Tuesday, 9 November 2010

An Analysis of the Coalition Cuts Narrative: Cuts and Tuition Fees

Since the Government came in to power in May of this year, their PR teams have been working overtime to create a narrative that goes something like this:  They arrived in power to find a country on the brink of “bankruptcy” because the previous government had lived far “beyond its means”. In order to save the country from meltdown the government’s only course of action is a massive cut in spending.  These cuts, while difficult, will be “progressive”, “fair” and will “hit those with the broadest shoulders hardest”.  All sensible and knowledgeable commentators accept the fact that cuts are necessary, and that those who disagree are short sighted, irresponsible “deficit deniers”. The country will ultimately accept the short term pain of cuts safe in the knowledge of our bright future.

This story is very plausible, very persuasive and very wrong.  Despite what the coalition tells us Britain is in no danger of bankruptcy. Our national debt as a proportion of GDP is below that of France, Germany, Italy, Japan and the US and the interest demanded on government bonds is at a historic low. The government constantly uses the analogy of a household in debt to argue that the sooner we cut spending the better. The only problem is that the government is not a household. A far better analogy is that of an investor who borrows money at a rate of interest as long as he can invest it productively. There is a huge amount of productive investment that the government could make that would justify the 3% of GDP it currently spends on interest payments (vocational training, universities and science funding and green technology to name but a few). Ultimately the deficit will have to be reduced but the timescales and methods of reduction vary widely. Given time a growing economy and inflation naturally bring down a deficit. Even if you decide to bring it down over a shorter timeframe there is still a choice between raising taxes and cutting spending. The reason the government has chosen the path of austerity is not economic necessity but an ideological commitment to shrinking the state.  

The well respected and independent think-tank, the Institute of Fiscal Studies, declared that (despite the government’s claims) its October spending review would hit the poorest hardest. This is before you even factor in that the poor rely most heavily on public services and are most affected by unemployment. The two other groups that will be most seriously affected are women and the young. Around two thirds of public sector employees are women and many of the cuts to benefits will fall heavily on mothers. This means that women will be doubly squeezed by rising unemployment and falling benefits and that gender inequalities are likely to rise. Young people are, by far, the group most affected by unemployment with around 20% of 16-24 year olds out of work. The government is slashing benefits, cutting training programmes, cutting university places, education funding and increasing fees.  All this will create a lost generation who cannot afford university have no job prospects and realistically have no chance of getting out of their parents house. The government’s claim that we are all in this together is farcical when you consider that 76% of the cabinet are millionaires, 66% went to private school and 86% are male.

 The government regularly cites the letter of 35 leading business men to the Telegraph to show that the experts are on their side. However the motivation of these business men is questionable. For example one of the signatories (Ruby McGregor-Smith, chief executive of the outsourcing company MITIE) in his annual report states: “"The public sector faces the prospect of considerable pressure on expenditure in the coming years. We believe that this will create significant opportunities for the outsourcing market as contracts will tend to become larger and broader in scope”In reality almost all independent opinion criticises the government’s plans including: among others three Nobel laureate economists, Barack Obama, the chairman of the Federal Reserve and the chairman of the Federation of Small Business.  The most important falsehood in the government’s narrative however is that austerity will lead to a brighter future. Confidence, the supposed objective of the government’s austerity has collapsed as each cut was announced. Unemployment is set to increase and growth is decreasing. This means that benefits will rise and tax receipts will fall so the deficit may not even be cut by that great a margin. I can put it no better than the Nobel Prize winning economist Paul Krugman: "The best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it."

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