Monday 11 October 2010

Economics for Sickies

The Guardian today report that :

  "Optimism among the finance chiefs of Britain's largest businesses has fallen for the third quarter to hit the lowest level in 18 months."

More worryingly perhaps, they also tell us that 

"Companies cut spending and hold back on hiring"

(Full article here

Now, why does this matter to someone on ESA or DLA, Incapacity or Jobseekers you might ask?

Well it's crucial to the coalition's plans that we don't fall back into recession.

The last Labour government spent a lot of their energies (yes, and our money) supporting jobs, stimulating growth and making sure home-owners didn't lose their homes. It's only really now that we're seeing an unwinding of a lot of these schemes, both here and in the rest of the world. Without replacements, the economy is effectively on it's own, left to sink or swim.

The coalition (at least so far) have no plan for growth, rather they believe that by pruning back the state and spending, the private sector will magically spring into life to take up those who lose their jobs in the cuts.

Now, this is the technical bit.

In most cases, every pound "given out" by the state is then spent by the recipient and therefore stays in the economy. If the government is lucky, some of the pound ends up back in the treasury in tax receipts (ie from VAT) If, for example the government supports a company with, say, £10,000 and the company goes on to make £100,000 profit rather than going bust, then the treasury receives it's £10,000 back in tax receipts AND receives tax from the employees of the company and perhaps 20% VAT on any product they produce. In this way, the original £10,000 isn't really spent at all, rather it has been a kind of loan. What's more, the company, now hopefully healthy, goes on to make profit for years to come, so the money is "paid back" many times over.

Are you with me so far?

Now this was working under Alastair Darling and Gordon Brown. The deficit was going down every month and was 25 billion lower than predicted when Osborne inherited the economy. Growth was strong and we were predicted to come out of recession faster and stronger than any other country in Europe. By spending, the UK was in fact saving. This is the oh-so-complicated and counter-intuitive truth of the last government's plans.

Now, Osborne only has growth and cuts to pay off the deficit. The problem is, the cuts stifle - strangle if you like - the growth. The £10,000 isn't available to the company, so they can't spend it. The company goes bust, they don't pay tax, their employers don't pay tax AND become benefit claimants in need of Jobseekers allowance and probably housing benefit. The company no longer exists so it can't make a profit in future years.

Simple examples, but I hope they help.

And what of us? It is a certainty that more people on ESA will be found "fit to work" (whether they are or not) under the new assessments as Osborne's plans depend on it. He aims to get people off Jobseekers too. The problem is, if you cut jobs in the public sector AND businesses are too concerned abut double-dip to hire anyone new, then exactly which jobs are we supposed to go into? With such a queue of applicants from the public sector, all with recent experience and skills, just who on earth will take on the person with a serious health issue instead? Who would take the person who's been unemployed for 6 years, or the woman who has been taking a break to raise her children, over the 27 year old, recently employed middle manager?

Osborne has predicted that 2.5 MILLION jobs will be created in the private sector over the 5 years of this parliament and the OBR have agreed. The problem is, he hasn't said HOW. Double dip would make those figures a nonsense (if they aren't already) and unemployment will rise rather than falling.

During the last recession in 2008, Labour spent money, yes, but so did every country. Crucially they spent it on saving homes from repossession, supporting industry (ie car scrappage scheme) and saving the banks. If this government aren't prepared to do the same through a double dip, the effects could be disastrous. Much higher interest rates,  millions unemployed and industry decimated. Or, hang on, is that Maggie's 80s I'm thinking of...........


  1. There must be limits to this, otherwise we would never have ended up in deficit in the first place (unless it was Labour's fault for not spening enough during their years).

    I'm not saying you're wrong. Just that it must be significantly more complicated.

  2. I've always believed this. It's not complicated - it's about your underpinning philosophy about the role of government in protecting its citizens. The Tories will always try and protect people who already have money through an automatic assumption that you spend less on those who don't because they don't make any money...they reckon that will help the economy - it won't, unless the private sector really does develop millions of jobs. In order to do that, they'll want to do away with minimum wage, stop benefits, stop spending on schools and education....We're in a deficit because of greedy, corrupt banks....

  3. Hi ladies - great to see the first comments are from women! One of the main reasons I set up the blog was to encourage more women to debate politics.

    @Corinne - Sadly, it really is that simple.

    The first and perhaps most important starting point is this :

    We always have a deficit. Almost all countries do.

    Labour inherited a rate (as a % of GDP) of 42% from the last Conservative government and it stayed lower than that for every year of the Labour government, falling to 29% in 2002 - it's lowest figure since WWII.

    The deficit shot up as the banks started to fail, businesses went bust and unemployment rose.

    After the global Credit Crunch in 2008, it rose to a peak of 72% in 2010.

    This was money spent on bailing out the banks and protecting the country from depression. Not pot plants and paper clips, lol.

    After WWII, our deficit was 215% of GDP!! 215%!!
    And what did we do then? We spent our way out of the problems by building the NHS, building schools and launching massive house building projects. This worked and led to the biggest sustained boom of our time.

    You'll notice that the coalition always refer to us having the largest WARTIME deficit. We've been at war for most of our history and even throughout the 18th and 19th century our deficits were higher than now.

    Anyway, thanks again for the comments - keep them coming! Sue Marsh