En Passant

Balance the Budget.

It sounds like simple household budgeting doesn’t it? Don’t spend more than you earn. But when it comes to Governments it is not the case that spending more than you earn is a bad thing.

First governments are not households. The analogy doesn’t stand up.

But let’s run with the comparison for a minute.  Lots of households in any event are in debt. Big time. 

They are paying off a mortgage. The point is that in normal times the value of the house they are paying off is growing. So although they might owe on average $300,000 the value of their $500000 house means they actually have a positive net worth.

So it is with Governments. They might spend more than they earn but if they are investing in growing assets like education and health for the working class and infrastructure like roads and transport, all of which will repay the investment many many times over.

Households invest in their kids’ future and so do governments.

But the Government and the Opposition have got in a tizz over Budget deficits. To understand why we need to look a little into the dominant economic and political philosophy of the ruling class, neoliberalism.

The return of economic crisis in the 1970s came about because profit rates in the developed countries fell. It was Marx who identified this tendency coming about as a result of the way production is organised.

Labour creates new value. Competition forces individual capitalists to look for ways to make their products more competitive than their rivals. This involves increasing investment in machinery and the like. The rate of investment in labour does not increase as quickly. All other things being equal this means that more and more is spent on capital and less, relatively, on labour.

Yet it is labour which creates new value.  So the amount of surplus the bosses get out of workers doesn’t match the increase in expenditure on capital and labour and so the rate of profit falls.

During and after the Second World War the dominant ruling class ideology was Keynesianism. This was the idea that markets left to their own devices did not necessarily produce equilibrium, for example did not produce full employment. Government spending or printing money could.

The economic crisis of the 70s destroyed Keynesianism as an ongoing option for the ruling class.

Governments turned to neoliberalism. The basic idea is that the market will solve all problems. Evidently left to its own devices the market  produces equilibrium. Less government will magically allow business to flourish and prosperity to return. That has worked well, hasn’t it?

It is not just industry bosses who depend on workers creating surplus value. This is the value left after paying workers to come back to work refreshed and to pay for the next generation of workers.

Banks too want their cut of the surplus value we create. So do landlords. And so does the state. But all of these groups are dependent on productive workers creating surplus. So they can’t be too pushy and destroy that process.

So as profit rates decline governments tax the surplus less, leaving more for the bosses as one way of trying to address falling profit rates.

The philosophy of small government reflects this. Governments around the world have privatised their own enterprises, cut back on government spending and freed up trade, currencies and labour markets. Do the Hawke and Keating Governments come to mind?

The political expression of this turn to neoliberalism was the election of Thatcher in Britain in 1979, Reagan in the US in 1980 and Hawke in Australia in 1983.

What neoliberalism is really about is making the working class pay for the crisis of profitability. For example as governments cut back on education and health spending to tax business less, the private market in those services expands and with it some of the remaining funding goes to benefit private education and health.  This is privatisation by stealth.

Although there have been up and downs since the 1970s, profit rates in the major developed countries have never really recovered since then. The consensus, if there can be such a thing among left wing writers, is that profit rates in the developed countries are now about half what they were in the halcyon days of the 1960s.

The Global Financial Crisis of 2008 saw governments intervene to save banks and other institutions too big to fail. If they had let them go under the capitalist system might have collapsed.

The GFC was an expression of the crisis of profitability. The best way from capitalism’s point of view to deal with falling profit rates is devalorisation – the destruction of the value of assets on the books. A plant that was before the crash worth say $100 million is after the crash now worth only $10 million.

This collapse in value enables remaining companies to buy up productive assets on the cheap and so begin the profit cycle anew. That is what happened during the Great Depression. There was both a devalorisation of productive assets and, during the war, the physical destruction of much capital in Europe. This gave the system a new lease of life and helps explain in part the long post war boom.

So too does massive US and Russian Government spending on unproductive arms manufacture.

But such destruction of capital on the books in the 1990s and after would have, in the judgement of bourgeois politicians and their advisers, destroyed the system. This is because capitalism has become more and more concentrated and centralised and so the collapse of one major player for example in the finance sector could have triggered fear and panic across that sector and then on to the rest of the capital.

But saving too big to fail companies does two things. It prevents devalorisation and so makes the next recovery weaker than the previous one and the next recession deeper than the last one.

Someone has to pay for all of this. During the GFC governments bailed out lots of banks and other institutions. One estimate is this cost $14 trillion, which is about the size of the US economy’s annual gross domestic product.

So Governments bail out the banks to keep the finance system working and with it the rest of the economy. They have to borrow to do this. This puts them into a budget deficit or an even bigger budget deficit.

Before the GFC budget deficits weren’t that big as a percentage of GDP in most developed countries. After the GFC they are huge.

What has effectively happened has been the nationalisation of big business private debt.

But now that governments have all this debt the interest on paying it off might be so great that the debt cannot be brought under control.

The banks, the very people the government bailed out, and institutions like the World Bank, the ECB and IMF, tell the governments they’ll have to cut their spending to pay off ‘their’ debts. Otherwise they won’t get any bailout money to pay off the debt that they took on from the banks to save them.

Notice what has happened here? Governments bail out banks so that governments can be bailed out by the banks, and other institutions.

The demand for cuts to government spending in Europe are not just for a little tinkering around the edges but wholesale attacks on workers.

So governments of both the left and right have responded by raising the pension age, cutting many basic entitlements, sacking public servants, closing down whole government programs, cutting back to the bone on others, imposing fees or increasing fees on government services, freezing or cutting wages…The list of attacks goes on and on.

Budget cuts as part of a move to a Budget surplus are really just code for attacking workers and making them pay for economic crisis.

Slashing government spending won’t actually address the underlying problem of low profit rates. It does nothing towards that goal at all, other than provide a few extra pieces of silver to the bosses to feed the profit machine. But it dampens down working class demand and so has catastrophic results for retail and similar industries.

In Greece for example predictions are that the country will be in recession for the next decade, unable to break out of its debt and government slashing and burning cycle.

The economic situation in Australia isn’t as bad as in Europe. There isn’t the same sense of crisis here as in Europe.

In part that is because China is still going OK, although its growth rates are slowing.

Even then, not all sectors of the Australian economy are going well. It looks like a 3 speed economy with the miners and banks raking it in, other industries doing OK and then retail and tourism for example up the proverbial without a paddle.

Labor governments have always been consistent in adopting the latest ruling class philosophy. They govern to make sure the capital accumulation process is working.

So they have adopted and believe the bullshit that is neoliberalism.

Part of that bullshit is a balanced budget. These buzz words hide a grim reality – to shift the burden of crisis on to the working class.

As the Australian economy begins to slow, the last thing it needs is massive government cuts. That will only worsen the slow down.

The idea that expansionary austerity works has been proven wrong in Europe and the UK and will be proven wrong in Australia. Expansionary austerity is cutting down the government forest to let the private enterprise weeds grow.

But it is not just that Labor is thoroughly infected with neoliberalism that drives it to produce a Budget surplus.

In case you hadn’t noticed, the Gillard government is on the nose. It is deeply unpopular; its neoliberal policies are deeply unpopular; it is scandal ridden; it is so bad it makes Tony Abbott and the collection of fruitcakes and freaks on his front bench look good.

So cocky are the Liberals that their shadow Treasurer Joe Hockey has been talking about ending the age of entitlement. He means cutting or ending government payments to people who need them.

Australia’s projected Budget deficit if nothing is done will be around $40 billion. Given that GDP is well over $1 trillion this is small beer.

The reason for the deficit isn’t government ‘over-spending’. As a consequence of the Global Financial Crisis, tax revenue has collapsed.

GFC losses are working their way through the tax system so company receipts are down over $5 billion.

Workers have put their hands in their pockets, not their wallets, so GST receipts will drop by about $3 billion.

The rich haven’t been selling their shares and other assets so capital gains tax is down billions.

So if tax revenues have dropped, why not introduce other taxes to recoup some of the lost revenue. What about a Resource Super Profits Tax to bring in an extra $10 billion a year? Oh…

How about extending rent taxes to other industries like the banks? That would bring in a few billion more. Or maybe you could just threaten to do that unless the banks pass on in full RBA cuts to mortgage interest rates. Hmmm…

How about a wealth tax? A tax on the profit of the sale of the houses of the rich? A bequest duty?

These tax changes would give you a budget surplus, introduce equality back into the discussion and debate and save those workers and the poor who will be the targets of this government and the next one.

That explains why Labor won’t do it. They want workers, not bosses, to pay for economic changes.

But the government needs to show to the bosses it is fit to rule for them. It thinks a budget surplus will do that for it. What it will do, given the fact it is a minority government and resistance in the Senate to major cuts from the Greens, is fiddle the books.

It will reduce tax concessions for the superannuation of the rich. It will defer some defence spending. And it will savagely attack single mums with kids at school.

Hey presto, a budget surplus.

Just to show it can give goodies out as well, it has refined the education tax offset, turning it into a cash grant. It will also introduce some sort of dental care scheme. let’s see the detail.

And it will allow business to carry back tax losses. This means that losses business make next year can be carried back against income declared this year and on which tax has already been paid. An instant tax refund.

All this Budget accounting trickery merely means that the pressure next year will be on the neoliberals of whatever party next year to deliver an ‘underlying’ budget surplus.

That will be even more brutal because you can’t keep producing Budget surpluses with sleights of hand and some targeted brutal cuts. You have to sack tens of thousands of public servants, destroy programmes and end welfare as we know it.

If Labor doesn’t do that, the Liberals will try.

The current fetish about a budget surplus is a political response to the troubles of the Labor Government and the global economic crisis and reflects the dominance of neoliberal thought around the globe and here.

Many sensible bourgeois economists are saying now is exactly the wrong time to go for a surplus. It will only slow the economy further.

Labor won’t listen. It is trapped in the logic of neoliberalism and the false cry of Budget surplus.

Prepare for a fight. The way to beat the barbarians in the distance is to beat back the Budget barbarians at the gate.