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What is wrong with the Chancellor's Autumn Statement

November 28, 2015 3:50 PM
By Geoff Crocker

Budget July 2015There are three huge defects in the Chancellor's autumn statement

1 Technical

The Chancellor fundamentally believes that the government budget can and should be balanced, or even run in surplus. This basic accounting assumption drives his whole thinking. But facts prove him, and the traditional thinking of the whole financial establishment, wrong on this. He has been unable to eliminate the deficit. He will not be able to eliminate it. In modern high technology, high productivity economies, deficit is inevitable, and manageable.

There's a huge problem in thinking here. The Chancellor approaches economic policy like an accountant, rather than as an economist. Books should balance. He talks about what we can afford, purely in financial terms. But it's not money which gives value to the real economy, but rather it's real economic activity which gives money its value. Economic activity creates financial value, and not the other way round. What we can afford has to be measured in real resources of people, skills, natural resources, technology and capital assets. A thought experiment demonstrates this. If it were possible to plug a machine into the earth to produce the whole GDP without labour and therefore without wages, then the money vouchers the government would have to allocate would all be a total financial deficit each year. Money does not have to be backed either by gold, or by the sale of government bonds, but only by output GDP. Deficits are here to stay. Facts support this hypothesis.

2 Practical

In seeking to eliminate deficit and balance the budget, the Chancellor feels forced to either increase taxation, or reduce spending. He has largely chosen the latter, and proposes a £12bn reduction in welfare spending, even though this is now to be taken not by tax credit reduction now, but by universal credit reduction later. This will nevertheless feed straight through to an equally large reduction in demand in the economy. This is the last thing the economy needs, since deficient demand continues to be the problem, as output growth exceeds wage growth in economies with increasingly automated production.

3 Moral

The burden of these welfare cuts will fall unequally on lower income earners and families. The distribution of the national income will yet again be skewed in favour of the rich and against the poor.

There is an alternative - a basic income

The only ultimately viable economic solution is a basic Citizen Income payable to all, funded by overt money financing, ie outside the public sector borrowing requirement. I argue these points more fully in a paper published by the Centre for Welfare Reform ref 'The Economic Necessity of Basic Income'

* Geoff Crocker is a professional economist whose book A Managerial Philosophy of Technology is published by Palgrave Macmillan.