May 27th 2011
Who will carry the debt in the future?
I am not an economist. I am not an expert in many things if indeed anything. The benefit I think is that I start to ask simple questions. So, today’s simple question is ‘is the government tackling the nation’s debt problem or transferring it to everyone else?’
Here is my simple theory:
Passing debt to individuals: the big headline is of course the rise in tuition fees: £9k a year will leave the traditional graduate £27k, but with other costs the average debt is surely going to be nearer £40k. The government’s argument is these graduates will earn more over their lifetime – it pays to get into debt in this case: nice argument – entirely contradictory to their approach to the national debt however. Government will have to hope people don’t take the ‘coalition approach’ to managing household debt as people will stop spending entirely to pay off the debt quickly!
In addition to this, the demise of the EMA is only going to cause financial hardship in families and lead to more… debt.
Increasing debt in the private sector: I know that the private sector is ‘used to debt’ as part of its funding make up – but at what point does that become dangerous for the country? With payments by results about to come the norm and part of huge contracts such as the Work Programme, I assume some are having to borrow like never before. I am not prone to sympathy for these borrowers but I would be interested to know what is happening to the scale of private sector debt – and indeed what margins they are building into their cost models when it comes to the pay back.
Then there is of course public sector debt and hidden debt: I never have been a fan of PFI – and the government isn’t convinced about value for money – yet the numbers went up last year. More ‘stored debt’ – lots in the NHS I dare say. Then what about the General Power of Competence: could this create the potential for more debt? Does it not increase councils’ ability to borrow? It is intended to increase entrepreneurship in the sector, but some win and some lose in this don’t they? I suspect we will see more public sector debt here.
And finally the voluntary sector: The much heralded Big Society Bank will provide… loans, the last government started it and this is government pushing down this route more and more, encouraging the sector to borrow. More will go down this route to survive in the world of payments by results and I predict many will fall by the wayside as they fail to generate the income necessary to pay off the debts.
As I say, I am no economist, so I would be happy to hear how wrong I am. But I can’t help thinking part of the debt reduction strategy is simply shifting deckchairs on the Titanic – and if it stops individuals spending, it could be make the ship sink quicker.
You are completely right Richard – if anything you only touch on the tip of the iceberg. Duncan Weldon who is an economist has written this recent piece on how the government is doing what you say but primarily focusing on households. The Government’s own figures show how they will get:
‘public debt down by £43bn BUT private household debt up by £245bn – five times as much.’
http://falseeconomy.org.uk/blog/household-debt-up
So the Government’s strategy for tackling the deficit is not about increasing tax receipts through strong economic growth but about forcing the debt onto businesses, third sector organisations but primarily ordinary people up and down the country. It’s scandalous.
I agree with your comments, but this can be taken further – I’ve also tried to wrestle with it, trying to tie together themes of debt, economy and ecology.
Theses on debt, economy and ecology
1. Economic growth is unsustainable since it requires absolutely increasing material throughput. This throughput creates devastating pollution of the ecosystem, most notably through greenhouse gas emissions. It will also be constrained by resource limits.
2. Economic growth is a result of capitalism, a system that requires the incessant expansion of capital.
3. Capitalism is beset with recurrent internal crises. It resolves these through fixes of various kinds including technological and spatial.
4. Periodically capitalism moves into a mode of expansion characterised by the creation of speculative bubbles. Most recently this has been seen in the hyper-development of finance capital relative to industrial capital.
5. Since the 1970s there has been a downward pressure on wages. The impact of this on consumption has been offset by the increase in household debt via easy credit. It is the bundling of various forms of debt in ultimately unsustainable pyramids that has precipitated the collapse of the current financialisation phase of capitalism.
6. States (which serve the interests of capital) have attempted three strategies to keep the motor of capital accumulation, and hence economic growth, running. The first was the bail out of failing financial institutions – the transfer of public wealth to private finance capitalist firms. The second was fiscal stimulus via cuts in interest rates and the printing of money. Both these were funded by borrowing money via the issuing of government securities (gilts in the UK). The third strategy has been to cut the government debt by cutting public spending and raising receipts, including taxes (themselves reduced through the reduction of economic activity in the recession).
7. This third strategy, by reducing incomes will further increase household debt (already three times government debt in the UK).
8. By borrowing, and paying interest, households subsidise capital accumulation by increasing the level of purchases above the level of earnings paid by the capitalist economy. This represents a third source of capital accumulation (the first is the theft of surplus labour, the second the theft of common assets).
9. Therefore the economic crisis involves a restructure of the relations between public assets (public services, government spending, government debt), household debt, and private profit (for capital accumulation). The crisis allows the state to re-stimulate capital accumulation and hence economic growth using a combination of rescue of banking services (and the availability of credit), fiscal stimulus of consumption and private borrowing. Reduction of incomes through public sector cuts and economic recession is a necessary component of that strategy whereby short run reductions in demand are traded off against the longer term reinforcement of the accumulation engine.
10. The economic crisis creates an opportunity to renovate the motor of capitalist accumulation and thereby restore economic growth.
11. State strategies, whether in the form of bank rescue, fiscal stimulus or reduction of government debt, all damage the environment by restoring economic growth.
first posted at http://greendealmanchester.wordpress.com/2010/06/27/theses-on-debt-economy-and-ecology/
27.6.2010