Cuts in spending won't reduce the budget deficit while the banking system is leaching wealth from taxpayers and savers
Public discourse, cheered on by the BBC, amplifies George Osborne's assertion that the deficit "is like a credit card", and that cuts in government spending are needed to reduce the deficit. If only government deficits were like our own. To pay down a credit card may require no more than a cut here and a tightening of the belt there. Perhaps we might supplement our income with a part-time job. But with cuts and additional income, it is possible to regain control, and pay down that card.
But government deficits cannot be managed like that. The UK Treasury cannot cut the deficit, only government expenditure. Whether or not the budget deficit comes down depends entirely on how the rest of the economy reacts. If confidence falls, private investment stalls along with cuts in public investment; if public and private sector unemployment rises, then government tax revenues will fall, welfare payments will rise – and the deficit will soar, regardless of cuts in child benefit or defence spending.
That is why the ruthless determination of the Treasury to inflict pain on the poor, on women and children, on the middle classes, quangos and the army, is so poignant to watch: it may all be to no avail. The debate is not between deficit cutters and so-called deficit deniers; it is between "cutters" and "spenders" – between spending cuts and fiscal stimulus.
"Cutters" believe they can bring down the deficit by slashing government spending. "Spenders" know that cuts cannot do it. Only by the public sector stimulating the private sector can we reduce the deficit. This leads us to the elephant that looms in the hall of public debate: the broken financial system. It is the banks that are broken, not government.
Think of the economy as a three-legged stool. One leg is public sector investment. The second is private sector investment and activity. The third is the banking system, which oils the wheels, so to speak, of the first two. The banking system exists to serve the real economy – but has been shattered by the theories of neoliberal economists.
As a result of liberalisation (including the 1971 Competition and Credit Control Act), the system as a whole has been burdened by bad debts and is effectively bankrupted. Banking debts worsen with every personal and corporate bankruptcy, every US home foreclosure (and there were more than 100,000 last month); and with the now inevitable fall in UK house prices.
The consequence is evident everywhere: in the hoarding of cash by bankers; in their failure to lend to the private sector for investment in economic activity. In the way pensioners, savers and taxpayers are lending to the banks – at what for some, are negative rates of interest.
In a truly bizarre twist, the banking system has become a borrowing machine, not a lending machine. Rather than serving its purpose of lending to the real economy, the banking system is leaching wealth from taxpayers, savers and entrepreneurs.
According to the Bank of England's June financial stability report, in terms of balance sheets, the UK private sector is repaying more to the banks than the banks are lending. Over the past five quarters net lending was positive only once. The latest quarter showed the highest repayment of lending on record. If repayments by other financial corporations had been included, the position would be much worse. In other words, pensioners, savers, companies, households and individuals are lending to the banks.
It gets worse. For the banks have chickens coming home to roost – known in the jargon as the "funding gap" or "funding cliff". According to the financial stability report, banks need to refinance or replace around £750bn to £800bn of term funding and liquid assets by end 2012. That implies they need to raise over £25bn every month for the next two and a half years. This is much more than the £12bn monthly average raised so far.
But economists – and politicians - have nothing meaningful to say about this failure of economics, and of institutions designed to underpin the real economy.
Instead economists, politicians and Treasury officials engage in a form of displacement activity, fiddling with child benefit and quangos. All the while the private sector, instead of doing the government's bidding and investing in economic activity, lends to the banks, and, starved of affordable credit, contracts its own activity.
Because of the failure of the banking system, the private sector will not be stepping in to compensate for the Osborne cuts. As a result, expect the budget deficit to rise. Pensioners, depositors and savers will continue lending their precious savings to bankers earning bonuses, in return for derisory rates of interest. And while this is happening, all eyes are on the innocent mouse that is child benefit.
Copyright Speakers Corner 2016