By Nicky Dempsey
Martin Wolf, the chief economics commentator for the Financial Times, has laid out a devastating critique of current government economic policy in Britain. In a widely-reported article titled ‘Cameron is consigning UK to stagnation’ he says it is a scandal that the government has cut its own investment, especially when it can in effect borrow for free, as real interest rates are at zero.
Wolf has been a long-time critic of the government for cutting its own investment in the recession. But he has become just one of the more influential mainstream voices now clamouring for a change of policy. He is echoed by Jonathan Portes, director of the influential National Institute of Economic and Social Research, whom he cites in the piece and is the former economics adviser to Tony Blair. The argument is reinforced by Nobel prize-winning economist Paul Krugman, who told a recent Newsnight audience that government policy was economically illiterate and bound to fail.
There is a growing chorus of arguments for increased investment in order to resolve the crisis. Since the collapse of investment has been the driving force of the economic slump in both Britain and in the industrialised countries as a whole, this represents a turn in the situation away from the argument that cuts in public spending will produce growth.
However, capital advocates a broadening of the reactionary agenda, not a retreat from it. This is evident from the CBI, which has recently issued a pamphlet calling for increased investment, as well as a group of Tory MPs calling itself the ‘Growth Factory’, with a 25-point plan for increased investment (as reported in The Times on May 21). Separately, the Institute of Directors has called for ‘deregulation’ and further cuts in public spending to finance investment, and the government has published the Beecroft Report itemising a series of employment rights and protections that should be removed.
The CBI pamphlet is titled ‘Smarter use of government balance sheet could solve the infrastructure impasse’ in which it argues that the ‘multipliers’ from infrastructure investment are 2.84, this means a £1bn investment will raise economic activity by £2.84bn. However, as the title suggests, the CBI’s argument is that the government should provide guarantees to the private sector (‘using its balance sheet’) so that capital can reap these large benefits of infrastructure investment, rather than the state which is expected to initiate and underwrite it.
This is not ‘investment, not cuts’, which summarises the necessary strategic response to the crisis. At best, it is ‘investment plus more cuts’. Even then, the commitment to investment is circumscribed by the insistence that it must be in the form a government subsidy or guarantee of profits to the private sector. On no account must the state reap the benefits of increased investment, despite providing the funds for it.
The rethink on policy is prompted by the renewed contraction of the British economy. By itself this is of little consequence for the majority of mainstream, bourgeois thinking. However, if the fall in output gathers pace then, without a very sharp reduction in total wages, profits will fall.
Therefore capital’s current campaign is two-pronged. First, investment is correctly identified as the main factor which could revive economic activity. But it is insisted that it is private capital which benefits, in order to boost profits. Secondly, wages and social wage benefits must also be cut to boost profits.
This latter point needs to be tackled head-on. The British economy appears to be unique in the industrialised world, as the fall in household consumption is now greater than the decline in investment. This is due to a combination of factors, including the short-lived investment recovery under Labour, the low level of pre-existing social welfare provision and the government’s real cuts to public sector pay. Given that household consumption continues to constitute over 60% of the economy, further cuts of this kind will only deepen the slump.
The debate on investment
The fact that leading economics commentators like Wolf and others have argued so vociferously in favour of investment is very useful for socialists, as reviving investment is necessary to solve the crisis . But it should be clear that for the CBI, IoD and others, there is no intention of allowing the state to lead an upturn in investment, which is what is objectively required. Instead, they want the state to provide subsidies and guarantees so that private capital would mainly reap the benefits of increased investment. Given capitalists will only invest if they are confident of profits, there is no guarantee these state handouts would be sufficient to actually produce recovery. One thing is certain they would be used to augment profits.
They remain utterly opposed to the state itself leading that investment. To do so, say, in the area of house building through local authorities, would be to remove the private sector from this sphere of activity for perhaps a generation or more. Four decades of privatisations have taken place in order to boost the ailing profitability of British firms, and reversing that cannot be countenanced. The state would be removing a portion of the means of production from the capitalist class, and this is impermissible.
In addition, there is much talk of making cuts elsewhere so, it is said, ‘in order to pay to for increased investment’. This is actually a deepening of the attack on public sector pay, welfare entitlements and public services in order to drive up profits through lower wages and privatisations. As Wolf and Portes point out, the British government can currently borrow virtually for free in the international markets, certainly free in real (adjusted for inflation) terms. Cuts are wholly unnecessary. They are designed to reduce wages and boost profits, not to ‘fund’ investment.
Of course, all this is dutifully echoed by the Labour right, with Andrew Adonis writing in a recent edition of Progress that, ‘New spending commitments can only be at the expense of existing ones and the numbers have got to add up’, putting the Blairites to the right of both the Financial Times and even their own former economics adviser.
The Labour leadership is nowhere in this debate, barely a minor irritant to the Tories and hoping that support for the current government will simply decline. Labour’s 5-point plan, mainly comprising a £2bn bank bonus tax to pay for 25,000 new homes and a temporary reversal of the VAT hike, is wholly inadequate to the situation. To restore the economy to its previous trend would require investment approximately 100 times greater than envisaged by Ed Balls. Given that there are over 1.8 million households on local authority housing waiting lists in England alone, the gross inadequacy of the plan is evident. In addition, they are committed to a public sector pay freeze, which will only deepen the decline in household incomes and consumption.
In the build-up for the maximum turnout on the TUC’s march on 20 October socialists building for the demo will need to explain that there are two class responses to the crisis, which should not be confused simply because both include the term ‘investment’.
One is the proposal from the capitalist class, which is to demand subsidies and guarantees for itself from the state so that the private sector gets the returns from investment. This is to be supplemented by further government spending cuts in order to drive wages down and profits up.
The other is the solution of the working class and its allies. This is for state-led investment, taking sectors of the economy out of the hands of the capitalists in order to provide what is socially and economically necessary, large scale investment in key sectors such as housing, transport, infrastructure and education. This is to be supplemented by every measure possible to increase the real incomes of workers and the poor, to protect their material well-being and therefore that of the economy as a whole. Investment, not cuts remains the correct working class response to the crisis.