David Cameron says he wants an apology from Labour for the state of the economy. But his approach to the budget deficit is either one of the most mendacious or one of the most ignorant ever made by a British Prime Minister. By using half-truths and gross over-simplifications Cameron has shifted the blame for the financial crisis and its aftermath from the reckless and probably fraudulent behaviour of traders of financial assets to the ‘irresponsible economic management’ of the previous government. By implication the hapless ordinary British voter is also guilty, and is going to feel the righteous pain of public service and job cuts. We are quite likely heading for one of the most unjust periods of governance Britain has ever known.
No adjustment that was ever proposed would have made much difference to the present position. The 2005 Conservative manifesto promised to reduce the deficit by £8 billion per year by 2007/8. Even if we make the generous assumption that they would have achieved this a year early and continued it in the face of the financial crisis, this would only have made a difference of a relatively paltry £24 billion to a debt of £866 million – £122 billion of which is accounted for by the debts of Northern Rock, and another £42 billion built up in acquiring the shares or loan books of other failing financial institutions.
It is at best a half-truth (and probably nowhere near that) to claim that the UK fiscal problem is primarily one of the government spending too much – it is much more one of government revenue falling off a cliff. Excluding the Northern Rock financing, government expenditure drifted up from 33% of GDP in 2000 to 36.6% in 2008. While this might have been greater than was prudent if the off-stage warnings of the fragility of the ‘great moderation’ had been heeded, it is quite wrong to see it as some sort of unprecedented test to destruction of government finances, as David Cameron would have us believe.
The reality lies in the figures for government revenue. Between 2000 and 2008, revenue increased every year and by an average of 5%. But in 2009, it fell by 8% – total revenue falling back to a level below that of 2006. Given the rapidity of this development, the government had two options: to make immediate, unplanned and indiscriminate cuts in government programs that could have sent business confidence spiralling further down, and severely damaged social and economic infrastructure; or to continue these programs in an attempt to maintain personal and business incomes with a view to speeding up the return to confidence and growth. Rightly or wrongly (most economic opinion suggests rightly) they went for the latter option. The inevitable result was a very large fiscal deficit.
According to Cameron, the Labour government was also responsible for the crisis itself by setting low interest rates, and allowing an asset-price bubble. But since 1997 interest rates have been set by an independent committee of the Bank of England, presided over since 2003 by Mervyn King, whose current backing the coalition are keen to emphasise. The Tories have never proposed to change this arrangement. Moreover their 2005 manifesto made no mention of tightening or changing the regulation of the financial sector. Quite the reverse – deregulation was the watchword.
Cameron talks in the same breath about interest rates on government debt and the rates UK citizens and businesses have to pay on mortgages and other loans. They are not the same, and there is no immediate reason, beyond bankers’ desire for additional profit, why other interest rates in the UK would rise should government debt rates do so. He also goes on at some length about the total interest rate burden, arguing that large interest payments are in themselves a ‘terrible, terrible waste of money’ because that money could be spent on schools or transport. If this was true it would be true of all interest payments – including the mortgage interest payments for houses we live in. But what matters is whether the loan exists for a good reason and what fraction of it has to be paid out in interest – not just how big the loan is, or how much total interest is paid. Moreover – another reality check – since two-thirds of bond-holders are not faceless foreign investors, but are UK citizens and institutions, most of that money ends up back in our economy anyway. Things are bad, but not so bad that truth and fairness can be thrown overboard.
No, the real blame for the financial crisis and the recession that followed falls to the self-delusion, deceit and probable outright fraud that led to the selling of mortgages to those that were unlikely to repay them, the purchasing of these mortgages by financial institutions once repackaged as marketable assets, and the insurance of these opaque assets against losses by the likes of AIG and RBS. The blame lies here and nowhere else. Given the wealth and expertise of financial asset holders and traders, the general assumption should be that those that trade in financial assets know the risks and accept them. If they fall in value, resulting in financial loss and bankruptcy, then generally it must be assumed that those holding them must take their losses along with their often massive gains.
Unfortunately when the banks were put at risk by the hubristic actions of their executives acting on behalf of their impatient investors, the system that supplies the life-blood of the economy was also at risk. Had this collapsed, the additional damage done to the UK economy would have been incalculable. The government saved these institutions from bankruptcy; in doing so they saved their shareholders and creditors from almost total loss, their executives from losing their pensions and their employees from losing their jobs.
We are yet to see the full nature of the expenditure cuts that are planned, but it seems most unlikely that they will involve simply chopping away dead wood – of which there may turn out to be plenty. All the indications are that there are likely to be widespread job losses and withdrawal of services. Despite the ‘we’re all in this together’ rhetoric it is simply not possible that this will not strike disproportionately at the already vulnerable and marginalised in society. These people are the ones it is absolutely the most unjust to target. They had no financial assets, they did not trade them, they played absolutely no part in determining the government’s policies toward the financial sector and asset-holders, and they are unlikely to be earning interest on the government’s debt. It is financial asset holders who have benefited at every stage in this saga and they should be the ones responsible for the pay-back. Additional taxes on financial assets would not only be fair in this case, but properly administered they would also be efficient. They could encourage the shift of inactive capital to spending and productive investment, boosting jobs, growth and government revenue from other forms of taxation.
In short, David Cameron, his party and the Liberal Democrats risk being seen to have visited a whirlwind on the poorest members of society in a quite cynical and underhand attempt to protect the interests of those that are not only responsible for the debt build-up, but have actually directly and indirectly benefited from the actions that led to it and the action required to limit its damage. If this doesn’t lead to rioting in the streets I don’t know what will.
© 2010 Diarmid J G Weir