This is the difference between the present value of the government’s commitments to cover its outgoings (such as state pensions and running the NHS) and the present value of its tax revenues. This difference is undoubtedly significant, at close to six times our national income.
But this has largely nothing to do with government borrowing and the creation of money other than the cost of finance i.e. the interest the government pays on our national debt, which forms part of those outgoings alongside paying for the NHS and welfare etc.
This is a problem in Europe too of course. Greece is at the epicenter of Europe’s so called ‘debt crisis’. The term debt crisis in particular is misleading here though as it is more of a deficit crisis. The Greek problem first came to light in October 2009 when global financial markets were still reeling from the financial crisis and Greece announced that it had been understating its deficit figures for years, raising alarms about the soundness of the country’s finances.
Suddenly, Greece was shut out by the private banks, as it was considered too high risk, such was the size of its borrowing and budget deficit. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.
In order to protect the Euro, the now notorious Troika of The International Monetary Fund, the European Central Bank and the European Commission stepped in with a funding package, but with it imposed terms – higher taxes, economic reforms and austerity. They had to otherwise nothing would change and they would never get their money back!
Unfortunately it hasn’t worked and there is no doubt now that five years on and the Greek economy is on the brink. The only sensible solution now is surely debt forgiveness (also known as debt relief) – this simply means writing off the debt to allow the country to recover, but the Troika are not budging.
So why did countries build up such budget deficits?
According to a number of academics, the fiscal imbalances, or deficits, are a consequence of public spending pressures that we face as the baby boom generation reaches retirement age and life expectancy continues its upward trend. Many countries are facing similar problems. The UK deficit is high relative to our US and European counterparts, but the Greeks situation is made far worse because financial institutions lost faith in the country as a borrower. The UK and Greece are very different beasts though.
Our borrowing costs are low and we are viewed as safe borrowers by the banks because the markets have confidence in the UK economy, whereas the bank’s have no confidence in Greece and its finances. The UK is considered a safe heaven because investors are reassured that the Bank of England will buy up bonds (government loans) in an event of any sell off. Also, because we are not in the Euro we can devalue our currency to increase exports. Finally, UK bonds are attractive because we haven’t defaulted on our debt for over 300 years.
So if our government finances are not such a mess, why is The Government imposing such harsh austerity?
Austerity is used as justification for a smaller state to gain lower taxes. It’s also argued that austerity was used to paint Labour as a party that can not be trusted with the country’s finances again. This is how The Conservatives won a second term because people vote out of fear. As everybody knows, elections are won and lost on economic credibility. Hence, as people believed the myth that Labour created the mess and The Conservatives were cleaning it up, Labour wouldn’t be trusted with power again.
Other solutions to dealing with the deficit
It’s not to suggest that the UK Deficit should be ignored, but there are many calling for a fairer, more measured approach. There are clear choices, which don’t even get debated in mainstream politics and the media. On the one hand, we could increase income taxes, National Insurance contributions or consumption taxes such as VAT and fuel duty. On the other, we can take the currently favored option of drastically cutting public spending.
What this really comes down to is which groups in society should bear most of the burden – low-paid workers and the unemployed who rely most on the welfare state, the NHS and other support services provided by any decent modern society, or should the wealthy bear more of the cost by paying a little more tax, or at least by paying some tax? Let’s face it, we lose billions in revenue from tax dodging corporations and high net worth individuals every year.
As a recent Guardian report uncovered…
“In the financial year 2012-13, the government spent £58.2bn on subsidies, grants and corporate tax benefits. It took just £41.3bn in corporation tax receipts.
In 2012, Amazon was attacked by MPs on parliament’s public accounts committee for avoiding UK tax. Yet in the same period, the online retailer was awarded £16.5m in grants by the administrations of Scotland and Wales to help build distribution centres. To link the Wales plant to the transport network, the Welsh assembly built the mile-long “Ffordd Amazon road” at an additional cost of £3m.”
This ‘Corporate Welfare’ is a blatant transfer of taxpayers money to large corporate businesses.
The Conservative Government likes to remind us is that movements towards higher corporation tax or tougher enforcement would likely deter investment in the UK, even by those corporations who are willing to pay their fair share, as it might be interpreted as a signal that further regulations will follow in the future, making it more difficult to do business in the UK.
But our Corporate Tax levy, at 20%, is lower than the global average and lower than the EU average. It is much lower than in France and Germany and half that of the US; and we’re giving away even more than we take in tax by way of direct handouts.
Our government is so obsessed with attracting big business that it imposes punitive cuts in spending to balance the books whilst subsidising big business. And these cuts are being made at a level and pace that cannot be justified. The fast pace of fiscal adjustment that George Osborne has instigated doesn’t aim to spread the pain. He wants instant results, so that he can take credit for re-balancing the books. Shrinking the state and lower taxes also fall in line with Conservative neoliberal ideology. The result is that the burden per person is much larger, and the economic pain for individuals correspondingly greater.
Does it work?
It hasn’t worked in Greece where austerity policies have led to unemployment rates of 28% nationally, without reducing the deficit or providing the economic growth it promised.
So, what should be done?
At the very least we need to have a public debate about how to deal with the deficit issue, rather than simply accepting the path chosen by the main political parties and the European and International financial institutions imposing austerity.
Is it time to consider a different approach with a higher proportion of GDP being spent on government services; perhaps 45% as is the case in Germany. We can’t continue to roll over for big business or give up trying to collect corporate taxes because it’s too hard. Instead, we need to see rich individuals and multinational companies paying their fair share of taxes.
Thomas Picketty suggests that a tax on capital instead, or as well as, income could not only provide fiscal returns, and hence reduce the fiscal imbalance, but would have other benefits too. The tax burden would fall heaviest on the “super rich” – those most able to afford the tax and who are the section of the populace that has benefited most from the economy. The tax, depending on what tax rate is selected, would also go some way towards reversing the polarity of wealth which has been such a feature of recent decades.
The concept of taxing capital fills the richest 1% with horror and has prompted an outpouring of misleading arguments against Picketty, and regrettably these arguments hold sway to our political leaders who are under the control of the 1% by virtue of their control of the media and the lobbying groups.
As well as reducing inequality we need to live within our ecological means and our current requirement of needing the resources of three planet Earths is already causing massive disruptions that will rapidly reach catastrophic proportions. If we really want to talk about balancing the books, the truth is that we need to take a look at what our fair share of the Earth’s natural resources is and set ourselves on course to really live within our means.