If you’re spending more than you’re earning, the debts will mount up. The obvious thing to do is to spend less, right? Of course that makes sense for one person, or one family. But it doesn’t make sense for a government – for at least a couple of reasons.
One person’s spending is another person’s income. If nobody spent anything, then nobody would have a job or an income. That’s the nub of the problem. If everyone cuts back on their spending at the same time, then everyone else suffers and things get even worse. It’s much the same for the government. When there is a financial upset, like when the banks created an unholy mess in 2008, things start going wrong. Businesses lose confidence and cut investments, people lose their jobs or get put on short time. The government’s income falls because less tax is paid, and the government’s outgoings increase because more people are claiming unemployment benefits.
Is that the time for government to cut its spending? No – it’s generally far better for the government to ride out the storm, borrowing to make up the difference. Otherwise, it only makes matters worse. Confidence will naturally return, people will get jobs and the government’s finances will come right again. The time for governments to make cuts is when the economy is booming, not when it’s just suffered a major shock. Talking of making matters worse, that is exactly what happened when George Osborne applied austerity in 2010. The economy was already showing signs of bouncing back, but Osborne snuffed that out. That’s why he couldn’t meet his promise to eliminate the deficit by 2015.
There’s another reason why austerity is a fraud. It’s just plain irrelevant to another problem. That is the problem of adding up the money flows in the whole of the UK. If one person wants to borrow, they have to find someone else who is saving. And overall, that has to balance out. So if businesses are saving, which they have been in the last few years, someone else has to be borrowing. Consumers have tended to save too, although that’s now just about fizzled out. But the biggest saver is the rest of the world. The UK is running a huge trade deficit – we’re importing far more than we’re exporting. That means that foreigners are saving with the UK. With everybody else saving, the government is bound to be borrowing – it’s just a matter of simple arithmetic.
How does austerity affect the trade gap? Well, basically it doesn’t. It’s pretty much irrelevant. The only way to cut the trade gap is for us to export more stuff to the rest of the world, or to make the things that otherwise get imported. Not only would that cut the trade gap, it would mean more people would have to be in work. Just the thing that we need when there are so many young people struggling to find jobs. Of course that has to be supported by high quality training and so on.
So austerity isn’t helpful in cutting the deficit and getting people into jobs, and it isn’t helpful in fixing the trade gap. It’s a convenient excuse, though, for people who want to hack away at public services like the NHS and to impose arbitrary restrictions on people who need to claim benefits. There are much better answers to the question of how to handle benefits, but that’s for another time. The point here is that George Osborne and company are snake oil salesmen, selling us something that won’t really make our ailments better at all. But it might help to line the the pockets of the already privileged people that they represent. That’s why the Green Party is opposed to austerity.