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Deficit and debt

Inextricably linked, though quite different, the terms deficit and debt are often used interchangeably by politicians. Britain spends around £670 billion a year on public and governmental services. But around 70 per cent of it goes on wages. The wage earners are paying income tax and consuming goods and services that attract VAT. Further, a significant proportion goes to capital spending to create jobs and infrastructural assets. Much of workers’ overtime also ends up back at the Treasury, though it is difficult to find out exactly how much.

Cash-flow issues leave government accounts in deficit. Receipts come in retrospectively – some relating to major companies and financial institutions – and capital gains tax is not collected until the start of the final quarter of a particular financial year, whereas public services have to be paid for up front. So governments borrow on the financial markets through the issuing of government bonds to private investors. We pay interest on these “pay-day loans” – the Public Sector Borrowing Requirement (PSBR).

Cut public expenditure and the deficit falls, but freezing wages and shedding jobs are not done in isolation. Similarly, increases in pension contributions and huge hikes in utility prices and basic commodity costs all serve to reduce disposable income and purchasing power. When demand in the economy diminishes, tax revenues fall along with economic activity and GDP.

Falling tax revenues mean more borrowing, with the national debt increasing as a direct result of government policy to cut the deficit. Keynes called this the ‘austerity paradox’. When Cameron denied any association between deficit reduction and recession the Office for Budgetary Responsibility had to correct him. It’s like denying Newton. Given time an apple falling from a tree hits the ground. Over the span of this Parliament, Osborne is predicted to borrow around £100 billion more than the previous government as a direct result of actions that he has taken to depress the material and social wage of working people in the public sector. It’s “invest to impoverish” just as they have “invested” in a student loan system designed to ensure that our young people become accustomed to debt.

The PSBR runs at around £120 billion a year and given the will there may be other ways of raising the money. Bank of England Reserves comprise many times GDP (around £1.5 trillion per annum) and according to the OECD, transactions totalling $500 trillion passed through the City of London in 2011. If we had control, the PSBR could be funded from “slippage”, so small is it in comparison. But state power is in the hands of the enemy.