James Meadway: you can’t have consistently rising debts, and consistently falling incomes. The two must collide at some point. That means a crisis
The deficit is still rising. After four years of the most aggressive spending cuts in living memory, George Osborne is today borrowing 10% more than he did this time last year - £11.8bn in September alone. Total government debt is more than £100bn higher than in 2013, at £1.45tn. The failure of Osborne’s sole economic strategy – cut the deficit, shrink the debt – is starkly apparent.
What truly beggars belief is that this has been achieved at the same time as economic growth has returned. On the IMF’s figures, the UK is set to be the fastest growing economy in the developed world over this year. Unemployment is falling. Jobs are being created at a record rate. And yet still, somehow, the government is still forced to borrow increasing amounts.
The culprit is not hard to find. Tax receipts have failed to grow with the economy. The graph below (taken from here) shows the course of tax receipts across different taxes since the crash of 2008.
Three things are immediately clear. First, without the ramping up of VAT in 2010, to 20%, Osborne would be in dire financial straits right now. Second, income tax has, despite apparently rising employment, failed to increase. Third, corporation tax, targeted for cuts, year after year, by Osborne, has slumped.
The tax system is increasingly leaning on regressive – biased in favour of the rich – consumption taxes, and failing to deliver from fairer taxes on income. This is a result of both government policy, increasing VAT but cutting corporation tax, and the kind of “recovery” we have ended up with.
Consumption is rising. More is being spent in at least some shops. But real incomes for most people are still falling – the longest sustained decline in real incomes since the 1870s. Revenues from consumption taxes have therefore stayed solid. But revenues from income taxes – assisted by Osborne’s cutting of tax rates – have, by the same token, fallen.
This doesn’t quite make sense. If real incomes are still falling, despite rising employment, how can people be spending more? Partly this reflects a return to rising inequality: in the last year for which we have figures, the richest 10% saw a 3.2% increase in their earnings, whilst the other 90% saw a decline. If at least some people have more cash, they can spend more.
But it is also the result of borrowing. Borrowing by consumers has been rising since early 2013; in particular, unsecured borrowing – borrowing without any collateral, such as a house in a mortgage – has been shooting up. This includes credit card debt, and store credit, as well as (increasingly) payday loans. It is, in other words, more insecure lending.
The story since 2007 is quite clear. Right up to the crash, people were borrowing more every month. As the crash hit, and the recession broke out, they began repaying their debt. Indeed, one of the major drivers of the recession was this slide in spending by households, since if less is being spent, less must also be sold: and so the whole economy gets pulled backwards. (This is the multiplier effect in action.)
But with the return to consistent growth from early 2013, this pattern reversed. Households began borrowing again in earnest from around January that year. Currently, unsecured lending is increasing at a rate of close to £1bn a month, and has wobbled around slightly under that figure for the last year. That’s about the same rate as the monthly increase in consumer spending over the last 18 months.
This need not be a problem, if it weren’t for two factors. First, people are already substantially indebted. Since the crash they have, as we have seen, attempted to pay down their debts. But this has only removed some of the debt burden created prior to the crash. The total volume of unsecured lending stands today at £162bn, having fallen from a July 2008 peak of £200bn. That’s a decline, but the total amount outstanding has been increasing steadily for the last year.
Second, real incomes are still falling. And debts must be repaid, with interest. You can’t have consistently rising debts, and consistently falling incomes. The two must collide at some point. That means a crisis.
So here’s the lunacy of the situation revealed. Osborne is having to borrow increasing amounts because incomes – and therefore income taxes – have not kept pace with economic growth. Yet that economic growth is, itself, being pulled along by a return to borrowing by individuals. Debt, government and household, is rising.
There is nothing sustainable in this situation. The hope in the Treasury is that taxes from self-employment, deferred by richer taxpayers seeking to duck the old 50p highest rate, will pick up in the next tax year. (Of course, with average earnings from self-employment down 22% since 2008, this may be a forlorn hope.) But that will be a one-off kick. Without a return to sustained income growth, spread across the population, the books won’t balance. We are, on the current course, headed for a crash.
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).