Austerity and The Deficit Myth

[SocialistPunk]

I was poking around on facebook and came across this article from 2012 in the Huffington Post.  

http://www.huffingtonpost.co.uk/ramesh-patel/growth-cameron-austerity_b_2007552.html

Quote:

Finally, Labour in 1997 inherited a debt of 42% of GDP. By the start of the global banking crises 2008 the debt had fallen to 35% – a near 22% reduction page 6 ONS Surprisingly, a debt of 42% was not seen as a major problem and yet at 35% the sky was falling down?

I seem to recall something about this in a Socialist Standard from a few years ago.

Can anyone shed any more light on this subject? 

[SocialistPunk]

Found this that challenges the first article.http://brackenworld.blogspot.co.uk/2012/10/did-ramesh-patel-get-paid-for-this.html

[Young Master Smeet]

Obviously, debt as a % of GDP depends on how big GDP is, so during a crisis GDP falls and the ratio of debt rises, automatically.Debt is not deficit. the deficit is the gap between income and spending (or, put another way, it is the rate at which the debt grows).  So, debt:GDP could be 1% but if the deficit was 100% of GDP that would be quite alarming (though not necessarily fatal, the only point of practical difficulty is when income can no longer cover at least the interest on the debt, since the government never has to pay down the principal, it can always 'roll-over' it's debts with new loans).  Even then, so long as the economy is growing, that's not so much of a problem.Imagine anyone who has ever taken out a mortgage.  In that year, they spent 300% of their income.  If every year they move to a bigger more expensive home, they will have a deficit of 300% each year (give or take some quibbles), but that will not be a problem if each year their income rises as well, and they are acapable of servicing the debts.  If they were immortal, like a state, they culd go on for ever doing this.  Since we're not immortal, banks would get jittery eventually that an unrepaid loan was heading their way.So, as Corbyn and Miliband and Brown before him) propose, you can run a deficit based on only borrowing to buy capital assets, in the above example, the house, since you can always tell your creditors you will have a house to repay with.  Obviously, the trick is money is fungible, even if you don't nominally spend borrowed money on eating (current account expenditure) the fact that you are borrowing to buy assetts means you can divert more of your income into living costs and current expenditure, so it's a bit of a slight of hand distinction.The real problem is that the capitalist class use their ownership of debt as a political weapon, to get their way.

[SocialistPunk]

Thanks YMS.Are you able to say if the first article is right or wrong?

[Young Master Smeet]

'Fraid I'm not going to plough through and fact-check it, seems plausible enough at face value.  The point, though, is that it's a non-debate, for some parties to the debate, any state spending is overspending.One issue is that borrowing is actually the way the state saves: states can't put money aside for a rainy day (if it takes money by taxation, it has to use it, else it should cut taxes). Arguably, a rational state should borrow as much as it can.But, he whole issue come back down to growth, so long as the economy is growing, it doesn't really matter; buit the more the state spends, the less capital there is for expansion and investment, and that is the limit.  So, the only way to prove Labour overspent would be to to show a fall in fixed capital formation:http://www.tradingeconomics.com/united-kingdom/gross-fixed-capital-formationNow, on the 10 yr scale, it's clear that capital formation nose dived; however, it was going upwards before then, if Labour's spending had been choking investment there'd have been at least a slowing of growth prior to 2008.  All the indications are that 2008 was a sudden shock (and in any case was caused by teh world economy, not Labour spending). 

[SocialistPunk]

More thanks your way, YMS.I know from our point of view the issue why and who's running budget deficits is a non issue. Either way it doesn't alter the inherent inequalities, and boom and bust cycles of capitalism.I was trying to figure out if the present government austerity plans were driven by ideology or economic necessity. When it comes to economics my brain switches off, but I suspect it's a mix of both.

[ALB]

What about austerity (as government cutting its spending) being an economic necessity (because in a slump its tax revenue falls — the budget deficit is not a myth) but that the choice of what spending to cut is a political one reflecting ideology.?For instance, the Tories' benefit cuts didn't have to spare the retired and make them all fall on those of working age not working (now to be extended to the working poor too). They could have cut pensioner's benefits and so cut non-pensioner benefits a little less but chose not to because they know that pensioners vote Tory more than the unemployed and the disabled.  They could also have increased tax on the incomes of the better-off (this wouldn't have affected profits as it's a tax on consumption) but chose not  to as these again are the people that vote for them. In theory, a different government could have applied the economic necessity of austerity in a different way, as the Syriza government in Greece tried to do and may still be.But of course as socialists it's not our business to get involved in arguments over where the axe should fall.

[Young Master Smeet]

Certainly, Governments have a choice.  I quite like Shaw's image, that wealth flows through society like a river, and anything the government does redistributes the wealth, one way or another.  So, back in 2010, IRC the Tories promised 80% cuts and 20% tax rises to clear the deficit, whereas Labour promised 70% cuts and 30 tax rises (or something like that), so a huge difference to millions of people, but obviously a big difference in time scales for dealing with it.The thing the government can't control is profit creation (although it can, if it makes a spectacular mess prevent profit formation).So, the thing needful in a crisis is to get rid of capital that is blocking further future investment.  One option is widespread bankruptcy, others are nationalisation, taxation, inflation, government borrowing (this resolves to a choice between taking capital and turning it into consumption or just ending it's exchange value and allowing the corresponding means of prduction to be used to fuel new investment and production).  Any choice means choosing first between capitalists or entering into competition with state capitalism versus private.The real limit of government action is the balance of class forces, and the capacity of workers to demand a price for their ongoing willingness to work (and, of course, employment is a dependent variable of the rate of investment of capital).

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