The
mess in Europe epitomised by the debt ‘crisis' in Greece
is instructive. The issue is being presented as a dilemma
facing the more developed countries of the European
Union, on whether they should condone fiscal "profligacy"
among their partners by bailing out Greece, which is
overburdened by a large fiscal deficit and massive government
debt. If Germany bails out Greece, it is argued, it
would only encourage the latter (and other countries
in the European Union) to spend even more and present
the bill to German and French tax payers in the future.
Hence, Germany and other EU partners should insist that
Greece adjusts by curtailing its expenditures to generate
the surpluses to pay its creditors. If in the process
the economy collapses, unemployment rises and standards
of living deteriorate, the government in Greece should
pay the price – even though it is not the current social
democratic government but its conservative predecessor
that is responsible for the state of the country.
The presumption here is that Greece has only one option:
that of cutting expenditure. Anybody acquainted with
rudimentary arithmetic would know that the deficit on
the government's account, which is the difference between
revenues and expenditures, can be reduced either by
cutting expenditures or raising revenues, or with some
combination of the two. When financial markets insist
on austerity to stave off default, the presumption is
that taxes cannot (read should not) be increased, making
reduced expenditure the only option. If that were true,
the EU is indeed faced with a dilemma, since if pushed
to adopt austerity measures Greece could walk out of
and jeopardize the future of the Union. Fortunately,
the argument is false. In fact, governments are thinking
of a range of measures from taxes on bonuses and incomes
of the rich to taxes on financial transactions or bank
balance sheets, to find the money to finance their debt
repayment commitments and additional expenditures.
It must be noted that those, like the Republicans and
conservatives in the US and elsewhere, demanding austerity
of governments that have built up large fiscal deficits
and accumulated debt, are not ideologically committed
to minimal government. We only need to look back a couple
of years to 2008 to realize that when the financial
crisis generated by private institutions threatened
the financial system (and collaterally damaged the real
economy), almost everyone turned Keynesian and demanded
of governments that they substantially step up spending.
We know from hindsight that much of that spending, euphemistically
termed as fiscal stimulus, went to support the private
financial sector rather than revive the real economy.
However, most analysts sidestep the fact that it is
the combination of this increased spending and the reduced
revenues resulting from the recession that increased
fiscal deficits across the world and substantially increased
government indebtedness. As a result, deficits that
were till recently seen as a fiscal imperative are now
being attributed to fiscal "profligacy". Since finance
has got its fix, and the system has been saved from
collapse even if not revived, the attempt is to divert
attention to reducing deficits and curtailing debt,
rather than towards raising additional revenues to finance
debt repayment.
The move to big government was not just a post-crisis
phenomenon. In fact, right through the years since the
1980s, when the ideology of small government gained
much support, governments from the Left, Right and Centre
had been expanding the state. As The Economist (January
21, 2010) put it recently: "Long before AIG and Northern
Rock ended up in state custody, government had been
growing rapidly. That was especially true in Britain
and America, the two countries in which "the end of
big government" had been declared in the 1990s. George
Bush pushed up spending more than any president since
Lyndon Johnson. Britain's initially frugal Labour government
went on a splurge: the state's share of GDP has risen
from 37% in 2000 to 48% in 2008 to 52% now. In swathes
of northern Britain the state now accounts for a bigger
share of the economy than it did in communist countries
in the old eastern bloc. The change has been less dramatic
in continental Europe, but in most of those countries
the state already made up around half of the economy."
These trends are likely to continue as developed-country
populations age and a higher proportion draw on their
pensions.
In sum, while politicians, policy makers, economists
and the financial media were railing against big government,
governments kept expanding relative to the size of most
economies. Why then the panic of recent months reflected
in the anxious discourse on the need to "exit" from
the fiscal stimulus and the widespread concern over
the crisis in Greece and the European Union? These arguments
stem from three sources. First, financial firms that
are no more able to leverage their bets have turned
cautious about who they lend to and how much, making
it difficult for over-indebted governments to borrow
more to meet commitments on past debt, besides financing
new expenditures. They must, therefore, raise additional
resources to meet these commitments. Second, experiences
in Dubai and elsewhere seemed to suggest that governments
that borrow through many arms may not always offer guarantees
against default, increasing default risk even on what
is considered sovereign debt. And, third, all of this
has raised the interest rates at which creditors are
willing to lend to over-indebted governments, increasing
the interest and amortization payments on their debt
and worsening the problems they face.
The consequent need to turn to new taxes to finance
debt repayment commitments comes at a time when there
are new demands for additional social spending by the
state. As noted above, it is now clear that for some
time now, and especially during the recent crisis governments
were borrowing heavily. During the Golden Age of capitalism
stretching from the Second World War to the late 1960s,
debt-financed state spending was significantly directed
towards constructing a welfare state, which had as its
corollary a higher social wage and improved income distribution.
As opposed to that, the increases in government deficits
in recent years have financed expenditures and concessions
that benefited those at the top of the income pyramid,
worsening income inequalities. The sharp increase in
expenditures after the 2008 crisis, to bail out financial
firms and clean up the mess they created, and the return
to business as usual and big bonuses on Wall Street
and in the City of London, has brought this to public
attention. The fallout has been a backlash against finance
and a demand that the government should do more to help
those who have been adversely affected by circumstances
that were not of their creation. This implicitly wins
social sanction for a proactive state and delegitimizes
the private sector and the ideology of "market forces"
on which it thrives. It also requires the state to find
the resources to redress the imbalances that have been
generated during this period.
Confronted with this situation, governments that realize
they cannot push for austerity without threatening their
own survival are likely, sooner than later, to turn
to the other option they have to deal with their fiscal
difficulties: that of raising taxes. Those taxes will
have to be substantially, even if not solely, on the
more well-to-do and would also take the form of direct
taxes on incomes, bonuses and wealth. This of course
is anathema to the well-to-do, who don't want to lose
through taxes a share of the additional benefits they
garnered as a result of state spending. What they would
prefer is for the pattern of government spending to
change, with salaries, pensions and social expenditures
being pruned, while spending on areas from which they
benefit is sustained. Hence, the cry for austerity when
public debt reaches levels where taxes on the rich rather
than "austerity" for everyone else is the better option.
If the reliance on taxes option is indeed exercised,
we would see an actual return to a new state, with more
spending on welfare and less inequality in income distribution.
That would be a reversal of the gains made by private
capital in the years when finance capital rose to dominance,
and Thatcher and Reagan changed the terms of the debate
and paved the way for state policies that shifted the
terms of exchange and the distribution of income in
favour of capital and the rich. The so-called "backlash"
against the state is nothing more than the effort of
private capital to stall that reversal and recreate
a world where the state predominates, but functions
not in the interests of all, but remains an instrument
of, by and for the rich and the powerful. It is not
a demand for small government, but for governance of
a particular kind, that favours the already well endowed
at the expense of those who have not shared in the benefits
of development.
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