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More evidence emerged today that the Tory-led coalition's cuts are pushing the economy further into recession reports James Meadway

George OsborneWith weary familiarity, Britain’s government deficit – the gap between what it spends, and what it receives from taxes – is revealed today as far worse than anticipated. Last month, the government borrowed £557m. In July 2011, it saved £2.5bn – spending less than it received in taxes.

For the financial year since April, its total deficit has risen to £44bn, £11.6bn higher than the same period last year.

George Osborne entered Number 11 in May 2010 with a single aim in mind: to reduce Britain’s government deficit, and pay back its national debt, by imposing the harshest cuts in public spending since the Second World War.

This was perhaps the single most foolish economic policy decision ever taken by a British government. It was never going to work, it hasn’t worked, and it isn’t going to work. The reason is simple, and sufficiently well-known that neither Osborne, nor his advisers, nor the Treasury have any real excuses for failing to take heed of it.

Government spending cuts reduce demand in the economy. As it reduces its spending, businesses sell less. As businesses sell less they, too, make cuts in spending to reduce costs. They cut wages and make redundancies. Those on reduced incomes or pushed into unemployment also spend less. A vicious circle is set in train. Any economic textbook will tell you this, and call it the multiplier effect.

When an economy is growing, this effect does not matter so much. Rising spending in the private sector compensates for falling spending in the public. But if an economy is in a recession, or just recovering from a recession – as Britain was, in early 2010 – the single worst policy for a government to follow is precisely the course this one took. No large economy has ever grown out of a recession by imposing austerity.

There are some specific reasons why this month’s figures are so much worse than expected. The Coalition – which, if nothing else, has become very adept at these sort of excuses – has blamed the temporary closure of a North Sea gasfield for reduced corporation tax receipts, with reduced North Sea revenues accounting for about £1bn of the shortfall. But this doesn’t account for the £0.7bn fall in corporation tax receipts from the rest of the economy.

The reason the deficit is growing is because the economy is not. Total tax revenues are down £0.8bn compared to last year. But the biggest push in the rising deficit is from increased spending, up £2.4bn on this time last year. That’s an increase in total spending of 5.1%, despite the cuts to public services. Expenditure has risen overall because the government has had to spend more on unemployment benefits. And it has to spend more on unemployment benefits because there are more unemployed. It is the – entirely predictable – failure of its own economic policy that has led us to this.

There is a clear solution. Instead of imposing cuts, government should spend. And it should spend wisely, creating sustainable employment by investing in green infrastructure: offshore wind, public transport improvements, loft insulation. Its own borrowing rates are at an all-time low, so financing investment is cheap.

Osborne won’t do this. The Treasury, using an interesting new definition of the word, is claiming that it will stick to its “credible” deficit reduction plans. There will be some further efforts to round up additional capital spending, but on nothing like the scale required. The politics of the situation are currently dead against a U-turn. Simply put, without the monomaniacal commitment to austerity, the Coalition has no other economic policy. Take that away, and there is nothing to either hold the Coalition itself together.

 

James Meadway

James Meadway

Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).

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