Here are the simple reasons Tory economic policy has been disastrously stupid for the past seven years

Philip Hammond with John McDonnell. Both know that governments do not go bust, which means they can borrow more cheaply than companies. Mr Hammond’s problem is he is ideologically opposed to that kind of borrowing [Image: Jeff Overs/BBC/PA].

We should all be grateful to Larry Elliott at The Guardian – and also to Philip Hammond – for making it easier to discuss the economy in terms everybody can understand.

That is, everybody except Conservatives, it seems.

Tory policy for the last several decades has been to sell off publicly-owned industries and services and cut the welfare state, in order to reduce taxes and provide higher returns to people who run the businesses that make the most money. The rest of us can go hang, in their opinion.

Trouble is, they arrogantly failed to understand that their well-being depends on the prosperity of the rest of the population; if the majority of people don’t have the wherewithal to buy the products produced by the rich, they won’t stay rich for very long.

The financial crash happened because people who weren’t earning enough were being offered loans they couldn’t pay off – by financiers who were betting on them being unable to service the debt.

When the prediction came true, the Conservatives managed to slither into office on the back of a lie that Labour had spent too much. This narrative clearly indicated the choice they took – to cut public spending massively.

This ‘starve the beast’ policy meant the poorest in society – unemployed and working-class people – were starved of money. As the Tories cut public spending in order to reduce the national deficit, the debt burden on these already-poor people rose, hugely increasing poverty. The statistics hide this fact because they are based on average earnings and average earnings have fallen.

The Tories thought their reduction in public investment would be balanced by an increase in private investment – but the boardroom bosses knew there was no point because their products would be bought by too few people to make the investment worthwhile.

That is the reason businesses have taken the easy way out – employing more people on the lower rates of pay and worse in-work benefits supported by the Tories’ cruel policies in order to increase their profits by minimising their outlay.

It is also the reason that public spending on infrastructure is the only realistic way of boosting the economy and reducing the national debt. John McDonnell has it exactly right:

Extra borrowing certainly means an increase in the national debt and higher debt interest payments in the short term, but that is not the real issue.

Imagine the chief executive of a FTSE 100 company going on TV to announce that the company was planning to go to the City to finance a new plant. The interview would not centre on what the investment meant for the company’s debt interest payments. The chief executive would be asked about what it meant for jobs, earnings and profits.

In the event that the chief executive was asked about the cost of the investment, they would give the same answer as McDonnell did, that at current rates of interest the investment would more than pay for itself, because otherwise we would not be doing it. Our debt interest payments will depend on what happens to interest rates and inflation, but our best judgment is that the investment will wash itself.

The Tories cannot support this plan because it conflicts with their neoliberal ideology, which demands that government’s must not spend money and must not interfere in industry.

This proves that their neoliberalism is fatally flawed:

Instead of obsessing about the red herring of debt interest payments, more attention should be paid to the things that do matter. Labour is planning to borrow to invest, not to cover day-to-day government spending, and that makes sense if the return on the investment is higher than the cost of financing the extra debt.

Governments do not go bust, which means that they can borrow more cheaply than companies. Since the financial crisis of a decade ago, interest rates have been historically low and if he chose to do so, Hammond could borrow money at a cost of little more than 2%, below the current rate of inflation.

That’s right – debt is a red herring. It only becomes important when government policy deliberately increases it in order to pressurise poor and working-class people.

Investment in the right places will bring a return of around six times the cost of debt interest payments – a flood of new money that could revitalise a UK economy that has been withering under Tory mismanagement for many years.

And pay special attention to the point that governments do not go bust – at least, UK governments don’t. This is because we have our own sovereign currency and can manipulate it, if needed, to ease our debt burden. That’s what quantitative easing was all about.

Proof of this point is the fact that, even when the UK’s credit rating was slashed after George Osborne missed all his deficit and debt targets, the cost of borrowing – for the government – stayed at rock-bottom.

But both Mr Osborne and his successor, Mr Hammond, have ignored this opportunity. It is against their beliefs as Tories.

So the evidence is clear:

Tory policies don’t work.

Labour policies will.

No wonder the Conservatives are trying to distract you with other things.

What a shame for them that the examples in the Guardian article – Brexit and the implied improprieties of Damian Green – are just as damaging to a government that can only survive if we are stupid enough to believe the stupid things they do.

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7 thoughts on “Here are the simple reasons Tory economic policy has been disastrously stupid for the past seven years

  1. rotzeichen

    Tory philosophy in a nutshell: Poverty creates borrowers, borrowers create bank profit, end of story.

    The Bank of England puts it: Borrowers pay interest to the private Banks on deposit, savers come at the expense of deposits.

    In other words, banks need borrowers not savers.

    1. Mike Sivier Post author

      Except borrowing doesn’t create bank profit if the borrowers can’t pay back the loan.

  2. Fibro confused

    I’m dyscalculic but even I can see the simplicity of John McDonnell’s/Labours economic policy, create long term wealth via well paid long term jobs increases the economy two fold, people spend earnings, companies produce more, it’s a simple plan when the investment is made in the right places, which is also part of the plan. Maybe because I see patterns rather than numbers it makes sense to me. OK I also don’t feast on MSM bull**** and unlike the majority of the voting Tory public I’m not a self centered egomaniac who care for no one, not even their own children or grand kids it seems given the kind of society they want to leave behind.

    1. Mike Sivier Post author

      Very good. Please remember to keep your language acceptable when posting to This Site.

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