Urgent Action to End Recession

A continuing recession throughout 2009 is inevitable only if the government fails to act decisively NOW.

The predictions of the majority of experts for 2008 were wildly wrong. For at least half the year they failed to grasp what was happening - apart from the honourable exception, David Blanchflower, a lone voice on the Bank of England's Monetary Policy Committee.

The government was slow to act (it took over four months to deal with Northern Rock), and the Bank of England even slower. The failures of the high street banks, and the tardiness of the government and the Bank of England, are the reasons there are now predictions of up to another million unemployed in 2009.

This must not be allowed to happen. All three owe it to us to act, urgently and decisively, in January 2009.

(i) Banks The banks must move to a reasonable level of lending to businesses and individuals - if necessary as a result of nationalisation. In any case, the government already controls (and, therefore, can act directly with) Northern Rock, Bradly and Bingley, Royal Bank of Scotland, the Post Office.

The freeing up of credit is urgent to keep people in jobs and in their houses.

(ii) The Bank of England Apart from further cuts in interest rates, which are expected, the Bank of England must also make significant funds available to support lending by the the high street banks.

(iii) The Government The government must ensure that (i) and (ii) happen quickly. Gordon Brown and Alastair Darling must show the same urgency when people's jobs are collapsing as they did when the banks were in danger of collapse.

The new USA President is, we understand, poised to introduce an economic recovery package of around £700 Billion (perhaps more). The UK must act at the same time, with at least £50 Billion - to reduce taxes for the lower paid, and to increase benefits for families and pensioners.

Obviously, this will mean additional borrowing in the short term but it is sensible to show the means of repayment. The repayment strategy should include:

(a) closing tax loopholes used by companies and the rich £20 Billion
(the trade union UNITE estimates £30 Billion could be acquired);

(b) a higher percentage tax on higher income earners £5 Billion
(over £100,000 a year);

(c) expenditure cuts, mainly defence £25 Billion

Without prompt action along these lines, no significant number of jobs will be saved.

BROWN GOVERNMENT: GET OFF THE FENCE:

£ Billions have been provided to support the banks. Northern Rock and Bradford and Bingley have been nationalised; a majority share-holding has been bought in Royal Bank of Scotland; the government will be the largest share-holder in Lloyds/HBOS. In addition, the Post Office is publicly controlled.

The current policy is to sell the government's stakes to the private sector at an appropriate time, which means, presumably, when taxpayers' support is no longer needed.

This policy is seriously mistaken. Instead, these banks should (in combination) be developed as a People's Bank to provide services in accord with government policies - to increase lending, provide financial services in areas where they do not exist. The latter applies particularly to the post offices - an alternative to closing them.

In addition, there should be negotiations with banks not controlled by the government, backed up by regulation to ensure services in the public interest.

Urgent Government Action December 2008

the Current Crisis: A Layman’s Perspective

The media is awash with experts, especially economists and financiers, telling us what to think. Although we are grateful for their specialist knowledge, there is an important distinction between technical expertise (how banking works, or doesn’t work. for example) and a perception of the economic and social reality experienced in communities.

I am not an expert. My perception of the 2008 crisis is shaped by a life-long interest in politics and world affairs; perceived as a member of the Labour Party for over 50 years. In a genuine democracy it would be accepted that the thousands with experiences similar to mine are able to make a useful contribution to the debate on what is to be done.

In our, increasingly undemocratic, society voters’ views are considered less relevant than, for example, the pontificating of the Governor of the Bank of England. For months we have had to listen to his increasingly obvious nonsense about interest rates, without any possibility of calling him to account.

The government, and the Bank of England under pressure, have taken decisive action in October and early November. But many of us, as well as some experts (for example David Blanchflower, David Smith, Larry Elliott and Will Hutton), saw the need for urgent action more than six months ago.

The October/November action, including the government’s fiscal measures, should have been taken earlier and it is certainly not sufficient. The focus, now, must be on countering the recession with measures which create not only a stable society, but also a much fairer one.

On responding to the crisis, how have the various ‘responsible’ parties performed?

The Bank of England

By refusing to cut interest rates until compelled by international and government pressure, the Bank has landed itself in the category of those who have acted irresponsibly. If David Blanchflower, the only member of the Monetary Policy Committee (MPC) to vote for interest rate cuts for 6 consecutive months, could see what was coming, why did the other members fail to notice?

The Governor’s advice was clearly wide of the mark. He should, at minimum, apologise and act quickly to compensate for his ineptitude. The 1.5% cut in November (again, strongly influenced by outside pressure) is a belated recognition that decisive action is required: it must be followed by two more cuts in December and January. Without further reductions, there is still a high risk of a long recession, with the likelihood of deflation.

The Bank of England’s inflationary fears of the past few months were unrelated to reality in the world outside. Recent inflation was the result of the rising costs of energy and food, where the Bank has no control. Rising prices were not the result of excessive wage settlements, and related UK factors - factors which can be directly affected by our interest rates.

These failures demonstrate the dangers of giving to experts powers which are not subject to any kind of democratic influence or control.

The Opposition Parties

The proposals of the Liberal Democrats’ Vince Cable have been more relevant than anything from other front bench persons this year. His criticism of the government is not for the action it has taken but for the delay in taking it. Incidentally, his excellent performance appears to have done his Party little good in the opinion polls.

The Conservatives, however, have appeared to be completely at sea (which, we now know, is where George Osborne actually was this summer). Everybody knows that the problems (especially in the City) originated with the Thatcher deregulation and privatisation; although it must be accepted that the Blair governments were remiss in allowing the markets to continue to enjoy their excessive freedom.

The Cameron Opposition appears to support the part nationalisation of the banks, while claiming that they oppose state intervention. On Channel 4 news 20 October, the Tory spokesperson claimed to be opposed to borrowing and tax increases but argued for the postponement of VAT payments and the reduction of national insurance contributions to help struggling companies.

When asked by the interviewer where, if not to be borrowed, the money was coming from, the interviewee replied ‘corporation tax’. It was pointed out to him that his Party is pledged to reduce corporation tax. This interview is typical of the Conservative’s contribution to the debates on the crisis.

Although the Blair governments (and the Bank of England) should not have allowed house prices and consumer debt to rocket, there is scant evidence of the Conservatives advocating alternative policies. They continue to criticise Gordon Brown, without offering any solutions of their own, and they appear to have little understanding of the international dimensions of the crisis.

The Conservatives’ opposition to borrowing to counter the recession obviously implies that their ‘remedy’ is to allow the market to take its course - with unemployment continuing to rise, as under the Thatcher governments of the 1980s.

Government Borrowing

First, it necessary to recognise that the £ billions made available to the banks is not public expenditure: it is investment, which could, and should, result in a profit. Of course there are always risks with investments, but the reasonable assumption is that there will be a positive benefit from the interest the banks pay on loans, and from a rise in the shares the government holds when normality returns to the markets.

Second, although rising (e g as a result of falling tax receipts) as the recession starts to bite, our government borrowing, as a % of Gross National Product (GDP), is lower that all G7 countries - with the possible exception of Canada.

Against the G7 average of around 80% of GDP, the UK’s borrowing is around 50%. Japan is almost 200%, Italy 100% and the USA, France and Germany in the 60%-70% range.

This means that the option of borrowing short-term to counter recession is available to the U K government. It is the only realistic option if millions are to be saved from the misery of long-term unemployment and its crippling consequences.

However, it is essential (i) to target expenditure to create a fairer society in the longer term, and (ii) that there is a strategy to repay the borrowing (say, to a national debt level of 40% of GDP) over a 5-7 year period.

Strategy for Recession

The government has already recognised that the appropriate response is to increase, not reduce, public expenditure. It is bringing forward projects, especially in construction. This is a modest step which will save some jobs; although it is likely to take time for any significant impact.

However, the urgent need is measures to make an immediate impact. The obvious answer, to stimulate the economy and create a fairer society, is policies for a redistribution of wealth. This implies radical policy changes, likely to cause the government to hesitate, but they are the only sensible and fair way forward.

More money must be put into people’s pockets - because they need it, especially for food and warmth, but also because it will have a positive effect on the economy. People struggling to make ends meet will spend any money they receive, with an immediate stimulus to retail sales.

In addition to the steps the government has already taken, I envisage something along the following lines:

(i) taking one million of the lower paid out of tax brackets;

(ii) doubling the winter fuel allowance;

(iii) a scheme to guarantee new mortgages, especially for first time buyers.

It appears that the government has already decided to invest in green energy projects, which will create some new jobs in the medium term.

Paying For It

It would be irresponsible, as well as damaging to the economy, to take these steps without a strategy to repay the borrowing – over a period, say, of 5-7 years. The policies for funding should include a windfall tax, a more progressive tax system, and a drastic reduction of public expenditure on defence.

The windfall tax should be levied on companies making excessive profits, especially the oil companies and the utilities. A major benefit of such a tax is the speed with which the income could be available to the government. It should be levied on profits 2007/2008 and paid 2008/2009.

People at the lower end pay a higher proportion of their income in tax than any other group, which is the main reason for taking at least a million out of tax brackets. If the means used were to increase allowances for all tax payers, the majority of working people would benefit.

I leave to the experts to cost the programme I have described. If my estimate of £100 billion is too low, the answer is not to reduce the programme but to increase the income to fund it.

Most of this funding must come from a windfall tax and from reducing expenditure on defence, including abandoning Trident. However, more must be acquired from a more progressive income tax system, with, instead of the proposed 45% rate, new rates along the following lines:

- a 50% rate for incomes over £75,000

- a 60% rate for incomes over £95,000

- a 65% rate for incomes over £120,000

This would raise some of the revenue to pay for the tax reductions: equally important, it would also be a first step towards the fairer society the Prime Minister is committed to create.