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Welcome to the age of cuts

The UK government faced a barrage of criticism over its National Insurance hike this week.  The tax – which theoretically pays for public services, pensions, and benefits – was in creased last autumn, before the political class became aware of the massive increase in gas and electricity prices coming later this year.  However, with cost-push inflation rising across the economy, and with rises in local taxes due to be announced, millions of British households are facing a massive squeeze on their standard of living.  This has given more weight to the idea that government should extend its pandemic borrowing until the economy has recovered, rather than raising new taxes at this point.

It goes without saying that nobody welcomes tax increases.  Nevertheless, as a consequence of the way this currency-creation system works, the government is rapidly running out of room to manoeuvre.  In the UK, around £500bn worth of government bonds are index-linked, so that as the inflation rate rises, so the cost of servicing the debt increases.  As James Sillars at Sky News reported this week:

“Interest payments on government debt hit a record £8.1bn for the month of December because of surging inflation…  The Office for National Statistics (ONS) said the cost of servicing the country’s £2trn+ debt pile was almost 200% or £5.4bn up on December 2020.

“It is because half a trillion pounds worth of government bonds are linked to the Retail Prices Index (RPI) measure of inflation which stood at 8.4% in December – its highest level since 1991.”

The problem will worsen in the spring as the new energy price cap comes into force, and as prices continue to rise across the economy.  This sets up one of contemporary democracy’s greatest flaws.  It is precisely during inflationary periods that the people begin to demand more government spending and less taxation.  But within the constraints of a debt-based monetary system, government has to do the very opposite – raising taxes and cutting public spending.  And the problem facing the UK government is multiplied as a consequence of the response to the pandemic and because of the economic dislocation caused by leaving the EU Single Market.

The early response from government has been a combination of hope and denial – the expectation that the world will soon be awash with energy, that lockdown-generated shortages will be disappearing, and that a new era of growth is just around the corner.  In short, the belief that all we need do is cushion the effect of rising prices for a couple of months and all will be well.  But the sudden increase in the price of gas and electricity, and the slower but more dangerous rise in the price of oil, point to a prolonged structural crisis for which we currently have no solution… they are the result of deeper problems such as:

  • the majority of the world’s large, cheap and easy oil and gas deposits depleting
  • the rising cost of opening new deposits
  • short-term pandemic and long-term climate policies halting investment in opening affordable new deposits
  • international competition for energy as the global economy emerges from pandemic disruption
  • The closure of energy infrastructure such as refineries, pipelines, power stations, and gas storage facilities

Meanwhile, self-inflicted supply chain blockages cannot be overcome without massively expanding the supply chains themselves, or alternatively, crushing demand down to a level where existing supply chains begin to cope again.  And the only way of crushing demand to this level is to squeeze discretionary spending even more than is currently happening.

The difficulty for government is similar to that experienced by private businesses, insofar as all of the easy cost-saving cuts have already been made.  The economic neoliberalism of the past four decades can be viewed as a process of trading resilience for efficiency.  Anything that wasn’t efficient was allowed to wither on the vine, even if it provided a safety buffer against hard times.  And so, faced with rising costs, private businesses are either having to cut into areas previously considered off limits, or they are having to close for good.  Yadarisa Shabong at Reuters, for example, reports that:

“Britain’s Royal Mail will lay off around 700 managers as part of cost-cutting efforts aimed at transforming the centuries-old postal company…

“Royal Mail has benefited from a boom in parcel demand during COVID lockdowns, helping the group make up for a decades-long slide in letter volumes.  But as coronavirus restrictions have eased, parcel volumes have tapered off from the highs of 2020, while rising inflation has raised costs.”

Meanwhile, Caroline Wadham at Drapers sees a perfect storm of retail job cuts and closures ahead:

“Retailers are grappling with a swathe of cost pressures. This month UK inflation hit its highest level for nearly thirty years as the Office for National Statistic’s Consumer Price Index reached 5.4%. On top of this, the cost of shipping has increased as a result of shipping delays, labour shortages, and a lack of container availability. Energy prices are also set to rise this year. In December, Emma Pinchbeck, the chief executive of Energy UK, told the BBC that prices could rise by as much as 50%.

“Surging costs looks set to continue as, from 1 April, National Insurance contributions will rise by 1.25 percentage points from 12% to 13.25%.

“The department store CEO warned that mounting costs might force retailers to shutter stores: ‘People will have to shut stores over the next few years – we’re already seeing Marks & Spencer and [hardware retailer] Wilko doing this. However, it could also lead to widespread redundancies, as we saw with Primark last week – the alternative to slashing stores will be to restructure the workforce and cut costs that way. We’re looking at the latter option, but we’re not big enough to offset high costs with payroll savings, whereas Primark will see that as a significant help’.”

As the private sector shrinks through closures and cuts – many of which involve the de-layering of higher-paid management positions – government faces the added burden of falling tax receipts.  Income tax and national insurance are levied on workers wages, the latter with an additional contribution from the employer.  Together, these account for 46 percent of government income.  Value Added Tax – which accounts for another 16 percent of income – will also be hammered by the growing decline in discretionary spending.  This leaves taxes on companies – five percent – and a range of indirect taxes – ten percent – as the main remaining portion of national tax income (a further eight percent is paid in local taxes).  But even these are likely to be hit by inflation, business closures and job losses.  For example, prior to the pandemic, fuel duty raised some £30bn.  But if fewer people are driving, and those who remain are driving less, then this income will also shrink.  Moreover, electric vehicles – which is the one category which is currently growing – are exempt.

Adding to the problem is what has been called “the great resignation.”  Around a million people have left the workforce in the course of the pandemic.  A third are the EU nationals who chose to go home rather than face lockdown in the UK.  But the other two-thirds are people who have come to realise that the game is no longer worth the reward.  As Robert Plummer at the BBC reports:

“Since the onset of coronavirus, there has been a big rise in the number of people classed as ‘economically inactive’ – that is, people who are not looking for jobs and are not available for work.

“The Office for National Statistics (ONS) reckons that there are 400,000 more people in that category than there were before the virus hit.  Darren Morgan, director of economic statistics at the ONS, says that total ‘increased sharply’ at the beginning of the pandemic, a rise he describes as ‘understandable’.  ‘If you lost your job then, there was little point in looking for one, given the economy was closed’.  But since then, the number of economically inactive people has proved ‘far stickier’ than the number of people out of work, he adds.  ‘We have not seen falls like we’ve seen in unemployment, and this is particularly the case for those over 50,’ he said.

“That, of course, includes some people who have chosen to take early retirement, although others may feel the choice has been made for them.”

Either way, that is a large bloc of people who used to pay tax and national insurance on their incomes, and VAT and various duties on their spending, who are no longer doing so.  Government, then, faces running out of things to tax just at the point where it needs the additional income to service the interest on its massively increased post-pandemic debt.  This leaves just two options on the table.  First, government could – but won’t – bring an end to the post-1986 system of allowing private banks to generate our debt-based currency out of thin air.  That is, it could – but won’t – exercise its ability to print new currency in order to pay off its debt directly.  The drawback being that in doing so it would greatly weaken the pound on international markets – something that would be devastating to an economy that depends to a large extent upon imports.  In future, a government may be forced to go down this route, but it will do so because it must not because it chooses to.

The second option – the one which governments have some experience of doing – is to follow the private sector in making cuts and closures.  And since, just like the private sector, almost all of the cuts that disadvantage the poorest have already been made, this means de-layering whole swathes of public sector – and quasi-private corporate welfare corporations’ – management and administration – something which may prove perversely popular with the majority of the electorate which has seen its prosperity decline over decades.

For government though, there is simply nowhere else to go.  Having squandered the energy and resources of the planet, they can neither print nor cut their way to prosperity.  The only choice that remains is the means by which the economy and the state shrivel.

As you made it to the end…

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