Austerity is not the solution

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By a Newsnet reporter

If you have a mortgage, get ready to get poorer – mortgages are on their way up!

In all the fuss about local elections (in which, yet again, the ‘None of the Above Party’ scored a resounding victory with two-thirds of the UK electorate finding something better to do on a Thursday) the vapid bubble that is the media village failed entirely to notice that mortgages are heading North.

Politicians and the media also failed to pay the slightest bit of notice to an Ipsos-MORI poll of what the electorate really care about – but more of that in a moment.

Last Monday and Tuesday, most leading mortgage companies announced increases for new policies and renewals.  And it is safe to assume that this is just the beginning in a series of increases.  Even if you do not have a mortgage, this increase will affect you, as it sucks spending power out of the economy and depresses the housing market.

Every businessman I have spoken to drew a sharp breath on the news, and I am sure that they gave a thought to their liquidity.  You can run a company at a loss for quite some time, but run out of cash and you can be closed down from one day to the next.

The central bank lending rates in Europe may not be going up, but the inter-bank rates are.  Firstly we are asking the banks to hold more collateral, and secondly, we are insisting they use freshly minted government bonds as that collateral.

Austerity is depressing the economy, which in turn leads to unemployment and other sources of poverty and that leads directly and automatically to greater government spending.  We cover that, by issuing more bonds and that means more government borrowing.

Right across Europe, governments are trying to solve the problem of over-borrowing with more austerity – which is depressing the economy, which in turn leads to unemployment …

… and today, Monday, we find out how Greece voted.  Do they continue down this austerity black hole, or do they quit the Euro and trigger an enormous crisis?  Early indications suggest the pro-austerity parties are not doing well.

Underlying all this talk of austerity is a giant fallacy.  The false assumption is that if we cut public spending, we can make up the massive short-fall in taxes.

As a one-line equation in a first-year student’s textbook, that may be true.  In the real world, nothing could be further from the truth!

There are three reasons for this –

1. All change costs money.  This is true for governments, as it is true for individuals.  Switch to a car that is cheaper to run, move to a cheaper house and the first thing you have to do, is spend money making that change.  Making civil servants more efficient, means you have to retrain some of them and pay-off those that you do not want.  Spend less on the NHS and more people get sick.  Spend less on inner-city schemes and you get an increase in crime.  Spend less on education and you get an increase in unemployment.

2. Governments lack the political will and the ability to make savings where they are needed, so they are forced to make savings where they can.  Overweening and inefficient bureaucracies remain, efficient bureaucracies get cut back.  Mad and pointless schemes continue, vital and much needed public investment gets cancelled. 

In this way, we still have 78,000 civil servants clogging the halls of the MoD, because they are very difficult to remove, but the Inland Revenue collects less tax than it should, because the already demoralised staff is being cut back even further!  Roads everywhere are covered in potholes and the A1 and the A9 remain as slow and deadly as ever, but Edinburgh gets a completely unnecessary tram line.

3. Major changes nearly always benefit the wealthy, depress the incomes of the middle classes and increase inequality.  This, in turn, leads to a downturn in economic activity and even poverty and poverty leads to increases in public spending.  A downturn in economic activity leads to a lower tax-take.

All this is not lost on the electorate.  The recent decline right across Europe was stunning and the job decline in manufacturing is now impacting Germany and France.  Greece may vote on Sunday to quit the Euro and that could trigger a massive crisis effecting everybody in Europe and beyond.  People are in fear for their economic future.

Which brings me neatly to that Ipsos-MORI poll – 62% of those questioned named the economy (or some aspect of it, such as unemployment, or inflation) as their main concern.

The belladonnas of media and politics may fret and pout over constitutional reform, global warming, international terrorism, gay marriage, or Boris Johnson’s electoral profile, but according to this poll, none of these issues were mentioned.  Even those old chestnuts that some politicians like to stir up, like crime, immigration and the NHS only scored 9% each as a major concern.

The Euro-zone economy is large and overwhelmingly driven by domestic demand.  That demand has been steadily squeezed by sustained austerity measures.  Further quantitative easing looks out of the question and the ECB’s lending to banks has not prevented a sharp slowdown in lending to the private sector.

Companies, frightened for their future, are hoarding cash where they can.  There is no way to avoid a recession in such circumstances.

Ordinarily, governments would take steps to stabilise their economies.  What is most frightening about the whole of Europe, is that this is not happening.  For now, austerity remains the only game in town and we are walking, eyes wide open, into a depression.

We are watching a giant car crash in slow motion, whilst central banks and governments that know how to prevent things from falling apart, sit back and do nothing.