Socialist Economic Bulletin

.496ZJohn McDonnell lays the basis to restore Labour’s economic credibility with the ‘Fiscal Credibility Rule’ By Michael Burke

Labour lost the last general election because it had no economic credibility, as the overwhelming bulk of opinion polls show. John McDonnell’s new ‘Fiscal Credibility Rule’ decisively and correctly addresses that issue.

“Labour would balance tax revenues and day-to-day spending over a five-year cycle, but this target would exclude long-term investment projects, allowing Labour to spend billions on projects such as housing, railways or high-speed broadband”, is how The Guardian summarised the new policy framework.

Despite an inevitably hostile Tory media McDonnell’s approach can succeed because it is correct. It stands in sharp contrast to George Osborne’s fiscal rules which place a ban on all borrowing for productive investment. This is Neanderthal economics which has the support of hardly any serious economist, even on the right. It also gets rid of the confusions of the ‘keynesian’ left of the Ed Balls type – which had little to do with the views of Keynes and fatally undermined Labour’s economic credibility.

Basic economics

All economic policies, including fiscal rules should be set within the basic laws of economics. Unfortunately after decades of the dominance of the Thatcherite economics which led to crisis, economic debate has been debased and a crop of crackpot ideas has grown up, Osborne’s among them. 

A significant increase in production requires investment in the means of production. Prosperity cannot be raised by no investment, as Osborne suggests. For example his policy has been to encourage consumption without increasing investment in areas such as housing. The net result has been a growing housing shortage. In effect he raised demand for housing without increasing investment. The effect was higher prices, just as the textbooks say. Across the whole economy the effect has also been to increase indebtedness. Household debt has soared along with overseas debt. This would be the effect of all schemes which see consumption as the key to growth.

Therefore McDonnell’s Fiscal Credibility Rule is correct. Increasing investment, and in conditions where private investment is low Government borrowing to achieve it, is the only sustainable mechanism for increasing output and the prosperity that depends on it. At the same time current or day-to-day spending will be balanced over the medium-term cycle. This too is correct, as it allows Government to respond to any downturn in the economy by raising spending. But under ordinary circumstances current spending should be balanced by tax revenues.

Misplaced criticism

Both of these policy planks have come under attack. It is widely argued that McDonnell’s rule is the same as Gordon Brown’s ‘Golden Rule’. Sometimes this is said as a result of a genuine misunderstanding. It also argued that the commitment to balance current spending with tax revenues means a commitment to maintain austerity. Both of these arguments are false.

The claim that John McDonnell is rehashing Ed Balls, made by commentators such as John Rentoul, is pure bullshit confirming that they do not understand basic economics, and the difference between investment and consumption. The difference between John McDonnell and Gordon Brown is that McDonnell is in favour of a massive increase in public sector investment. Brown slashed it to record lows. He only increased it later in response to the crisis.

In the 1960s and early 1970s public sector net investment had frequently exceeded 6% of GDP. Thatcher cut that to a low-point of 0.7%. But Blair and Brown kept it at 0.6% of GDP for 3 years at the beginning of their time in office. Later, Brown did increase public sector investment in response to the crisis which was crucial to economic recovery. But that was after a crisis in which chronically low levels of investment and high levels of speculation played a decisive role.

Brown’s was an entirely wrong economic policy – the reverse of what is required. It is government current spending which should be allowed rise temporarily in response to crisis, while investment should be maintained at persistently high levels. This is what John McDonnell proposes, and Gordon Brown did the exact opposite.

The separate argument that a commitment to balance current spending over the cycle is to adopt austerity is foolish and muddle-headed. The budget is comprised of two elements, outlays and revenues. A commitment to bring these two into balance says nothing about cutting spending, simply that taxes must match that current spending. 

The most effective way to increase tax revenues and to lower current spending is to grow the economy. SEB has previously referred to UK Treasury research which shows that government finances improve by 75 pence for every £1 increase in GDP. The excellent research is unjustly overlooked because it shows the very high sensitivity of government finances to changes in output. 

By implication it also shows the fundamental relationship between government investment and the provision of public services and social protection that are the key to a decent society. If the output multipliers from a change in output are generally about 1.5 or more and the sensitivity of government finances is 0.75, it possible to calculate the immediate effect on government finances from every £1 increase in investment as follows:

Therefore there is an immediate positive return to government finances of 12.5% from every £1 invested. A 12.5% return is a very large multiple of current government borrowing costs as the yield on long-term gilts (UK government bonds) is around 1.5% (and the yield on inflation-proofed or index-linked gilts is negative).

If done on a sufficient scale, from this return it is possible to commit further investment, improve public sector services and improve government finances. The new investment asset (housing, super-fast broadband, renewable energy production and so on) will also yield a return over the long-term either directly or indirectly.

Therefore there should be no fear of scary headlines of the type that ‘McDonnell plans to borrow billions’. State investment is correct under current circumstances, and state investment is supported by the leading economic commentators such as Martin Wolf. It clearly correctly distinguishes Labour from the Tories and voters will increasingly grasp that such investment is crucial. 

Borrowing for investment, not for consumption, is also key to rebalancing the economy. This means increasing the role and weight of the productive sectors of the economy and thereby producing a reduction in the role of speculative finance. It is logically impossible to persistently borrow for consumption and to reduce the weight of the finance sector in the British economy. As consumption does not lead to growth the only thing that will grow is government debt and the interest on it, which is the mainstay of speculative finance. This is why debt as a proportion of GDP has ballooned under Osborne from 65.2% of GDP to 83.7% of GDP even when interest rates are ultra-low.

It is evidently wrong to suggest that John McDonnell’s Fiscal Credibility Rule is either a rehash of Gordon Brown’s Golden Rule or a commitment to austerity. It is a recognition that investment leads growth while consumption cannot, and that very large government investment is required because of private sector failure. It codifies that understanding for government finances. As a result it can restore much-needed credibility to Labour’s economic policies.

.386ZLabour right-wing still in the austerity dead end

But Osborne’s argument that more austerity is required because there is a slowdown is as false as his other claims. It should be noted that Osborne’s austerity approach goes completely unchallenged in the so-called alternative budget. The effects of Osborne’s first bout of austerity should be well-known to readers of SEB:

· Average living standards (per capita GDP) stagnated
· Real wages fell
· Public services are in crisis as jobs were cut
· The public sector deficit was not eliminated, and actually rose in 2012 as the economy slowed to a crawl
 · Productivity actually fell, which had only previously occurred in the early years of World War I and in the Great Depression

In economic terms, renewed austerity is equivalent to applying leeches to the patient when the previous quack remedy has failed. As the effects of austerity fall mainly on ordinary workers and the poor, the social effects are enormously damaging. 

It is clear that what is actually required is a strategy for investment-led growth. This will address the economic crisis directly and so will correct the deficit in government finances in the process. Fortunately, this is possible with the new economic framework outlined by Jeremy Corbyn and John McDonnell .

In contrast to the note from Rachel Reeves the new leadership of the Labour Party has identified the deficit of investment as central to the economic malaise facing Britain. In the US they talk of ‘secular stagnation’ or tepid growth because investment has only expanded by 10% in the years 2007 to 2014, according to World Bank data. In Britain investment has increased by just 7.8% in those 8 years. This little more than half the world rate of investment growth (14.2%) which is itself weak by historical standards.

The policy of asking and bribing the private sector to invest, a policy shared by Osborne and the Labour right, has failed spectacularly at Hinkley and elsewhere. Fewer homes are being built despite soaring prices, flood defences have been allowed to deteriorate and the rail network is truncated and overloaded, there is a looming energy capacity crisis while investment in renewable energy has been cut, and so on.

Labour’s new leadership argues that the public sector should increase its level of investment, in order to address this deficit and to spur growth. Relying on the private sector to lead has been tried and failed. In addition, unlike the hopes or pious wishes of both Osborne and Reeves, they have identified the means to achieve this increase in public sector investment, principally through the establishment of a National Investment Bank. This can borrow cheaply in the financial markets with the implicit guarantee of the UK Treasury. It can also ensure that the returns on the investment accrue to the public sector and that the investment stream is maintained even if private sector profitability is insufficient, or deteriorates.

It should be noted that this authentic version of a National investment bank has almost nothing in common with Osborne’s sop of a Green Investment Bank or Nick Trott’s version produced under Ed Miliband, which was aimed at providing loans to small firms where the commercial banks have refused. As small firms are not engaged in large scale housing programmes, or construction of rail networks, or the huge investment needed in renewables, this would be rather pointless to address an investment crisis. 

Ending austerity

The word ‘austerity’ does not appear in the alternative Budget from Rachel Reeves. This is for the very good reason that the Labour right believes it is inevitable, and has only ever argued for slower or shallower cuts at most.

By contrast Corbyn and McDonnell have outlined the economic policy framework which can end austerity by investing for growth. The clear distinction in borrowing only for investment and balancing current spending over the business cycle is the correct framework as it is the only one which is sustainable because it maximises the government impact on growth and living standards, and the returns to government from that investment.

It is also a strong base from which to attack Osborne, who rules out even borrowing for investment (although in reality he has doubled the level of government debt by borrowing to cover current spending, which is clearly unsustainable). Osborne’s policy, to save first and only invest when there are sufficient accumulated funds, belongs to a pre-banking, pre-financial era. It is as stupid as it is primitive. 

The Corbyn/McDonnell framework also stands in sharp contrast to the accumulated confusions of ‘keynesians’ (who have little to do with the views of Keynes) who believe governments can perpetually borrow for consumption, rather than as a temporary measure to avert crisis. As this entails debt and interest on it without raising the level of output, so it becomes a drain on the economy and slows growth.

Osborne and Reeves share the view that the private sector should be left to determine the level of investment in the economy and consequently to maintain or extend its near-monopoly on the ownership of the means of production. They maintain this even when the private sector is manifestly failing to deliver adequate investment. Of course, the ‘keynesians’ are opposed to austerity and its effects (unlike Osborne and Reeves) but they lack a credible framework to achieve an alternative because they refuse to clearly distinguish between the economic consequences of borrowing for consumption and borrowing for investment.

Corbyn and McDonnell do have the framework to achieve that and a mechanism to do so. Not only are they committed to ending austerity but their plan to increase public sector investment via the National Investment Bank means the public sector can borrow sufficient funds for the scale of investment and direct it towards the sectors required. 

The consequent increase in growth will allow them to halt all austerity policies and to roll them back. Government revenues will rise with increased economic activity and government outlays will fall as decent well-paid jobs are created. This is a deficit-reduction programme based not on cuts but on growth, and a commitment to both social welfare and rebuilding public services in the transition to a stronger growth economy and beyond. Because it is theoretically grounded, this is a genuine, practical anti-austerity policy.

.127ZThe giant consequences of China’s 6.5%-7.0% growth target
By John Ross
The following analysis of China’s decision to adopt a growth rate target of ‘at least 6.5%’ for its new 13th Five Year Plan for 2016-2020 originally appeared at China.org.cn.

The economy tops the agenda at this year’s National People’s Congress (NPC) with a focus on both prospects for 2016 and the 13th Five Year Plan for 2016-2020. Discussion on both was framed by two major events. On March 4, Chinese President Xi Jinping made key statements on China’s long term economic strategy while attending a panel discussion at the annual meeting of the Chinese People’s Political Consultative Conference (CPPCC). On March 5, Premier Li Keqiang delivered the government’s work report to the NPC focusing on medium to short term targets. The relation between the two was clear.
At the CPPCC, Xi Jinping reiterated that China’s fundamental economic structure would continue to be based on “diverse” forms of ownership which would develop side by side with a state sector that would play the “dominant” role – a firm restatement of China’s fundamental economic strategy since reform was launched in 1978. This economic structure generated in 1978-2015 an average annual GDP growth of 9.6 percent – the fastest sustained expansion by a major economy in history.
Xi Jinping’s emphasis may be placed in the context of two statements he made in November. At a politburo study session China’s president emphasized that a Marxist political economy would continue to guide China’s economic policy. Following a meeting of the Communist Party of China’s Central Committee, the president stated that economic growth during the 13th Five Year Plan period must average “at least 6.5 percent.”
Premier Li Keqiang’s work report to the NPC outlined medium to short term projections within these fundamental parameters. As the international media focused attention on 2016’s growth target of 6.5-7.0 percent, and the Five Year Plan’s minimum annual 6.5 percent, these will be analyzed first.
Qualitatively, China’s target is to achieve a “moderately prosperous” society by 2020. This translates into the Five Year Plan’s arithmetic.
To achieve “moderate prosperity,” the previous 12th Five Year Plan set the goal of doubling GDP for 2010-2020 – requiring a 7.2 percent annual average growth over the decade. However, in 2010-15 growth was faster than the targeted rate – averaging 7.8 percent. To complete the goal by 2020 now requires 6.5 percent growth. This constitutes the basis of the “at least 6.5 percent” target during the 13th Five Year Plan reiterated in Li Keqiang’s government report. The 2016 growth target is to meet or exceed the annual rate required to achieve “moderate prosperity” by 2020.
Both the Five Year Plan and 2016 targets are aimed at achieving their goals without economic overheating. In 2016, inflation is forecasted at 3 percent, accompanied by a budget deficit of 3 percent of GDP – modest by current international standards. Environmental protection is emphasized with energy consumption per unit of GDP targeted to fall by 3.4 percent in 2016. The Five Year Plan, for the first time, incorporates a total cap on annual energy consumption – an equivalent of 5 billion metric tons of coal by 2020. To sustain technological innovation, R&D expenditure will rise from 2.0 percent of GDP in 2015 to 2.5 percent by 2020.
Socially, strong emphasis was given to poverty reduction, with central government funds being increased by 43 percent in 2016. Over the course of the Five Year Plan, all of China’s 70 million people remaining in poverty will be lifted out of it, with 2016’s goal being 10 million. Life expectancy, the most sensitive overall indicator of social well-being, is projected to rise by a further year during the Plan.
Achieving these goals will have truly dramatic consequences for China, constituting an enormous increase in human wellbeing. But to understand the world changing consequences of China achieving these goals, and therefore the scale of challenges faced, it is necessary to translate these figures into international standards.
China in 1949 was one of the world’s least developed and poorest countries and has already transformed the world by achievements in poverty reduction. From 1981 to the latest World Bank data, 728 million people in China were lifted out of internationally defined poverty – the whole of the rest of the world achieved only 152 million. Now, after 37 years of rapid growth, China is about to transform the world towards the top range of international income levels.
“Moderately prosperous” is a specifically Chinese target, but the World Bank establishes an international criterion for a “high income” economy – per capita GDP of $12,736 in 2016. While exchange rates would affect the exact figure, China achieving the 13th Five Year Plan’s growth and inflation targets would bring it to the threshold of or exceeding World Bank criteria for a “high income” economy.
But in the latest World Bank data, the combined population of all high income economies is 1.368 billion, while China’s population is 1.364 billion. China entering the ranks of high income economies would, in a single step, double the number of people living in these countries.
Chinese people achieving “moderate prosperity” would transform the global economic situation. It would also transform China’s position in the world, being reflected in corresponding changes in China’s defence spending and foreign policy weight. But as a consequence, rather than concentrating on the enormous step forward for humanity that China’s “moderate prosperity” would constitute, some forces are attempting to block China’s rise – even if this means China’s people, one fifth of humanity, would not achieve prosperity.
The most powerful such forces are U.S. neo-cons whose goal, in the words of a recent study for the U.S. Council on Foreign Relations on “Revising U.S. Grand Strategy Towards China,” was, “preserving U.S. primacy in the global system ought to remain the central objective of U.S. grand strategy in the twenty-first century.” To practically achieve this, it called for “new trade arrangements in Asia that exclude China.” Parallel anti-China propaganda campaign attempts are seen as otherwise inexplicable attempts to portray China as facing a “hard landing” when China’s growth rate is almost three times that of the U.S. with China adding more to the world’s GDP each year than the U.S.
The fact China has set a growth rate goal of 6.5 percent and above for the next five years has a far greater significance than in domestic terms alone. It is the most important economic target on the planet.John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

.405ZChina won’t have a hard landing – because it is not a capitalist economyBy John Ross

John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0

.773ZCrisis remains an investment crisisBy Michael Burke
Prior to the recent G20 meeting leading international economic bodies such as the IMF and the OECD made tentative calls for increased investment, although this was often confused with increased spending. This is a belated or partial recognition of the real source of the crisis in the advanced industrialised countries. In terms of actual changes to policy it seems to have made no impact at the G20 whatsoever.

As the world economy is once more slowing and there are again a series of spurious explanations offered for this, it is worth revisiting the actual causes of the ongoing crisis which first became widely apparent in 2007. In this piece the advanced industrialised countries as a whole will be the reference point, using aggregate data for the OECD. But each individual economy within the OECD simply provides its own unique combination of these common factors, including Britain.

If one word can summarise the entire crisis in the advanced industrialised countries it is: Investment. The fall in Investment preceded the fall in GDP. It was also the largest component of the fall in GDP and it is the sole component which has failed to recover.

These points are illustrated in Fig.1 below, which shows real GDP, Final Consumption and Investment (Gross Fixed capital Formation, GFCF) for the OECD as a whole, using US$ Purchasing Power Parities.

Investment (GFCF) first fell in the OECD in 2008. Both GDP and Final Consumption Expenditure continued to increase and only fell for the first time in 2009. Falling Investment caused the crisis. On a full-year basis the total decline in Investment was 13% from its pre-recession high to the low-point of the recession in 2009. By comparison GDP fell by 3.5% and Consumption fell by 0.3%. The fall in Investment was far greater in proportional terms than GDP or Consumption.

Even though Investment is a far smaller proportion of GDP than Consumption in the OECD, its decline in monetary terms was far greater. From the pre-recession peak to the low-point of the recession Investment fell by US$1.3 trillion (in PPP terms). Consumption fell by US$ 0.03 trillion, or US$30bn, and barely constitutes a blip in the chart above. The fall in Investment was the largest component of the crisis.

Since the trough of the recession in 2009 real GDP has recovered by US$3.95 trillion. In 2014 GDP was US.55 trillion larger than its peak in 2008. Consumption is stronger. It has increased by US$2.17 trillion since 2009 and is now US$2.26 trillion above its pre-recession peak. By contrast Investment has recovered by only US.94 trillion from 2009 to 2014 and it remains US.37 trillion below its 2007 peak, or US$366 billion. The economic crisis in the OECD remains an investment crisis.

Consumption requires Investment
Economics should be the study and practise of achieving the greatest sustainable material well-being of the whole of society. For most of humanity this still revolves around the struggle for food, shelter and clothing. In the advanced industrialised countries, the required quality of those necessities has increased alongside the desire for good health services, education, welfare, access to recreation and leisure, and so on. Unfortunately, for material reasons a great deal of confusion surrounds that goal and the methods to achieve it. 

The (inverted Say’s Law) argument that increased Consumption will lead to increased Investment has evidently not materialised in the current crisis. As noted above, Consumption has increased but Investment has not. This was also the case in the Long Depression at the end of the 19th century as well as in the Great Depression of the 1930s. In both cases Investment continued to stagnate or fall despite a rise in Consumption. Currently we are in a phase of what Marx called the hoarding of capital. Keynes used the terms liquidity preference.

The reason is simple. The advanced industrialised countries are capitalist economies. Capitalism does not exist to satisfy human needs, or the desire for material well-being. It is not driven by ‘demand’. It is driven by profit. Under circumstances where Consumption has recovered, but profitability, or anticipated profitability has not, then Investment will not increase. This characterises the current situation in the OECD economies.

All Consumption of any good or service must be preceded by its production. Any attempt to increase Consumption without increased production simply leads to the creation of debt, a claim on future production. It is unsustainable. The current downturn in the British economy arises because household debt and overseas indebtedness have both increased to unsustainable levels. 

There are two principal methods of increasing production. One is to just get more people into work and/or make them work longer hours for less, or some combination of the two. The other is to increase the productivity of labour through increased Investment, either in the amount or quality of the means of production or through the increased skills of the workforce. The former cannot lead to rising living standards as it relies on working longer for less, and is the path Britain has chosen over the past period. The second method, the increased productivity of labour requires Investment.

Therefore, in order to raise living standards and to sustainably improve both the quality and quantity of goods and services generally available (including housing, health care, education, welfare and so on), it is necessary to increase Investment. Increased Consumption first requires increased Investment.

Levels, ratios and proportions
The Consumption of goods and services is a measure of the material well-being of the population. Yet, there are two main uses of all output, it can either be consumed or invested. So, if it were possible to sustainably increase the level of Consumption by reducing the proportion of the economy directed to Investment and increasing the proportion devoted to Consumption, then the level of Investment should be reduced to a minimum or even zero. In reality, the opposite is the case. The greater the proportion of the economy devoted to Investment, the faster the rise in sustainable Consumption.

Taking just the OECD data cited above, in the period from 2007 to 2014 investment as a proportion of GDP fell to 20.5% from 22.5% in the period 2000 to 2007. Consequently the proportion of GDP devoted to Consumption rose. Yet the level of Consumption increased by a cumulative 18.6% in the earlier period and has increased by just 6.4% in the same 7-period since the recession. The level of Consumption rose more rapidly when it was a smaller proportion of GDP.

This seems to be paradox, in that a falling proportion of Consumption in GDP leads to its faster growth rate. It is extremely important, since the population naturally does not care what proportion of the economy it is consuming, only that its material well-being is rising. But there is no paradox if it is understood that there is no such thing as a Consumption-led economy. On the other hand, as Investment increases the means of production, then the economy as whole can expand with rising Investment. From this expansion of GDP it is possible to increase the level of Consumption.

This is why the economic policy framework outlined by Jeremy Corbyn and John McDonnell recently is so important, because it is correct. There is a clear emphasis on borrowing for investment, and that the current or day-to-day budget will be in balance over the business cycle. The National Investment Bank will be the principal vehicle for the investment. This amounts to the public sector having a greater role in the investment function, thereby leading to stronger growth. It is primarily from this source of rising activity that the current budget will be brought into balance as tax revenues increase and social welfare outlays related to poverty and underemployment decline. Over time the entire austerity could be reversed and living standards raised.

It is George Osborne’s refusal to invest, indeed his ridiculous ban on productive investment that will deepen the crisis. The new framework from the labour leadership begins to offer a way out of perpetual crisis and austerity.

.255ZLabour now getting it right on economic policy frameworkBy Michael Burke
Below is a series of short extracts from recent speeches or articles by Jeremy Corbyn and John McDonnell. They amount to the beginnings of a major campaign to reorient the economic debate in Britain along the correct lines.

Together they are based on the correct economic framework that investment is the decisive driver of economic growth and prosperity. As a result it is logical, as

.006ZThe mystery surrounding the ‘productivity puzzle’By Michael Burke
The latest official data show how far the UK economy is lagging behind other industrialised economies in terms of productivity, in this case output per hour worked. There is too a long-standing discussion amongst economists in Britain about the so-called ‘productivity puzzle’. There is a genuine crisis of productivity in Britain. But in reality there is no productivity puzzle at all. It is easily explained by the weakness of investment. In particular, the recent fall in in the stock of capital in the British economy explains the almost unprecedented decline in UK productivity.

Currently, debate in Britain is dominated by the possibility of ‘Brexit’. This is an error. Under current circumstances, whether Britain is in or out of the EU is a trivial matter in economic terms compared to the crisis of productivity. This is because, contrary to George Osborne (and those on the left who are confused and echo him) it is not possible for consumption, or wages to lead economic recovery. Sustainable increases in consumption require sustainable increases in output. Unless that is achieved by more people simply working longer hours, then it must come via increased productivity. Without it, living standards will fall. This will be the case in or out of the EU.

Yet the latest ONS data show that productivity is falling. It also shows how far the UK economy lags behind other industrialised economies. Fig.1 below shows the relative productivity performance of the UK economy versus the other countries of the G7. According to the ONS, UK GDP per hour worked in 2014 was lower than the rest of the G7 average by 18%. Within that, it was lower than both the US and France by 31% and lower than Germany by 36%. The sole G7 economy whose productivity is lower than the UK’s is Japan, which has been stagnating for 25 years.

.866ZLabour’s economic alternative to the budget should centre on a National Investment Bank

John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com3

.801ZBetter off with Labour – the alternative to Osborne’s cutsBy Matt Willgress of the Labour Assembly Against Austerity

The following article deals with Osborne’s responsibility for the current slow down in the British economy. The article previously appeared here on Left Futures under the title ‘No hiding place for Osborne’.

The British mainstream media is now so clearly biased in favour of the ruling party it can sometimes seem as if politics is entirely divorced from reality. But reality has a habit of intruding on make-believe. This is the position George Osborne now finds himself in.

In the Autumn Statement, the Office for Budget Responsibility (OBR) ‘awarded’ Osborne £27 billion in lower Budget deficits because of projected stronger growth. The March 2016 Budget is likely to tell a very different story, with growth forecasts slashed. Osborne is likely to admit that the Tory Government will again miss its deficit for the current Financial Year and has, in the words of Shadow Chancellor John McDonnell MP, “been getting his excuses in early.”

In June 2010 Osborne and the OBR projected that the £153 billion deficit would now be eliminated. Yet it only narrowed by £64 billion. Even the OBR’s latest forecast shows the deficit at £73.5 billion for the current year, meaning the deficit is still close half its original size.

The reason for this is twofold: growth has been far below official estimates and cuts don’t lead to savings. Austerity slowed the economy to a standstill in 2012 and then Osborne abandoned new measures austerity measures, instead stoking up consumption and house prices to help get re-elected. Government current spending is also £40 billion a year higher than when the Coalition took office, because austerity increases low pay, under-employment and poverty. At the same time, it is Government investment that has actually collapsed.

Ideological cuts

How could Osborne have got it so wrong?

He is often described as an ‘ideological Chancellor.’ He believes in austerity and shrinking the state, subscribing to the notion that the state impedes growth and that removing its role in the productive sectors of the economy will lead to prosperity. This applies across the board – to education and health, banking as well as energy, water, transport, or house building. He believes his medicine works and is repeatedly surprised when it doesn’t. He is then obliged to rationalise or find excuses for its failure.

This is what led him to a U-turn on growth. But any observer of the economic data would know that the economy was already slowing. To take one example the annual growth rate had already slowed to 2.1% in the third quarter of 2015 from 3% in mid-2014.

Rationalisation of the troubles to come

In his ‘cocktail of negative factors’ affecting the economy Osborne cited the turmoil in the Middle East, the slowdown in China and falling commodities’ prices. All of these are international factors of varying significance. But in truth the continued slowdown in the British economy is mainly home-grown.

Middle East turmoil has been a continuous factor since Britain and the US first began bombing it some years ago. But as it is not new it cannot be responsible for a downturn.

In terms of China, Britain does not export much and very little of that low total is destined for China, just 2% of total UK exports. The Chinese economy has slowed from 7.5% growth to 6.5%. The direct effect on Britain’s growth is therefore negligible.

The fall in commodities’ prices is very significant globally, and depresses Britain’s North Sea oil output. But as Britain is a big net importer of commodities, the collapse in commodities’ prices is a net benefit to the British economy.

Reality intrudes

The responsibility for the slowdown in Britain can be laid squarely with Osborne. He inherited a slow recovery in 2010 and promptly stalled it with austerity. Because the economy was stagnating in 2012 and Tory poll ratings fell, Osborne then stoked rising consumption and house prices in order to get re-elected. That short-lived and unsustainable boom-let which is now running out of steam.

This was predicted by numerous leading economists. Now, Osborne will deepen this slowdown by imposing a second round of austerity. It will have the same effect as the first, although in circumstances of slowdown rather than recovery.

But the political situation has changed dramatically. There can be no blaming the effects of this new crisis on Labour. Instead, Labour now has a leadership utterly opposed to austerity and beginning to advance an alternative to it.

In addition, wider layers of society are drawn into opposition to aspects of austerity. This includes highly skilled health workers. It will increasingly include teachers, students, industrial workers, housing association tenants and many more, struggles that can be linked together through initiatives such as those organised by the People’s Assembly Against Austerity.

Not only is the broad anti-austerity movement is growing, but crucially under Jeremy Corbyn there is now a political leadership in Parliament to offer an alternative policy for Government. The fightback is stepping up – we all have a duty to get involved, both in building the People’s Assembly Against Austerity movement, including its Labour wing the Labour Assembly Against Austerity, and in building Labour’s electoral support for this year’s London Mayoral Contest and the election of a Jeremy-Corbyn led Government in 2020.

See labourassemblyagainstausterity.org.uk and www.thepeoplesassemblyagainstausterity.org.uk for more information and to get involved.

EVENT: Better Off With Labour – The Alternative To Osborne’s Cuts – 9 March 6.45pm, House of Commons.  Annual LAAA pre-budget event with speakers including John McDonnell MP and Cat Smith MP. RSVP on Facebook at https://www.facebook.com/events/1254712247879119/

.495ZLessons for Latin America from China’s Economic SuccessBy: John Ross 

The following article deals with the lessons for the Latin American left from China’s unprecedented history of economy growth, poverty reduction, and rising living standards. Its central point is that the Latin American left is rightly proud of the ‘revolution in distribution’ since left wing governments appeared in Latin America. But Latin America has also needs to study the ‘revolution in production’ of China – that is the securing of decades of rapid economic growth which provided the underpinning for prolonged increases in living standards.

The article appeared in English and Spanish for the Community of Latin American and Caribbean States (CELAC) summit. While specific points on the alleviation of extreme forms of poverty apply to developing countries nevertheless the overall economic framework, that state led investment is the key to sustained growth, also applies to Europe.

Latin America in the period led by left-wing governments made a fundamental ‘revolution in distribution’ to the enormous benefit of the continent’s people. As the World Bank analysed in 2013: ‘For the first time ever, a decade of strong economic growth within the region saw employment increase and wage inequality drop, contributing to an unprecedented reduction in poverty and an increase in prosperity for all levels of society… average real incomes in Latin America have… risen by more than 25% since the turn of the millennium. And with the lowest wages increasing considerably faster than the regional average, it has been the poorest 40% who have benefitted the most.’

From 1999-2012, 31 million people in Latin America were lifted out of the World Bank’s international definition of extreme poverty of $1.90 daily expenditure in internationally comparable terms (parity purchasing powers at 2011 prices). In the same period 52 million were lifted out of World Bank defined poverty of daily $3.10 expenditure measured in the same units.

The basis of this tremendous social progress was accelerated economic growth in contrast to the economic catastrophe produced in the late 20th century by neo-liberal policies.

Until 1993 average per capita GDP in developing Latin American economies remained below 1981 levels. By 1998 annual average per capita GDP growth was still only 0.9% – using a five-year average to avoid the influence of short term fluctuations.

Only after Chavez was elected Venezuela’s President in 1998, followed by other left wing Latin American leaders, did economic growth seriously accelerate. By 2007 annual average per capita GDP growth in Latin America reached 2.8%, again taking a five-year average, with faster growth in key countries including Venezuela’s 5.7% and Argentina’s 7.7%. The left wing governments ‘revolution in distribution’ ensured the benefits of this economic growth was shared by Latin America’s population.

But unfortunately recent economic setbacks indicate that this ‘revolution in distribution’ was not yet matched by an equivalent ‘revolution in production’ – an ability to maintain strong positive economic growth in the face of negative world economic trends. Taking the latest available data Argentina’s GDP growth has fallen to 0.5% and Brazil’s is -1.7%.

Due to the consequences of such economic slowdowns right wing forces won Argentina’s recent presidential election and Venezuela’s legislative elections while a (so far unsuccessful) attempt to impeach Brazil’s President is underway. This is particularly serious as such right wing forces present themselves as ‘centrist’ for propaganda purposes but in reality their economic programmes represent a shift towards neo-liberalism – polices which have produced economic disaster not only in Latin America but elsewhere. Failure to maintain substantial economic growth in adverse global circumstances therefore led to highly undesirable setbacks.

I am based in China but follow Latin America closely and have travelled there numerous times including twice for conferences with President Chavez personally. From this experience I believe it is crucial Latin America’s left closely studies China’s economy – not in the sense that China’s model can be mechanically copied, but in the sense that key economic processes operate in it which are equally applicable to Latin America.

China successfully made a ‘revolution in production.’ For nearly four decades China’s economy grew annually at over 8%, taking it from one of the world’s poorest countries to the threshold of a ‘high income economy’ by international criteria. This was the largest ‘revolution in production’ in human history. Even after the international financial crisis produced global economic slowdown, China in 2015 achieved 6.9% growth.

Contrary to US myth, China’s growth did not benefit chiefly the rich but ordinary people. China lifted 728 million people from World Bank defined poverty. In 2015 the average inflation adjusted real disposable income of China’s population rose by 7.4%. This is the type of ‘revolution in production’ Latin America needs.

The differences between Latin America and the ‘China model’ are clear. Modern statistical methods, officially adopted by the UN and OECD, show that fixed investment accounts for over half GDP growth. China’s high investment level explained its rapid growth – in 2014 China’s fixed investment was 44% of GDP. Latin America’s far lower investment level makes it impossible to achieve rapid growth and maintain this in adverse global circumstances – Argentina’s fixed investment level is 17% of GDP, Brazil’s 20%, Venezuela’s 22% – Ecuador, however, had a decisively higher investment level at 28% of GDP. Taking into account capital depreciation the contrast is greater.

Net savings, the finance available for additional investment, is 32% of China’s Gross National Income compared to 7% in Argentina and 5% in Brazil. Some countries, Bolivia and Ecuador, have achieved levels of 15% but this is still below China’s level. With such low levels of fixed investment rapid growth and anti-cyclical stimulus packages are impossible.

The reason for China’s rapid investment growth is clear. China has both a private and a state sector but it is not a ‘mixed economy’ in a Western sense. In Western economies the private sector is dominant, in China there is a ‘dominant position of public ownership’ to use the official formula. In Western terminology China’s model can also be expressed in Keynes’ concepts: ‘the duty of ordering the current volume of investment cannot safely be left in private hands’, there should be ‘a socially controlled rate of investment,’ requiring ‘a somewhat comprehensive socialisation of investment.’

The ‘China model’ did not eliminate the private sector but made state investment the economy’s driving force – with the private sector also benefitting from the resulting growth. It is China’s ability to have a state sector which does not administer the economy but is sufficiently large to maintain and control the economy’s investment level which explains China’s success. It is this model of an economy, which does not eliminate the private sector but is driven by high levels of state investment, that explains China’s rapid growth and differentiates its model from that of most of Latin America.

For economic success, study of China’s ‘revolution in production’ should supplement the ‘revolution in distribution’ of which the Latin American left is so justly proud.

John Ross is Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China in Beijing.

This article was originally published by teleSUR at the following address:
http://www.telesurtv.net/english/opinion/Lessons-for-Latin-America-from-Chinas-Economic-Success-20160126-0014.html

John Rosshttps://www.blogger.com/profile/08908982031768337864noreply@blogger.com0