Give it to the spenders, not the banks and businesses, Mr Osborne

Why is the government persisting in policies that strangle demand in the economy instead of boosting it?  Faced with a bad financial crisis, a paralytic economy and no growth, the coalition government’s immediate instincts are utterly predictable: print money and give it to the banks, and lend a bunch of tax or borrowed money to more banks and small businessmen.  Then scold the banks for not lending the money to the businessmen and scold the businessmen for not borrowing it to start up or expand projects that will employ some of the hundreds of thousands of public servants thrown out of work by the ‘deficit reduction’ programme of cuts in government spending.

Sure enough, that’s all the Chancellor of the Exchequer, George Osborne, can think of to get the economy moving.  Meanwhile the numbers of the unemployed, thanks to the remorseless cuts,  keeps growing, costing the government more and more in unemployment benefit, housing benefit for those who lose their homes as well as their jobs, and costs to the NHS, and reducing the government’s tax take, thus increasing the budget deficit and the need for more, not less, government borrowing.  Trouble at the Eurozone mill further aggravates the problem, although it manifestly didn’t cause it.

The truth, unpalatable as it may be to the Tories and embarrassing to their LibDem partners (some of whom may be presumed to know better: eh, Vince?), is that the root of the problem is lack of aggregate demand in the economy.  Too many people haven’t got enough money, and they are mostly getting worse off all the time. Not enough households or firms are spending or planning to spend enough money on goods and services to justify businesses in investing to produce more of either, or, therefore, to risk borrowing money for that investment.  Demand is so flat that business perfectly logically lays off its staff instead of recruiting new employees, thus further depressing demand as more of those made redundant join the dole queues.  The main reason for the banks’ failure to lend more for business expansion and start-ups is that business is unwilling, quite rationally, to risk taking out expensive or even cheap loans when there’s so little prospect of selling more goods and earning enough additional money to service and eventually repay the debt.  Pumping more and more money into the banks is not just irrelevant: it’s stupid, when the same money could be put to so much better use.

The government should be lavishing additional money on those who can be relied on to spend all of it, and at once.  These are not bankers and businessmen, who will save most of it, much of it in off-shore tax havens or on investments in the economically expanding countries of Asia and Latin America.  Those who would spend every extra penny here are the unemployed and the chronically sick, living on minimal and yet still shrinking benefits; pensioners whose pensions have been hit by the recession and cuts; those scraping by on the minimum wage;  and others on low incomes hit by 5% inflation and the savage increase in VAT: adding up to constant reductions in their living standards in real terms and the constant fear of redundancy which deters them from spending what money they have on anything but absolute essentials.   All these groups can be trusted to go out and spend every extra penny they get, thus raising levels of demand and restoring the confidence of business in the likely profitability of borrowing to invest and to employ more workers – giving a push to the now stalled virtuous circle.

So what does our dogged coalition government do to put more money in the pockets of the would-be spenders?  It raises VAT by a swingeing 2.5%;  it sacks huge numbers of public service workers, adding to unemployment and slashing their spending power (as well as ceasing to receive their taxes);  it systematically decimates social service benefits just when they are more than ever needed, and thus further flattens demand in the economy;  it sanctions more and more printing of money to bolster the banks (which don’t need it when demand is flat), thus adding to inflation and reducing the spending power of the whole population;  and it stubbornly goes on wasting billions of pounds on foreign military adventures and occupations in Afghanistan and Libya (and seemingly does some hopeful planning for more of the same in Iran).  It spends more billions on a nuclear weapon capability which is neither independent nor a deterrent and on ego trips such as the Olympic Games which will make whole areas of our country virtually uninhabitable by the natives for months at a time. It persists in wasting money on keeping tens of thousands of people in bursting prisons who ought not to be there and who could be more beneficially dealt with at a fraction of the cost in the community, all because of a cowardly terror of being labelled “soft on crime”.  All this squandered money could perfectly well be diverted into sharp reductions in taxation of the low-paid, in halving or even suspending VAT and employees’ National Insurance contributions, making special Recession Compensation payments of £200, £300 or more each to all unwaged with an income of less than (say) £15,000 a year, and just about any other kind of hand-out to the wannabe spenders in our unequal society.  It would actually be more sensible to drop bundles of five-pound notes from helicopters over the shopping malls and sink housing estates of our major cities than to go on shelling out millions a month on new unneeded aircraft carriers, drones, fighter-bombers and tank landing craft, and on generals, admirals and air marshals who in a sane world would have nothing to do, and who in most cases have nothing to do anyway, even in the insane world that we and they inhabit

The absurdity of loading the banks with money and then trying to bully them into lending it to those exalted ‘small businesses’ which were supposed to replace the public sector as the engine of expansion and growth is vividly illustrated by an inconspicuous article in the Financial Times of 26-27 November.  It begins:

Banks under constant fire for failing to lend to small business often complain that there are not enough suitable candidates, and a survey indicates they might have a point. The poll of 155 individuals taken during November’s Global Entrepreneurship week found a fifth of recent start-ups and 16 per cent of those aiming to launch a company did not intend to write a business plan and many did not understand basic concepts such as gross profit and turnover.

The poll shows that many would-be entrepreneurs had no understanding of such basic concepts as gross profit (47 per cent), turnover (31 per cent), margin (19 per cent) or even cash flow (16 per cent). Only 30 per cent could define all four.  Only just over half of those surveyed knew that the VAT threshold was £73,000, and 23 per cent couldn’t define VAT taxable turnover. (The article observes that failure to manage VAT, paid in arrears, is a big cause of cash flow problems and business failures.)  And these are the buffoons to whom Mr Osborne wants the banks to lend our money, or to lend the money we have given the banks with our guarantee, when not only a hefty minority of them are clearly incapable of setting up and managing a whelk stall, but also when there are so many people out there made unemployed by government policies that no-one can afford to buy whelks anyway, even from the most brilliantly funded and managed whelk stall.

The only possible explanation for this blindly obstinate pursuit of doomed, counter-productive and wrong-headed policies by the Tory-led coalition government is ideology. The global, or western world’s, financial crisis and credit crunch provide an unmissable opportunity to dismantle a welfare state that has never been loved by free market fundamentalists and apostles of unbridled capitalism.  For a Tory ideologue, anything smelling of redistribution is a no-no.  It goes against the grain to dish out money to the poor, beyond what is absolutely necessary to keep them from starving, on the principle that the only way to make the working class work is to force them into jobs by the threat of dismissal and penury, thus curing them of the deadly disease of ‘benefit dependency’, even when the jobs simply aren’t there. Conversely, in the traditional Tory book the best way to induce the bankers and the business-owning and  –managing classes to expand their activities is to bribe them with money from the taxes raised from those less fortunate than themselves, ‘subsidy dependency’ bearing no resemblance at all to dependence on state benefits.  Well, you’ve tried that now, George, and it’s only made matters worse.  Why not give the other thing a try?  You could start by suspending VAT, and call it Plan A+.

Brian