Increases in public spending do not automatically equate to a progressive redistribution of wealth, argues Susan Newman
This week’s budget was heralded as a big spending operation aimed at stimulating the economy. Some people are claiming that it looked like a Keynesian-inspired John McDonnell budget. Is Conservative economic policy Keynesian now? If so, is this a good thing?
Some of the trailed measures didn’t really materialise. As it turns out, the rise in corporation tax – incredibly attacked by the Labour leadership – has been put off till 2023. In the meantime, big businesses are being offered a tax-break over the next 2 years to the tune of £25 billion when they invest in qualifying plant and machinery as a measure to incentivise investment.
Sunak did extend the furlough scheme and the £20 top up of universal credit for a few months. This was more a response to public pressure than any change in ideology.
Keynes famously said that ‘the government should pay people to dig holes in the ground and fill them up’ as a way to maintain incomes during an economic downturn and unemployment in order to prevent a fall in aggregate demand.
Since people with lower incomes spend a larger proportion of their income on consumption, such a scheme would have a greater positive impact on the economy compared with the maintenance of wealth or incomes of the rich. Better still, governments could pay people to build and maintain roads, schools, and other social infrastructure, stimulating aggregate demand through direct government investment.
By contrast, the countercyclical policies outlined in Sunak’s budget rely almost entirely on stimulating private sector investment. Neither education nor health and social care saw any significant increases in their budgets. There was no long-term commitment to investment in the social infrastructure.
At best this is a right-wing Keynesianism, one reflected in the policies of many contemporary Anglo-Saxon economies, and based on preserving the structure of an economy that is heavily tilted to favour the already wealthy and protect the monetary value of their assets in finance and real-estate.
The extension of the stamp duty holiday was a case in point and the public sector pay freeze remains in place, with local government and education workers hit the hardest, not to mention the absence of meaningful pay increases for the lowest paid NHS workers.
Austerity will co-exist with this kind of stimulus. Council budgets, already cut to the bone over the last decade, face a further squeeze. Council tax hikes will come into force next month meaning mainly working class people will be paying to plug some of the gaps in local council budgets, but we can anticipate further local spending cuts.
Right-wing Keynesian proponents differ from those in the socialist left in their vision of the economy itself. For financiers and conservative governments, the economy is a system organised for the preservation and promotion of profit. For socialists, the economy relates to the organisation of society in order to meet social and environmental needs.
Stimulus packages designed by conservative governments will be aimed at supporting private firms rather than dealing with the structural problems of the economy that were further exacerbated in the course of this pandemic.
To make matters worse, deficit financing is taking place through Quantitative Easing (QE), whereby the Bank of England ‘creates’ new money to buy government bonds from banks and investors. This has the immediate impact of increasing demand for government bonds, increasing their price, and injecting money into the economy.
Under Corbyn’s leadership, the Labour Party called for a people’s QE that was tied to investment in physical and social infrastructure. In the absence of a people’s QE it is up to the private sector to decide on how best to invest the extra funds. The impact of QE is a lowering of the returns on government bonds and a lowering of the interest rate.
Investors seeking higher returns will turn to the stock market and real-estate, raising asset prices and worsening inequality. While the stock market and the real-estate are not the economy, it is in the interest of the wealthy to keep stock and real-estate prices buoyant and this is why they therefore measure the health of the economy based on these market trends.
Sunak’s pump priming will do nothing to equalise incomes and wealth. Its aim is the preservation and promotion of the accumulation of wealth through increased government intervention whilst holding down the incomes of the majority of working people. Investment in social infrastructure that would be key to any levelling up society are deprioritised, even in the depths of a public health crisis that has also revealed the chronic underfunding of schools.
Policies that would see wages rising at a faster rate than productivity growth, so that workers gain an increasing share of the pie, resulting in a real redistribution across society are emphatically opposed by right-wing Keynesians. We have seen the inflation hawks attacking Biden’s very moderate rise in minimum wage and one-off payment to low-wage earners in his stimulus package for the US announced earlier this year.
Neither the left or right wing versions of Keynesianism dares to tackle the central contradiction of the capitalist economy; the fact that the rate of profit depends more than anything on keeping wages down. Socialists’ objective should be to transform the economy into an organisation of society that prioritises the needs of working people and nature. Sunak’s business-centred spending has profits as its motor and attacks on working people at its very heart.
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