2012 was a bleak year for the majority. The average household income saw its largest annual fall since records began. Hunger was an acute reality for the record 200,000 people expected to have relied on food banks. Nearly half a million households lived in officially overcrowded homes. There were over 62,000 homeless families in England despite their being 279,000 long term privately owned empty homes. And according to the Department of Work and Pensions own figures, one in every four babies was born into poverty. 58 per cent of them will have at least one parent in work, and yet just £36 a day will be available for food, water, clothing, heating and transport.
The economic system that will greet these children and their parents will ensure that opportunities are so scarce and average wages so low, that food and housing will be literally unaffordable. More than likely, these children will go through life with low esteem, constricted aspirations and low life expectancy. It is a situation that breeds fury and despair for millions of people, and the loss in opportunity for individuals is a mass loss of talent and prosperity for society.
The truth, of course, is that the Coalition does not deliberately seek to hurt people. The end goal of economic policy is not to throw more and more people into poverty. The problem is that our political elite view economics through a narrow, subjective prism that warps fundamental priorities when making decisions over the system they attempt to pursue.
There are three fundamental flaws to the Coalition’s chosen course. First, cuts alone do not reduce debt. As public expenditure is cut back, jobs disappear and wages fall below the income tax threshold. Tax revenues fall, therefore, precisely at the time that welfare expenditure has to increase. One of the greatest fallacies in contemporary politics is that managing a national economy is like managing a household. It’s not. Unlike a household, a government’s expenditure is its income, and its income is its expenditure. And international markets get just as spooked by a fall in tax revenues as they do by increases in spending, as shown by the recent downgrade of the UK’s AAA credit rating.
But the Coalition knows this. They know that shrinking the public sector can only work if they can at least compensate with equivalent growth in the private sector. The idea is that rather than increasing demand by ensuring people have a job and a disposable income, you boost supply by optimising conditions necessary to get products to market: cheap credit, ‘flexible’ labour laws and general deregulation.
But there is a peculiarity about the decision to pursue this balance in policy: history tells us it doesn’t work. As economists Joseph Stiglitz and Paul Krugman have pointed out, the preconditions required for a successful supply-side recovery are exceptional. Either a country must start with extremely high interest rates that can be quickly reduced, or else it must start with a high currency value that can be reduced rapidly in relation to a trade partner. Yet today, interest rates already stand at a record low of 0.5 per cent, with absolutely no room for further reduction. And a slow global recovery throws up no viable trade partner against whom we can devalue our currency. In short, the second problem with the Coalition’s plans for ‘recovery’ is that the necessary technical pre-conditions simply don’t exist. Consequently, UK society is paying the price for a double dip recession made in Downing Street.
But the third oversight is the most serious of all, and it concerns a rarely challenged consensus in mainstream UK politics. It is the basic idea that the creation of wealth is more important than the number of people that it benefits. Supply-side economics is saturated in this philosophy, aspiring to completely unshackle the powers of supposedly ‘free’ markets in order to generate increasingly concentrated wealth. For this reason, even successful supply-side recoveries are achieved at the expense of mass unemployment and huge inequality. During Britain’s ‘Keynesian consensus’ of 1950 and 1979, unemployment in Britain never rose once above 3 per cent, yet since 1979 and Thatcher’s ‘supply-side revolution’ it has averaged 7.8 per cent – precisely the same figure as at the end of 2012. High, long term unemployment is not a short term symptom of recession; it is the structural cost of an economic system that obsesses over the existence of growth, rather than who gets to feel it. Such a system measures success by low interest rates rather than affordable homes, by monetary inflation rather than wellbeing. Growth becomes an end in itself and policy making takes on a distorted priority: markets go from being effective servants to being dangerous masters.
The answer to this mainstream political consensus is an economic system that enshrines the role of markets and an economy as providing for society. A system that sees economic decision making devolved and democratised in a way that boosts demand rather than supply, getting the economy working again for people. It all sounds a bit like a utopia; out of touch from the constraints and practicalities of the real world. But here is how a government could start to implement it today, if it decided to sacrifice a bit of wealth creation at the top for a bit of wealth distribution at the bottom.
In the private sector, co-operative models could be supported to expand and employee representatives could be made mandatory on corporate boards; each helping to ensure that wealth creation would be driven by the need to optimise a return to working people and communities. Future Quantitative Easing could be wound down and the money that would otherwise be created by the Bank of England to improve liquidity in the financial sector, could be lent to the Treasury and used as seed funds to start up local co-operative banks. Tens of billions of pounds would be made available to harness local know-how to make practical loans available to small and medium sized business. The effect would be to hand banking back to local communities while simultaneously diverting the flow of money away from international derivative trading and back towards the real economy.
In the public sector, economics could be localised, with councils and communities given greater resources from central government to invest in infrastructure, jobs and public goods. A huge stimulus could be implemented by local authorities to raise standards of living, create jobs and boost demand. Spending would be directed at re-diversifying the economy by boosting ailing industries that have the most potential to provide value to society. Hundreds of thousands of high quality, affordable homes could be built and vacant homes put back into service; creating jobs, providing cheap rents, reducing homelessness and enabling people onto the property ladder. Building thousands of new schools and improving existing ones would reduce class sizes and create jobs in teaching in addition to construction. Subsidising home insulation and small scale renewable energy installations would reduce energy costs for the 300,000 people currently in fuel poverty. Increasing the speed and scope with which super fast broadband is rolled would reduce travel costs for millions of people whilst creating new technical jobs. And an ambitious new energy programme to expand renewable generation would make the UK a world leader and exporter in new technologies while reducing the UK’s vulnerability to global fuel prices and resource scarcity.
There is no shortage of potential funds to do this. The UK ‘tax gap’, made up of annual tax evasion, avoidance and late receipts, and worth approximately £120 billion, could begin to be recouped with greater investment and a renewed mandate for HMRC, and new anti-trust laws. A 2011 study showed that such is the abundance of uncollected tax, for every one pound spent on local tax collection, ten pounds would be recouped in revenue. A Financial Transaction Tax of 0.05 per cent could be levied on all banking transactions, raising tens of billions in the UK and reducing the profitability of the types of high frequency trading that magnify financial boom and bust. Such a tax is actually highly uncontroversial; everyone else in the economy apart from financial services already pays a transaction tax – it’s called VAT. The introduction of a land tax could provide a progressive alternative to council tax, encourage development of disused space and reduce land speculation. A restructuring of income tax could also shift the burden from low earners to high earners. It would raise billions in additional revenue and take more people at the bottom out of tax altogether; an outcome that even right-wing think tanks agree is one of the best ways to boost demand.
The current structural deficit and state debt does not irrevocably necessitate cuts in public spending and an accompanying neo-liberal, supply-side strategy for growth. It presents a choice. And beyond the economic jargon, the choice is actually very simple. The choice on the one hand is for people to be a resource for a rich economy. The choice on the other is for a rich economy to be a resource for society. The Coalition has chosen the former, and people are paying the price. But it doesn’t have to be so.
 Institute for Fiscal Studies (IFS), ‘Living standards, poverty and
inequality in the UK: 2012′, (June 2012), p. 1 (Found at: http://www.ifs.org.uk/comms/comm124.pdf)
 Oxfam, ‘The Perfect Storm’, (June 2012), p. 5
 Department For Work and Pensions (DWP), ‘Households Below Average Income: An analysis of the income distribution 1994/95 – 2010/11’, (June 2012) p. 13 (Found at: http://research.dwp.gov.uk/asd/hbai/hbai2011/pdf_files/full_hbai12.pdf)
 Tax Research UK, ‘Tax Justice and Jobs: The business case for investing in staff at HM Revenue & Customs’, (March, 2010), p. 2
 Compass, ‘Plan B: A good economy for a good society’ (Found at: http://clients.squareeye.net/uploads/compass/documents/Compass_Plan_B_web.pdf)
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This post was written by Alfie Stirling