The Shadow Chancellor, John McDonnell, was recently rebuked by Andrew Marr on his show for the likely £49 billion in interest payments that would be sparked by Labour’s proposed increase in borrowing to fund public investment.
Not only have 22 economists now come out in support of McDonnell’s plans, and in criticism of the media’s fear-mongering and flagrant misuse of figures, but there is a fatalistic sickness at the heart of these criticisms that needs both diagnosing and curing.
22 economists answer John McDonnell's media critics: YES a Labour government can responsibly borrow for productive investment. https://t.co/nAdeh4U4MI @LabourList @AaronBastani @OwenJones84 @paulmasonnews @LabourList @PeoplesMomentum pic.twitter.com/TJppmo6xtV
— Ann Pettifor (@AnnPettifor) November 26, 2017
As with all statistics, the figure Marr gave was much like a bikini, revealing something tantalising, but concealing the most important bits:
£49 billion was misleading, as it included £9bn owed by the Treasury to the Bank of England (BoE). Because the Bank is part of the public sector, £9bn is in effect owed by government to itself.
Not only this, but providing such a figure in isolation is misleading.
It is best understood as a share of the UK’s national income or GDP. This amounts to just 2% of GDP – a historically low share of the national ‘cake’. This is remarkably low, given the costs (debt) incurred by the government to bail out the private financial system after the 2007-9 global financial crisis.
In fact, the figure isn’t even anything new. As with all reports of Corbyn’s Labour (nationalisation of public services, public investment, opening up discussion with so-called terrorists), it is a total misnomer to describe the figure in terms as if it is radical and unprecedented.
In 1987/88 when Conservative Chancellor Nigel Lawson was stoking an unsustainable boom, debt interest (see the OBR’s databank on public finances here) was at virtually the same level as the OBR estimates it is today – circa £40 billion (in 2016/17 constant prices). When the Tories left office in 1996/7 debt interest payments were again at the same level as estimated today – £40 billion (also in 2016/17 constant prices).
This is deeper than mere media misreporting of Labour fiscal impropriety, though. The fear in general of the deficit, notwithstanding that it stands to be no more under a prospective Labour Government than the incumbent Tory one, is misguided.
Firstly, the Tories are running a deficit and have systematically failed to meet any and all the targets they have set themselves when it comes to closing it or paying off the debt. But instead of running it in order to fund investment, they are running it to fund their own fiscal shortcomings. McDonnell’s plan will see a deficit run deliberately to target smart investment in public projects.
Secondly, the evidence is in that the neoliberal hegemony of austerity isn’t working. The idea is that the State is a prudent household, simply sacrificing a treat here and there to have money in the bank to spend on the house later so it doesn’t have to go into debt.
The treats, in that metaphor, are of course paltry frivolities like benefits for disabled people who couldn’t live without them, and police funding.
Austerity isn’t working. As John McDonnell points out:
UK growth is now the lowest in the G7, and we have the worst set of official forecasts in the Office for Budget Responsibility’s history. Productivity growth is the worst since Napoleon was retreating from Russia, wage decline the worst since the invention of the steam engine. And clearing the government’s deficit, which Philip Hammond’s predecessor once reassured us would be done by 2015, is now pushed back to perhaps 2031.
The State isn’t a household. The State is sovereign and issues a sovereign currency. The State cannot go bankrupt or insolvent or be wound up. The State is the safest debtor there is.
Not only this, but all borrowing isn’t created equal. The State can borrow from the shadow banking sector of the private financial side, but so too can it borrow from itself, by in effect ‘selling’ Government Bonds such as Gilts to the Bank of England.
This form of borrowing is much more low risk and sustainable. This distinction is one McDonnell tries to make to Marr himself when he could fit words between the host’s incessant childish, pawing and soporific whinnies for “A FIGURE”.
As it is, all the current economic depressant has done is suck money out of the system.
Think of this. The Executive, through the Bank of England, ‘creates’ the money in the system. Most of it now being numbers on a screen as cash dwindles. The economic consensus would then have you believe that the Government needs that money back from citizens in taxes in order to pay for anything. In essence, it puts citizens as necessary middle men to get any money.
In fact, the Government needs to pump money into the system for there to be growth. Either into private enterprises that create jobs and build infrastructure, or, much more favourably, into public-run undertakings that may produce profit for the public purse. To do this, the government needs to run a deficit.
In essence, the State spends money into existence.
If the State doesn’t run a deficit, then the people do. It is economically impossible to have a country in which both private individuals and the State are in surplus. One has to run a budget deficit, and the other a surplus. Since people can go bust and the State can’t, the State needs to run the deficit.
So to try and achieve economic growth currently requires private individuals and small businesses to go into debt to invest. It results in speculative bubbles and, in the worst case, another financial crisis.
Not only this, but in the media’s desperation for shocking soundbite figures, they miss the point. It is all well and good to assert that the economy is growing well based on figures, but when it relies on the exploitation of cheap labour, microcosmic tax havens for massive corporates and forgoes investment and production, it is not economic growth in any meaningful sense.
It is obfuscation for the media to focus on shocking numbers like £49 billion. The real numbers they should focus on are those of unemployment rates, food bank proliferation, public sector pay rises (of which there have been none), inequality in monetary terms, investment, production, research and development.
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