From the TUC

Inequality: The price of austerity

22 Jun 2012, by Guest in Economics

It’s now official, after the mild economic recovery failed to gain any traction in 2011 when the economy grew by a paltry 0.8%, Britain is now back in recession. Actually, we’re in the first ‘double-dip’ recession since the economic turmoil of 1975. ‘Double dip’ of course is where the economy goes back into a recession before it has had a chance to recover its previous high of economic output.

As a result, Even the IMF has now urged George Osborne to start preparing an emergency package of spending increases to deliver growth and boost demand as it called for further interest rate cuts and more electronic money creation from the Bank of England to lift Britain out of its double-dip recession.

The government’s economic policy of pay austerity for the public sector – the pay freeze followed by the pay cap of 1% – is also not working. As a new PCS pamphlet shows, the price we are having to pay is growing inequality. Exorbitant energy bills, increased travel costs, benefit and tax credit cuts, VAT increases and falling wages have resulted in high levels of personal debt, just to make ends meet. It has also, as the IMF recognised, led to weak consumer spending, sluggish demand, and an under- performing economy. Without increasing wages, we are not able to arrest this downward spiral.

The widening wages gap has been worsened by cuts in benefits and tax credits as low incomes fail to keep pace with the rise in earnings. With the obscene income differential between the top earners and the rest, PCS show in their new booklet Inequality: The price of austerity that we urgently need to increase pay for the 99% as Britain is creating a profound and damaging economic segregation.

It’s worth noting that thirty years ago the UK was one of the most equal countries in the western world. Today, as we know, the UK is a very unequal country, and this inequality is the result of a major shift in income distribution over the last three decades. Over the last thirty years an increasing share of national income has gone to bankers and business executives. The diminishing share of GDP going to workers has led even the IMF Managing Director to acknowledge the need for strong trade unions and policies that increase the share of national income going to workers.

The global lesson lends credence to the economic theory that raising pay works and austerity doesn’t. In Greece, after a decade of public spending cuts, massive privatisation programmes and deregulation, the country is near bankruptcy. More austerity imposed on top of what has happened in the past few years means it is almost certain that the ‘Greek rescue’ will fail. Austerity in Spain also hasn’t worked. Spain has entered a double dip recession throwing the spotlight on the dire state of the whole Spanish economy. The unemployment rate has hit a new record high of 25%, its property bubble has burst, and its banks need a €120bn bailout.

In the UK, it’s now clear the cuts policy is not a matter of economic necessity but of political choice. There are alternatives and better decisions about stimulating economic activity could be taken, especially including raising wages to enable the economy to grow and overcome the deficit over a period of time. Plenty examples exist in Latin America involving measures to encourage growth and building alternatives to austerity. For example, Argentina has experienced one of the longest periods of economic growth in the country’s history. By rejecting ‘conventional’ economic wisdom, the Kirchner administration in Argentina has been able to grow the economy and create jobs by increasing demand. The latest US data also shows that growth through public expenditure is ongoing and the unemployment rate is starting to fall.

Moreover, the global economic crisis and fiscal aftershocks demonstrate the damage that can be done by groups of politicians too closely tied to a financial sector which has its own reactionary agenda. This is why PCS are part of a growing coalition that argues for an alternative to austerity.

The coalition government and much of the media have used the economic crisis, the national deficit and decisions to cut public expenditure as a means to shrinking the state. They have turned a global financial crisis caused by corporate and personal greed into an ideological attack on public services, pay and pensions.

Over the coming months we need to win across all sectors to the economic arguments for fair pay, quality jobs, growth and redistribution as a means of creating a more cohesive, inclusive economy.

GUEST POST: Enrico Tortolano is a Policy Officer at the union PCS. His main policy areas of responsibility are pay, economic policy, taxation and their European and International dimensions. He formerly worked in Latin America, on human rights issues with trade unions. He is regularly published in Tribune, mostly reporting on the political economy of Latin America, but quite frequently, as a book reviewer covering an eclectic mix of politics, philosophy and economics.