Investment not cuts

March for the alternative: 26 March 2011

By Stephen MacAvoy

Falling real wages, record youth unemployment and collapsing living standards are not by-products but the aim of Tory economic strategy.

The goal is to push up profits by driving down wages and slashing public services, to encourage business to invest and kick start the economy.

But it hasn’t worked. Investment remains sluggish and the economy is flat-lining. Rather than rethink the strategy, the Tories have decided they need to go further, through attacking employment law, sacking even more public sector workers and ever deeper austerity measures, all announced in the Chancellor’s Statement in late November.

A successful fight-back against these attacks needs a credible alternative economic policy. First this means rejecting the childish nonsense that the problem is ‘we’ have ‘overspent the national credit card’. The root of the crisis unfolding since 2007 is not ‘too much debt’, but insufficient growth.

Addressing why there is virtually no growth in the British economy should be the starting point of economic policy. If there is a return to growth, debt will be paid down as a by-product of rising national income.

The reasons the failure of growth is the combination of a long-term decline in the level of investment as a share of GDP, exacerbated by a complete collapse in investment with the onset of the economic crisis.

Despite its appearance as a ‘debt crisis’ – first in sub-prime mortgages in the US, then the banks, and now sovereign debt in the Eurozone – the roots of the crisis lay in a long-term decline in investment.

With the onset of the crisis, this decline in investment turned into a rout, as companies – many of which have huge levels of unused savings – stopped investing their capital.

Given the British economy is overwhelmingly controlled by private companies, this refusal to invest has dragged the whole economy down. Breaking this capitalist investment strike is key to restoring growth in the economy.

Instead the Tories are trying to placate them through making investment ‘safer’ by driving down wages, living standards and labour rights.

But this has not persuaded the capitalists to invest, and just sent the economy into a downward spiral as consumption also collapses. Cuts and austerity have reduced living standards at their sharpest rate for 30 years, meaning that in recent months the decline in private consumption has even surpassed the huge fall in investment levels.

The exact opposite is needed. If the private sector refuses to invest, the government needs to step in and stimulate the economy through an investment programme. This would create growth and jobs, increase consumption and encourage private investment.

The Tories argue that a programme of investment is not feasible because of the high levels of public debt. But this is looking at the problem through the wrong end of the telescope. It is the lack of growth that is causing the deficits and making them more difficult to pay back.

As a recent Guardian editorial explained: “borrowing rates for the government remain rock-bottom…the markets are therefore willing to finance infrastructure development, and the government should borrow to create a recovery fund” (17 November 2011).

Anyway, we know the government can find resources for its priorities, such as a possible £1 billion or more to unleash thousands of bombs on Libya. Britain continues to have the fourth largest military in the world, with an annual budget of £40 billion, plus the billions in the so-called “special reserve” for fighting wars.

Cutting the military budget to the level of Germany would save about £18 billion per year. Refusing further military adventures and cancelling the £100 billion to be wasted on replacing Trident would yield much more to reverse cuts, boost consumption and carry out targeted investment.

Or the government could simply force companies to invest by seizing their assets if they don’t. But instead the government is stepping up its attacks on the working class.

Our response must be to demand investment not cuts, welfare not warfare.