Why Neoliberal Austerity Doesn’t Work

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This is not intended to highlight the moral failings and humanitarian tragedy of an economic ideology (neoliberalism) which punishes the most vulnerable and favours the wealthy, as this should be self evident.

Instead this article is intended to highlight why the policies of the current government (which as things stand look to be continued whatever plausible party/parties end up in power after next years General Election) are not fit for purpose, harm the economy and do not support the claims uses to justify them in the eyes of middle class voters.

First, we must address the difference between the current model and classic austerity, which is a time honoured hallmark of old school small-c conservatism, used during times of hardship (such as, the period after the second world war, specifically the 1950s.)

Classic austerity basically amounts to not spending money you don’t have, cutting your cloth to suit your means and all those other handy 
sayings your granny used to have that amounted to living within your means, thrift and saving. This policy is designed to stop you incurring debt, help pay off the debt you already have and save for another day. It’s worth noting that this policy was successfully implemented in the post-war years which ALSO saw the institution of the NHS and the welfare state…

Neoliberal austerity uses the same justifications but reckoning that in times of hardship (a condition which becomes self sustaining as I shall elaborate below) the state cannot afford to support those who produce least and should instead concentrate on helping corporate interests operate in the country, justified by the concept that companies create jobs, wealth, employment and all those lovely things as well as the idea that money made at the top ‘trickles down’ to those beneath.

Here are three of the main reasons why neoliberal austerity doesn’t work on the platform it’s sold to the public.

1 It Doesn’t Reduce Debt, But Does Reduce The Tax Base

The prime justification for austerity is a worryingly high national debt and recurrent budget deficit (in lay terms, the state owes an insane amount of money and is always spending more than it is making, thereby increasing the debt – like having a credit card bill that keeps on getting higher, because you can’t cover the monthly payment.)

However, despite the protestations of the Conservative-led government, the UK national debt has gone up stratospherically since they took power – up from £0.76trillion in 2010, to £1.26 trillion in 2014 – an increase of 65.78% in only four years (again, like having a credit card that was at a £1000 limit, but the balance is now at £1678) and we still have a vast budget deficit (how much we need to borrow to pay our bills) meaning we’re going into the red by about £105 billion in this financial year alone.

Why is this?

The answer is because despite all the welfare cuts, the sale of public services, the wage freezes for public sector workers etc. the government is still spending much more than it’s making.

The reasons are two-fold – firstly, the neoliberal emphasis on companies first manifests as vast corporate welfare payments which effectively prop up the fossil fuel industry, the privatised railways, saved the banks from their own iniquities and others and costs vastly more than the much attacked and demonized social welfare budget. Of course, you never hear about this because the mainstream, corporate media are quite happy with this arrangement.

Secondly, the neoliberal fear of annoying companies has led to widespread tax avoidance by huge corporations who make billions of pounds in Britain – the likes of Amazon, Starbucks and Facebook pretty much pay NO TAX in this country but again, all the attention goes on the vastly smaller amount that can be put down to welfare fraud, or indeed the entire social welfare budget.

Tax-V-Benefit-Fraud-Graph-Excellent-2

This has also led to the idea of ‘workfare’ where people are compelled to work in what would be minimum wage jobs for big companies, just to receive their basic benefits from the government. This leads to said unemployed people being treated as almost slave labour, with less time to find suitable ‘real’ work and saves the corporations money and also has the effect of removing these capable workers from the possibility of paying income tax, as they would if they were considered to be actually working.

An ideological drive to reduce the rate of tax leads to tax cuts for the higher bands and an increase in the ‘tax free’ threshold at the bottom of the scale, which majorly benefits the rich, benefits the middle class a bit and those at the bottom of the scale not at all. The net effect is that income tax receipts go down, combined with the failure to collect the proper amount of corporation tax and increased spending on corporate welfare

You could say that the neoliberal agenda is actually quite a socialist one in terms of government spending, it’s just that the money is funneled to companies rather than people.

There is a further reason why these policies reduce the tax base, but it’s worth it’s own heading…

2. Tendency to Consume and the Lie of ‘Trickle Down Economics’

Neoliberal policies are predicated on the assumption that if you keep the ‘job creators’ (i.e. companies and rich people) happy and comfortable, their wealth will trickle down to the rest of society. This is absolute crap.

This is because people who have lots of money, don’t tend to NEED more and as such don’t spend all of it and tend to save a significant proportion. This is always a good personal financial policy, but by funneling more money towards wealthy people, that money is effectively leaving the economy and into the bank/investment accounts of a few, where it tends to accrue.

funny-glass-wine-trickle-down-economics

By contrast, less well off people can always do with some more money, to pay down their debts, pay their rent (maybe rent a better house or even buy one), their bills etc. Maybe they could eat a little better, update their wardrobe, maybe go out for dinner etc.

This is called the marginal propensity to save and the marginal propensity to consume, both key elements in Keynesian economics and serving to illustrate that economic recovery, higher tax receipts, and getting rid of a deficit are in the long term best served by investing in the poorest, not the richest.

Basically, raising the income of folks below the breadline leads to that money being inserted back into the fluid economy as they buy products and services, which induces economic growth, ore people employed and paying tax, more corporation tax being collected and so on. As opposed to freezing wages, cutting benefits, making people work for benefits (removing the possibility of that work resulting in income tax receipts) while cutting tax and funneling public money into companies (who are already receiving free labour under workfare.)

Of course, this is in direct contrast to the ethos of the neoliberal mainstream (Conservatives, Labour, Lib Dems, UKIP and half of the SNP.)

3 Atrophy of Public Services & Infrastructure

It is difficult for a country to experience economic growth when the basic fabric that makes the country run is underfinanced. The neoliberal preference to downsize public spending either by refusing to give local authorities more money and/or privatizing whole chunks of infrastructure leads to a situation where day to day life for the average worker is increasingly difficult, leading to health issues, transport being uneconomical and other problems.

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How can you expect mothers to go back to work without adequate childcare? How can you expect people experiencing a real terms drop in wages to afford the above-inflation rises implicit in privatized energy and transport bills (being run for profit, not public service?) How can you expect a beleaguered, underfunded and increasingly run-for-profit health service to keep your workforce healthy and fit to work.

Johann Lamont’s much misinterpreted ‘something for nothing’ comment back in 2012 was actually a good point AGAINST neoliberal cuts, as the SNP administration magnanimously offered free further education and prescriptions while not raising taxes, inevitably meaning that the money had to be funneled from elsewhere, such as other aspects of education or healthcare.

You can’t implement a tax freeze and increase the amount of public spending without pruning it from elsewhere, as my granny would have said – robbing Peter to pay Paul. However, tax rises and/or a rise in total public spending is anathema to a neoliberal.

Conclusion

Thus, neoliberal austerity does not work, because it fails to reduce debt, stymies economic growth and as history shows us through increasing inequality it will inevitably lead to social breakdown in time.

Now, I’m not the kind of person to knock holes in things without offering constructive feedback, so I’d like to offer a few alternatives to the current system which would aid growth, aid in cutting the UK’s deficit and be more socially progressive than the current system.

These suggestions are based on a few (I think reasonable) assumptions.

1. That economic growth is best served by facilitating the working class into better paid work, flattening the gap between the lowest and highest wages as this will naturally reduce the welfare bill and increase consumer spending as well as receipts from income tax and corporation tax.

2. That companies will still choose to operate in country’s where they are taxed and regulated fairly, as even if profit margins are smaller, there will still be profit to be had.

The suggestions fall into two broad categories.

Income

Instituting a Living Wage (currently calculated at £7.65, a whole £1.15 an hour higher than the minimum wage) would increase the take-home income of a worker on a 35 hour week, by £120 a month or roughly £1’400 a year. It would also almost double their tax contribution to the public finances.

Immediately, we would see an increase in consumer spending and higher tax receipts WITHOUT INCREASING THE RATE OF TAX. These are all good things in a capitalist economy, yes?

A more drastic step, which could be taken instead of or in addition to a Living Wage would be the concept of a Citizen’s Income, where every citizen in the country receives a base income from the state as a right of citizenship. Realistically, this would be a partial income designed to be supplemented by other earnings/benefits as appropriate and would be scaled by age, with children receiving less than adults (effectively replacing child benefit.)

Some would argue that this step would encourage people not to work, but I (and many others) believe it would empower people to find suitable work, making part time employment more feasible for some.

Of course, if a citizen’s income was implemented, the tax-free band at the bottom of the pay scale would be scrapped and you would start paying income tax from the first pound of your earned wage, which would immediately increase tax receipts assuming employment remained at the same rate.

However, employment should rise as the increased income stimulates consumer spending, generating economic growth and the safety net of the citizen’s income would allow more people to take part-time or flexible work.

For those unable to find work, especially through disability, there would remain a vestige of the current convoluted welfare system designed to ensure that every man, woman and child in the country we’re above the poverty line.

Tax

The idea of a Robin Hood tax is not a new one, becoming especially popular after the financial crisis of 2007 as the farcical failure of the banks led to a world-wide depression which was essentially without cause (previous financial crashes have been linked to wars, epidemics or some other drastic loss of production capacity, this one was entirely created in the fantasy realms of investment banking, creating insane amounts of notional money, which was then lost, probably by one person in the chain asking when they actually get paid.)

Even a nominal tax on the quite ridiculously profitable financial sector would generate billions for the economy, which would help to pay down the debt and reduce the deficit (which was in a large part caused by the need to bail out the banks following the crisis) and could be maintained afterwards as a balancing agent, compelling those companies who most profit from the desperation of the poor to contribute to greater social equality an end to poverty (which as I’ve discussed above, stimulates economic growth which is good for everyone.)

An increase in Corporation Tax is often mooted as a progressive solution to the problem of the deficit, but I would settle for the current rates of corporation tax actually being collected.

In light of the increased expense of instituting a living wage, I would also consider a corporation tax cut (effectively trading off direct tax receipts for an increase in consumer spending and the resultant economic growth) and perhaps as an additional measure further % cuts in the tax rate could be awarded for companies who operate in environmentally friendly ways (the inverse being true for those found to pollute), who show a commitment to equality in opportunity and pay and other progressive elements.

Of course, without instituting a living wage, corporation tax should be fully collected and probably increased to redistribute the wealth which leaves the country to the coffers of multinational corporations back to the people of the country.

There is one last suggestion I would make, which is neither about income or tax, but also kind of both, the question of…

…Workfare

As discussed above, workfare is the practice of compelling unemployed people to take minimum wage jobs for big companies JUST TO RECEIVE THEIR BENEFITS. This is ass backwards because this results in said unemployed people having less time to find a job, effectively laboring for free to a company who ends up not having to pay them, generating higher profits for the company involved and no potential income tax for the country.

I would scrap this policy immediately.

However, it is true that the act of being unemployed makes it harder to find work as work is a habit and gaps in your record never look good on a CV. As such I believe a limited form of statutory employment for unemployed people would be beneficial, however in a much different form to workfare.

Individuals would be assessed on their capabilities, needs and desires and employed by their local authority on a part time basis of say, 16 hours a week (dependent on personal circumstances) with that time split between suitable work (admin, stock control, parks maintenance etc.) and training to help them find a permanent job. This work would be paid, with a portion of the pay held back to be given as a lump sum once ‘real’ employment was found.

This would keep unemployed people in the habit of work, earning a wage and developing their skills while also benefitting their local community (rather than some faceless multinational.)

Just an idea.

In short, neoliberal austerity is not fit for purpose, is actually harmful to the economy and the social fabric of a country and must be replaced by a more caring, progressive suit of policies. I hope in this article, I have made the economic case for such a change.
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