By Michael Burke
A majority of European leaders have opted to try to strangle the Syriza-led
government slowly rather than immediately crush it. In order to survive the
Syriza leadership has had to make a series of compromises. The burden of these
new measures offered in the latest negotiations is overwhelmingly tax increases
and they mainly fall on companies and the higher paid. But, unless there is a
breakthrough on debt reduction, there is no progress on ending austerity.
One faction, led by German finance minister Schauble and supported by his
Irish and Spanish counterparts wanted to organise a run on the banks and
overthrow the government in a re-run of the crisis that was provoked in Cyprus
in 2012. Reports suggest that US Treasury Secretary Lew was instrumental in
pursuing a line of compromise instead. But all the institutions ultimately
represent the interests of big capital and Greece’s creditors. As a result they
remain committed to austerity and the ultimate destruction of all anti-austerity
forces in Europe, including the Athens government. What they dare not risk is
the possibility of European and possibly global financial market turmoil from a
disorderly ‘Grexit’.
The new tax measures Syriza has offered are significant. According to the Financial
Times, “More than 90 per cent of the €7.9bn fiscal package would be covered
by increases in tax and social security contributions. The tax measures include
a special levy on medium-sized companies’ profits, higher value added tax rates,
a rise in corporation tax and a wealth tax on household incomes above €30,000 a
year.” According to Eurostat, median household net incomes in Greece were €7,680
in 2014.
Other
reports suggest that even this is not acceptable to the IMF, which
represents US interests. They want the burden of taxation shifted from business
to cuts in social security payments. While the US holds no Greek government
debt, it is the biggest foreign owner of Greek listed shares.
It is clearly preferable that the fiscal burden is borne by companies and the
higher-paid. But there is nothing in the current agreement which improves the
position of the mass of the population. The effect of the concessions will be
slower growth, even if most workers and the poor have largely been shielded from
the worst direct effects.
Further details have yet to be hammered out. The focus on the primary surplus
(the balance of government income and spending excluding debt interest payments)
is meaningless as it is based on the false premise that spending cuts or tax
increases will lead to equivalent savings, ignoring the economic effect of
slower growth on both government spending and tax revenues. The only possibility
for measures to boost growth via investment is if there is significant debt
reduction and lower interest payments. On this, the IMF representing the US is
more willing to support debt reduction precisely because almost nothing is owed
to the US. For the opposite reason, hostility to debt reduction is most
ferocious among some of the European governments.
The majority line among the institutions is clearly based on political
considerations. Immediate crisis and turmoil has been avoided because of the
wider risks to a fragile set of advanced industrialised economies. But
undermining Syriza and demoralising its supporters remains the aim. The latest
set-backs are only the first steps and the institutions will welcome any splits
in the government.
But Syriza still has room, and some time to act. It can improve the balance
of forces domestically and internationally by taking unilateral anti-austerity
measures using the resources of the Greek oligarchs, possibly supplemented by
overseas investment. It is now obvious that it must have measures to protect
bank deposits from another bank run provoked by the ECB and others. The
institutions will return with further demands in future, when this new measure
fails to produce growth and improved government finances. Syriza should prepare
for that inevitability.
Wednesday, 24 June 2015
Wednesday, 17 June 2015
End Austerity Now - Demonstration 20 June London
Assemble: 12 noon
Bank Of England (Queen Victoria St) London
Tube: Bank (Central/Northern/DLR lines)
Tube: Bank (Central/Northern/DLR lines)
Organised by the People's Assembly Against Austerity
Tuesday, 2 June 2015
Declining US profits and private investment
By Michael Burke
US corporate profits fell in the first quarter of 2015. This is the second consecutive fall, technically causing a ‘profits recession’. The nominal level of profits of $2014.8bn in Q1 was lower than in Q2 2012. Profits have fallen to 11.4% of GDP, compared to 12.2% at their pre-crisis peak in Q3 2006. The trend in corporate profits is shown in Fig. 1 below.
The motor force of capitalist economies is the accumulation of capital via
profits, as the name suggests. ‘Demand-led’ or ‘wage-led’ economies are a
logical impossibility for the simple reason the wages, or demand, or any other
comparable variable follow the production process. There can be no wages or
demand without prior production.
Falling profits in a recovery is extremely unusual. But this is the third time this has happened during this weak recovery. In effect, because the economy lacks any great momentum, it is easy for external effects to push profits lower. This could be poor weather, a stronger US Dollar, shipping strikes, weak overseas demand, and so on.
But the effect of a sustained fall in profits is simple. Companies exist to realise profits and will stop investing if profits fall. In Fig. 2 below US corporate profits and US private sector fixed investment are shown in nominal terms for the purposes of comparison.
The Great Recession was preceded by a decline in profits and the fall in fixed investment followed with a time lag. This was a classic profits-led recession, which was partly obscured by the speculative frenzy that continued until 2007 (but which is a recurring end-of-cycle phenomenon).
However, until now private sector fixed investment has not suffered a fall in
the current expansion despite the preceding short-lived declines in nominal
profits. Since the low-point in private investment at the beginning of 2010
there has been an uninterrupted rise in private investment until the final
quarter of 2014.
That changed in the first quarter of 2015. Private sector fixed investment fell in Q1 2015. The decline was extremely modest, from $ 2,850bn to $2,841.5bn and could yet be revised away. But there are further causes for concern. In real terms real GDP growth has increased by just €254bn over the last three quarters. At the same the stock of unsold inventories has risen by €257bn. If goods remain unsold, profits cannot be realised and the most obvious course of action is to cut back on production.
Many official and private commentators suggest that the latest weak data is simply a one-off, reflecting extremely poor winter weather in the US. That could prove to be the case. But the combination of rising inventories, falling profits and the new fall in private investment does not point to an improving outlook for the US economy.
US corporate profits fell in the first quarter of 2015. This is the second consecutive fall, technically causing a ‘profits recession’. The nominal level of profits of $2014.8bn in Q1 was lower than in Q2 2012. Profits have fallen to 11.4% of GDP, compared to 12.2% at their pre-crisis peak in Q3 2006. The trend in corporate profits is shown in Fig. 1 below.
Fig.1 US Corporate Profits
Source: BEA
Falling profits in a recovery is extremely unusual. But this is the third time this has happened during this weak recovery. In effect, because the economy lacks any great momentum, it is easy for external effects to push profits lower. This could be poor weather, a stronger US Dollar, shipping strikes, weak overseas demand, and so on.
But the effect of a sustained fall in profits is simple. Companies exist to realise profits and will stop investing if profits fall. In Fig. 2 below US corporate profits and US private sector fixed investment are shown in nominal terms for the purposes of comparison.
The Great Recession was preceded by a decline in profits and the fall in fixed investment followed with a time lag. This was a classic profits-led recession, which was partly obscured by the speculative frenzy that continued until 2007 (but which is a recurring end-of-cycle phenomenon).
Fig.2 Profits & Private Fixed Investment
Source: BEA
That changed in the first quarter of 2015. Private sector fixed investment fell in Q1 2015. The decline was extremely modest, from $ 2,850bn to $2,841.5bn and could yet be revised away. But there are further causes for concern. In real terms real GDP growth has increased by just €254bn over the last three quarters. At the same the stock of unsold inventories has risen by €257bn. If goods remain unsold, profits cannot be realised and the most obvious course of action is to cut back on production.
Many official and private commentators suggest that the latest weak data is simply a one-off, reflecting extremely poor winter weather in the US. That could prove to be the case. But the combination of rising inventories, falling profits and the new fall in private investment does not point to an improving outlook for the US economy.
Friday, 29 May 2015
What can we expect from renewed austerity?
By Michael Burke*
The new Tory government will renew its austerity offensive shortly with the publication of an ‘emergency Budget’ on July 8. It is simple to demonstrate that the previous austerity programme caused the economy to grind to a halt (and with it the improvement in government finances).
Supporters of austerity like to claim that austerity led eventually to recovery. But this is logically impossible. A force applied from one direction, the downward pressure on the economy, cannot sequentially have the effect of lifting the economy. Most children learn these cause and effect relationships through play at the ages of 2 to 4, with marbles, wheels and water.
Therefore the actual course of events of the last round of austerity will prove instructive as to what can be expected in the next 5 years. This has important political as well as economic implications.
Anyone tempted to throw in their lot with Tory economic policy, for example among the Labour leadership contenders, will be obliged to defend the impact of Tory austerity. As there is no solid basis for the current ‘recovery’ which is supported by increasing household debt and borrowing from overseas, the inevitable bust will occur. The ‘Barber boom’, the ‘Lawson boom’ both ended with a slump, and the feeble Osborne recovery reproduces them in a worse environment.
According to the IFS the Tory Government plans imply £45bn of ‘fiscal tightening’ in this parliament equivalent to 4.1% of GDP, although we have yet to see the actual plans of the emergency Budget in June. This is approximately equivalent to the fiscal tightening of the last parliament although it is suggested that all of it will be achieved with cuts to public spending rather than in combination with tax increases as previously. The axe will fall heavier this time.
The previous programme of austerity caused a double-dip recession in most sectors of the economy. The economy had been growing at a very modest pace of 2.1% in the 4 quarters before the last Coalition took office. The double-dip recession in production, construction and agriculture is shown in Fig.1 below. Only services continued to grow.
It is notable too that industrial production (including manufacturing plus energy) is still below the level the Coalition government inherited in 2010. No industrialised economy can sustain growth without growth in industrial production, as the label implies.
In real terms there was no growth in Government consumption spending in both
2010 and 2011. This turned a modest recovery back close towards recession, only
saved by the growth of the service sector in 2012 plus the Olympics effect.
We have already seen how austerity caused a sharp renewed slowdown in the economy as a whole. There is no logic to claim that austerity also led to eventual recovery. Instead, as Tory poll ratings plunged after the ‘omnishambles Budget’ and the economy risked falling back into outright recession, Government policy was changed. There were no new Government spending cuts from 2012 onwards. Government consumption was allowed to grow and the austerity offensive was put hold (Fig.2).
The result of increased Government consumption was a modest expansion. Real
GDP grew by 2.8% in the pre-election year of 2014. But this was little more than
the 2.1% growth achieved in the year prior to the imposition of austerity. Over
the 5-year period 2010 to 2014 real GDP growth has averaged just 0.75%. This is
exceptionally weak by historical standards and is striking after a sharp
recession, when the usual pattern is for a more rapid recovery. GDP growth has
only matched the growth of the population so that per capita GDP has stagnated.
Under these circumstances living standards cannot rise.
Investment
However, there is no such thing as a consumption-led recovery. It too is a logical impossibility. Economies are dominated by production. As the proportion of GDP devoted to consumption rises, economic growth tends towards zero. The reverse is also true; as the proportion of GDP devoted to investment rises, so GDP growth increases (including the growth of consumption within that).
Without production, the expansion of which relies on investment, consumption can only be increased by further borrowing.
One of the central fallacies of Tory economic ideology is the idea that by shrinking the state the private sector will thrive. As Government is the largest single customer of the private sector goods and services, the opposite is the case. Cutting public spending damages the private sector and exacerbates its weakness.
Cutting public investment has been a central part of austerity and a key way that government spending has fallen overall. The deficit has fallen by damaging future growth.
This has been the effect of the previous round of austerity. The entire crisis was caused by the slump in business investment, which caused unemployment to rise and Government tax revenues to fall (hence the rise in the deficit). The weakness of business investment can be seen as early as 2006 (Fig.3) and in the sharp decline again in 2008.
Fig.3 Business Investment & Government Investment
Under the Labour Government investment was increased in 2008 and 2009 to offset a crisis caused by this private sector weakness (Building Schools for the Future, bringing forward planned capital infrastructure projects, etc.).
The Coalition slashed Government investment. The effect was predictable. The recovery in private sector investment was halted. It is only in 2014 with a pre-election rise in Government investment did business investment begin to accelerate again.
If the Tory government attempts to close the deficit by cutting its own investment, or acts on the belief that the private sector will deliver better and more investment in public services, then the effect will be the same once more. Business investment will be cut again. There is no ‘productivity puzzle’. Without investment productivity cannot grow and living standards cannot rise.
‘Welfare’
The Tory Government has also announced plans for further cuts in social security. 64% of all households are in receipt of one type of social security benefit or another, over 20 million households. They, we are the majority.
The previous Coalition Government managed to remove somewhere between 1 million and 2 million households from entitlements that were in receipt of small sums. Most of those of working age in receipt of benefits are actually working. Either their pay and/or their hours are too little to subsist on wages alone. A large proportion of these are single parents.
The Tory party and a supportive media have waged a relentless campaign against ‘welfare scroungers’ in ‘benefits Britain’. The reality is that this is the majority, whose general welfare and wellbeing benefits us all. Not only do cuts in entitlement cause enormous hardship to millions, it actually hits everyone economically. ‘Presenteeism’, being at work but not engaged with it through insecurity or concern for childcare of healthcare responsibilities is widespread and on one estimate is said to depress the economy by £15 billion.
Entitlement to benefits is a function of low pay, disability, old age, poverty and excessive rents. Britain has one of the lowest levels of social security protection among richer industrialised economies. Britain spends 0.4% of GDP on unemployment benefits compared to 1% for the OECD average. In contrast, Britain spends 1.5% of GDP on housing benefits where the benefit goes to landlords while the OECD average is just 0.4%.
A recent report by Shelter shows that the annual subsidy to private landlords amounts to £14bn, which is greater than the planned welfare cuts. The cuts to welfare will cause enormous human misery. Cutting the handout to landlords would remove incentives for buy-to-let and so act as a brake on the upward spiral in rent and property prices.
In the wider picture, the deficit will soon fall to around £85bn annually and below. Handouts to the corporate sector (tax breaks and incentives) amount to £85bn annually. The entire deficit could be removed by ending this corporate welfare without any of the damaging cuts planned. This alone would address the question of the deficit. But for sustainable growth, public sector-led investment is required.
*This is a slightly modified version of a recent presentation for Labour Against Austerity in the House of Commons
The new Tory government will renew its austerity offensive shortly with the publication of an ‘emergency Budget’ on July 8. It is simple to demonstrate that the previous austerity programme caused the economy to grind to a halt (and with it the improvement in government finances).
Supporters of austerity like to claim that austerity led eventually to recovery. But this is logically impossible. A force applied from one direction, the downward pressure on the economy, cannot sequentially have the effect of lifting the economy. Most children learn these cause and effect relationships through play at the ages of 2 to 4, with marbles, wheels and water.
Therefore the actual course of events of the last round of austerity will prove instructive as to what can be expected in the next 5 years. This has important political as well as economic implications.
Anyone tempted to throw in their lot with Tory economic policy, for example among the Labour leadership contenders, will be obliged to defend the impact of Tory austerity. As there is no solid basis for the current ‘recovery’ which is supported by increasing household debt and borrowing from overseas, the inevitable bust will occur. The ‘Barber boom’, the ‘Lawson boom’ both ended with a slump, and the feeble Osborne recovery reproduces them in a worse environment.
According to the IFS the Tory Government plans imply £45bn of ‘fiscal tightening’ in this parliament equivalent to 4.1% of GDP, although we have yet to see the actual plans of the emergency Budget in June. This is approximately equivalent to the fiscal tightening of the last parliament although it is suggested that all of it will be achieved with cuts to public spending rather than in combination with tax increases as previously. The axe will fall heavier this time.
The previous programme of austerity caused a double-dip recession in most sectors of the economy. The economy had been growing at a very modest pace of 2.1% in the 4 quarters before the last Coalition took office. The double-dip recession in production, construction and agriculture is shown in Fig.1 below. Only services continued to grow.
It is notable too that industrial production (including manufacturing plus energy) is still below the level the Coalition government inherited in 2010. No industrialised economy can sustain growth without growth in industrial production, as the label implies.
Fig.1 Most Sectors Experienced A Double-Dip Recession
Source: ONS
We have already seen how austerity caused a sharp renewed slowdown in the economy as a whole. There is no logic to claim that austerity also led to eventual recovery. Instead, as Tory poll ratings plunged after the ‘omnishambles Budget’ and the economy risked falling back into outright recession, Government policy was changed. There were no new Government spending cuts from 2012 onwards. Government consumption was allowed to grow and the austerity offensive was put hold (Fig.2).
Fig.2 Real GDP & Government Consumption
Table1. Real GDP Growth Real Govt Consumption Growth
Source: ONS
Investment
However, there is no such thing as a consumption-led recovery. It too is a logical impossibility. Economies are dominated by production. As the proportion of GDP devoted to consumption rises, economic growth tends towards zero. The reverse is also true; as the proportion of GDP devoted to investment rises, so GDP growth increases (including the growth of consumption within that).
Without production, the expansion of which relies on investment, consumption can only be increased by further borrowing.
One of the central fallacies of Tory economic ideology is the idea that by shrinking the state the private sector will thrive. As Government is the largest single customer of the private sector goods and services, the opposite is the case. Cutting public spending damages the private sector and exacerbates its weakness.
Cutting public investment has been a central part of austerity and a key way that government spending has fallen overall. The deficit has fallen by damaging future growth.
This has been the effect of the previous round of austerity. The entire crisis was caused by the slump in business investment, which caused unemployment to rise and Government tax revenues to fall (hence the rise in the deficit). The weakness of business investment can be seen as early as 2006 (Fig.3) and in the sharp decline again in 2008.
Fig.3 Business Investment & Government Investment
Source: ONS
Under the Labour Government investment was increased in 2008 and 2009 to offset a crisis caused by this private sector weakness (Building Schools for the Future, bringing forward planned capital infrastructure projects, etc.).
The Coalition slashed Government investment. The effect was predictable. The recovery in private sector investment was halted. It is only in 2014 with a pre-election rise in Government investment did business investment begin to accelerate again.
If the Tory government attempts to close the deficit by cutting its own investment, or acts on the belief that the private sector will deliver better and more investment in public services, then the effect will be the same once more. Business investment will be cut again. There is no ‘productivity puzzle’. Without investment productivity cannot grow and living standards cannot rise.
‘Welfare’
The Tory Government has also announced plans for further cuts in social security. 64% of all households are in receipt of one type of social security benefit or another, over 20 million households. They, we are the majority.
The previous Coalition Government managed to remove somewhere between 1 million and 2 million households from entitlements that were in receipt of small sums. Most of those of working age in receipt of benefits are actually working. Either their pay and/or their hours are too little to subsist on wages alone. A large proportion of these are single parents.
The Tory party and a supportive media have waged a relentless campaign against ‘welfare scroungers’ in ‘benefits Britain’. The reality is that this is the majority, whose general welfare and wellbeing benefits us all. Not only do cuts in entitlement cause enormous hardship to millions, it actually hits everyone economically. ‘Presenteeism’, being at work but not engaged with it through insecurity or concern for childcare of healthcare responsibilities is widespread and on one estimate is said to depress the economy by £15 billion.
Entitlement to benefits is a function of low pay, disability, old age, poverty and excessive rents. Britain has one of the lowest levels of social security protection among richer industrialised economies. Britain spends 0.4% of GDP on unemployment benefits compared to 1% for the OECD average. In contrast, Britain spends 1.5% of GDP on housing benefits where the benefit goes to landlords while the OECD average is just 0.4%.
Table 2. Social Protection Expenditures As A Proportion of GDP %
Source: OECD
A recent report by Shelter shows that the annual subsidy to private landlords amounts to £14bn, which is greater than the planned welfare cuts. The cuts to welfare will cause enormous human misery. Cutting the handout to landlords would remove incentives for buy-to-let and so act as a brake on the upward spiral in rent and property prices.
In the wider picture, the deficit will soon fall to around £85bn annually and below. Handouts to the corporate sector (tax breaks and incentives) amount to £85bn annually. The entire deficit could be removed by ending this corporate welfare without any of the damaging cuts planned. This alone would address the question of the deficit. But for sustainable growth, public sector-led investment is required.
*This is a slightly modified version of a recent presentation for Labour Against Austerity in the House of Commons
Tuesday, 19 May 2015
Did New Labour spend too much?
By Michael Burke
It is not sufficient for big business to have secured an election victory and an overall Parliamentary majority for the Tory Party. It is also necessary to intervene in the Labour Party to ensure that its leadership also conforms to big business interests too. This has currently taken the form of candidates in the leadership contest being asked to declare that Labour ‘spent too much’ in the run-up into the Great Recession. Answering Yes to this question is effectively a loyalty oath to big business interests, a renunciation even of the social democratic vestige of economic policy under New Labour.
The question is economically illiterate. It is taken as axiomatic that if there was a deficit that spending must have been too high. But all deficits are composed of two items; spending and income. In the case of government that income arises mainly in the form of taxes. It does not follow from the existence of a deficit that the culprit must be spending.
The reality is that measured as a proportion of GDP New Labour spent less on average than Margaret Thatcher. This is shown in Fig. 1 below. On average New Labour’s spending amounted to 41.5% of GDP. By comparison, under Thatcher government spending was 44.2%. In relation to the deficit, the taxation levels were also very different. Under New Labour taxation revenues were on average 37.5% of GDP. Under Thatcher taxation revenues amounted to 42.0% of GDP.
The argument that Labour spent too much has no factual basis whatsoever. The
loyalty test of renouncing the ‘overspend’ is based on a complete fiction. In
fact, because it was in thrall to neoliberal economics, it is clear that New
Labour taxed too little.
Under New Labour the main rate of corporation tax on profits was cut from 34% to 28%. ‘Taper relief’ on capital gains was introduced which cut the tax rate on capital gains (CGT) from 40% to 24%. This system was later scrapped and the rate cut to 18% by Alistair Darling. Owners of assets therefore paid a far lower tax rate than the tax on workers’ income. A system was also introduced where, almost uniquely in advanced economies, companies could set off both past losses against corporation tax, and carry back losses to reduced their tax bill too.
None of this led to an increase in productive investment, which was the supposed reason for these huge giveaways to capital. Instead there was a very substantial increase in speculative investment, which did contribute to the crash. On the contrary, investment (Gross Fixed Capital Formation, GFCF) continued its long-term decline, as shown in Fig.2 below.
The effect of boosting speculative investment is indicated by the growth of
housing as a component of the pre-crash British economic expansion. Fig. 3 below
shows the level of GFCF and the level of productive investment, that is GFCF
omitting housing. This clearly shows that the decline in productive investment
was uninterrupted throughout the period of New Labour as well as before and
since under the Tories. In this entire period economic policy was neoliberal
dominance which meant there was an explicit aim of reducing taxes on business in
order to increase investment. The policy was a complete failure.
The trend towards lower productive investment by the private sector and
increased speculative activity was also fostered by the government’s cuts to the
level of public sector investment. The data and OBR projections are shown in
Fig.4 below. As government is the biggest single purchaser of goods and services
in the economy, cutting government investment encourages the private sector to
cut its own investment.
It is one of the central myths of neoliberal economics that government investment ‘crowds out’ private sector investment. The opposite was the case; a cut in government investment accompanied declining productive investment by the private sector. By contrast, rhe temporary rise in public sector investment in 2008 and 2009 helped to lift the economy out of recession and was rapidly ended by the last Coalition government.
New Labour did not spend too much. It taxed and spent too little, less than
Thatcher. Worse, the cuts in taxes for the business sector and the owners of
assets did not lead to increased investment. Investment fell and was itself
exacerbated by the decline in public sector investment.
Defence of these simple facts has been made an acid test. They are actually the vestiges of social democratic economic policy at the level of the Labour leadership. If it is accepted that Labour ‘spent too much’, big business interests will have rewritten history in its own interests and fundamentally undermined the character of the Labour Party.
It is not sufficient for big business to have secured an election victory and an overall Parliamentary majority for the Tory Party. It is also necessary to intervene in the Labour Party to ensure that its leadership also conforms to big business interests too. This has currently taken the form of candidates in the leadership contest being asked to declare that Labour ‘spent too much’ in the run-up into the Great Recession. Answering Yes to this question is effectively a loyalty oath to big business interests, a renunciation even of the social democratic vestige of economic policy under New Labour.
The question is economically illiterate. It is taken as axiomatic that if there was a deficit that spending must have been too high. But all deficits are composed of two items; spending and income. In the case of government that income arises mainly in the form of taxes. It does not follow from the existence of a deficit that the culprit must be spending.
The reality is that measured as a proportion of GDP New Labour spent less on average than Margaret Thatcher. This is shown in Fig. 1 below. On average New Labour’s spending amounted to 41.5% of GDP. By comparison, under Thatcher government spending was 44.2%. In relation to the deficit, the taxation levels were also very different. Under New Labour taxation revenues were on average 37.5% of GDP. Under Thatcher taxation revenues amounted to 42.0% of GDP.
Fig.1 Government spending and revenues as a proportion of GDP
Under New Labour the main rate of corporation tax on profits was cut from 34% to 28%. ‘Taper relief’ on capital gains was introduced which cut the tax rate on capital gains (CGT) from 40% to 24%. This system was later scrapped and the rate cut to 18% by Alistair Darling. Owners of assets therefore paid a far lower tax rate than the tax on workers’ income. A system was also introduced where, almost uniquely in advanced economies, companies could set off both past losses against corporation tax, and carry back losses to reduced their tax bill too.
None of this led to an increase in productive investment, which was the supposed reason for these huge giveaways to capital. Instead there was a very substantial increase in speculative investment, which did contribute to the crash. On the contrary, investment (Gross Fixed Capital Formation, GFCF) continued its long-term decline, as shown in Fig.2 below.
Fig. 2 Investment decline as a proportion of GDP
Fig. 3 Investment and productive (non-housing) investment
It is one of the central myths of neoliberal economics that government investment ‘crowds out’ private sector investment. The opposite was the case; a cut in government investment accompanied declining productive investment by the private sector. By contrast, rhe temporary rise in public sector investment in 2008 and 2009 helped to lift the economy out of recession and was rapidly ended by the last Coalition government.
Fig.4 Public sector investment
Source: OBR
Defence of these simple facts has been made an acid test. They are actually the vestiges of social democratic economic policy at the level of the Labour leadership. If it is accepted that Labour ‘spent too much’, big business interests will have rewritten history in its own interests and fundamentally undermined the character of the Labour Party.
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