Recent data on the UK economy is more bad news for public spending which will lead to the major political parties having to make larger cuts because of their lack of alternatives.

The UK economy just staggered out of recession in the last quarter of 2009 growing by only 0.3% and inflation has sharply risen over the last two months reaching 3.5% in January 2010.

The UK is bogged down by the burden of debt and a continuing freezing of credit which has led to growing levels of unemployment and under employment. At the same time UK manufacturing has continued to weaken and the small size of the sector has not allowed the UK to participate in the restocking of rundown inventories world wide. This has meant the recovery in the UK economy has come later and is weaker than in the other major world economies. The destruction of large parts of production capacity in the UK is what also partially lies behind the increase in UK inflation. Increased demand for goods, even at a low level, as some of money printing measures finds its way into the economy, is unable to be met by the manufacturing sector causing rising prices as demand exceeds supply and dearer imports (because of weak pound) are sucked into the UK. This inflation could be a permanent feature of the damaged UK economy.

All of this means that government tax revenues will be weaker as growth, if any, for the next few years will be well below government forecasts as inflation reduces the real value of future planned spending.

For the major parties, that are stuck within the framework of bailing out the banks and industry and making the majority of the population pay for it, this will mean more cuts in services, jobs and wages.

Where Has the Deficit Come From?

Has this deficit been with us all the time or just suddenly appeared? It has been increasing over the years as successive governments have tried to make up for the reduction in taxation revenues on the rich and the massive shift in wealth from the poorer sections to the richer sections of society over the last 25 years. Public debt took thirteen years to double from the end of 1993 to the end of 2006 the last full year before the credit crunch broke in 2007. Since 2006 it has nearly doubled from £500 billion to £866 billion at the end of 2009.

Most of the increase has come from the government bailing out the banking sector. Since August 2007 they have ploughed £130b billion directly into the banks and another £200 billion indirectly through quantitative easing where they have bought government and corporate bonds back from banks and other financial institutions. Only a small amount of this money – about £25 billion – has found its way back into the economy mainly through prime mortgage lending.

The credit crunch led to a the worst recession since the 1930s and tax revenues have fallen as people become unemployed and business go bust while at the same time benefit payments have gone up because of the growing levels of unemployment and under employment. We can see the latest evidence of this trend when Britain posted in 2010 its first deficit for a January since records began – an initially reported £4.3 billion deficit was posted when economists had predicted a £2.6 billion surplus. This takes our total debt to £874.3 or 62.5% of the all wealth we produce in a year (GDP). Our deficit for financial year 2009/2010 is likely to be 13% of GDP which is a worse ratio than Greece’s.

Who Is To Blame For This Mess?

Of course the bankers and the economic system which needed huge levels of debt to survive. But the New Labour governments of Blair and Brown created the conditions for this massive credit bubble and the bust which has followed. It was they that deregulated the financial: markets; institutions; and products. And it was they that oversaw a liberal interest rate policy.

The SNP are culpable to for cheering on the Scottish banks before it all went pear shaped but more importantly freezing council tax for two years which has led to local cuts and a windfall for the better off. They to failed to implement a progressive local tax to replace the regressive council tax.

Alternatives to the Cuts

There are alternatives to the cuts that would in fact mean an increase in public spending. Some of these alternatives are:

• Take control of the UK banks assets and capital
o they have £5 trillion in assets and £560 billion in capital¹

• Tax the Rich
o For example, 100% tax on income over £50,000 for the top 10% of earners would produce £150 billion more annually which is equivalent to an extra 33% of public spending²

• Raise Corporation Tax which has been cut by successive governments from 45% to 28% and clampdown on corporate tax avoidance
o Doubling corporation tax would raise another £45 billion annually³

• A local progressive tax to replace the council tax

• Cut defence spending and withdraw the troops from Iraq and Afghanistan

o Reducing defence spending to a level that is genuinely for defence would save another £30 billion annually4

• Scrap Trident
o This would give a one off saving of £75 billion

We Depend on Public Services

Our Economy is dependent on public services. The UK economy only just came out of recession in the last quarter of 2009 (it grew by 0.3% ) because of a 2.2% growth in the public sector. A recent study carried out by Manchester University has shown 64% of Scottish jobs created over the last ten years were directly or indirectly dependent on the public sector.

That’s how irrational all the major parties are over fighting over the cuts. We say fight the cuts and put forward a rational equitable solution that creates jobs and services for all.

Appendix 1 Alternative ways to spend the £200bn that has been spent on quantitative easing

1. 3.6 million affordable homes;
2. 13,000 mid sized secondary schools;
3. 4,000 General Hospitals; or
4. Some combination of 1 to 3.

¹Bloomberg Financial News Company Reports year end 2008.

²Derived from Office of National Statistics Average incomes, taxes and benefits by decile groups of NON-RETIRED households, 2008-09.

³Derived from Office of National Statistics tax revenues 2008-09.

4Derived from Office of National Statistics Public Expenditure 2009-09.

5 Derived from costing published by the Joseph Rowntree Foundation and the Guardian.