spending on benefits for example. And everyone knows someone who knows someone living the life of Reilly, with a six-bedroom house, exotic foreign holidays, a gas guzzling 4x4 and all courtesy of the taxpayer.
Yes, there is abuse. And yes, where it goes on (and it is endemic in parts of our class) it should be stopped. But if we are serious about getting public finances in order we need to look at the big players. Tax evasion is currently running at £15 billion, compared to benefit fraud at £1 billion.
And that is as nothing compared to the (legal) avoidance of tax by large companies through sharp practice, loopholes, off-shore accounts, tax havens and the like. The relatively recent development of protesters sitting in peacefully to draw attention to the tax avoidance of major high street retailers and others has successfully raised general awareness of this practice, which has all the morality of fare dodging but on a corporate scale.
And now we have the debate over whether the 50 per cent tax rate for the wealthy should be scrapped. George Osborne whines that a punitive tax regime will drive the skilled and the entrepreneurial abroad. Yet even that doyen of finance capital, billionaire US investor Warren Buffet is arguing that the wealthy are not discouraged by higher taxes. Osborne’s proposal, naturally, would be financed by yet more draconian cuts in public services.
And of course, there is the greatest loss of all to public revenue, which is represented by unemployment. Latest figures show that a further 38,000 are estimated to be out of work this month. That is another 38,000 who will be claiming benefits (albeit reduced), 38,000 buying fewer goods and services, 38,000 who will not be creating wealth.
Any prudent householder seeks to live within their means. So too for the nation. If we are spending more than we earn let’s address it. Let’s cut what we don’t need. Britain’s public spending shopping list currently stands at just over £700 billion. Defence (for which read attack) costs us £37 billion, excluding the spending – said to be from “reserves” – to fund Britain’s criminal involvement in Libya.
Are munitions for battleships and fighter planes better for this country than schools and hospitals? International aid costs £6.2 billion. EU contributions cost £7.9 billion. Even the interest on the debt we owe stands at £43 billion a year. If there are to be public spending cuts, let’s open the books and have a real debate about what we need and what we don’t need.
But more importantly, we have got to get to the nub of the question. If earnings and spending are out of balance, instead of concentrating exclusively on the spending side of the equation, we need to recover that understanding that a successful economy can only be built on industrial foundations. ■