Tag Archives: Green New Deal.

Prem Sikka: “If austerity is over, the Chancellor must present a plan to invest in our economy”

Chancellor Philip Hammond’s number one focus should be investing in a sustainable economy, argues Prem Sikka, Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. 

In a recent article, Sikka (below right) observes that in the face of Brexit uncertainties, many businesses are withholding investment. But to meet the challenge, the government will need to abandon almost of its headline polices.

He points out that historically, the private sector has shown little appetite for long-term risks and the state invested heavily in biotechnology, telecommunications, postal, information technology, utilities, shipping, railways, airlines and many other long-term industries.

For the last 40 years, the government has privatised most of these industries and relied on a variety of tax incentives to persuade the private sector to invest.

Sikka’s verdict: the results have not been encouraging – investment slumped

The lowest ratio of investment to GDP in EU countries was recorded by Greece (12.6%), followed by Portugal (16.2%) and the United Kingdom (16.9%). And since the 1990s, the UK R&D expenditure has fluctuated between 1.53% and 1.67% of GDP, well below the EU average.

Successive governments made a deliberate decision to prioritise the service sector though it is the manufacturing sector which generally generates more skilled, semi-skilled and higher paid jobs. Its multiplier effect – the ability to generate additional jobs – is also greater as the items need to delivered, maintained and repaired. Yet the manufacturing sector has continued to shrink and now accounts for around 9% of the UK GDP compared to 30% in China, 20% in Germany, 12% in the US and 19% in Japan.

Without adequate purchasing power, people cannot afford to buy goods and services and that itself discourages investment.

Investment, innovation and R&D need to be accompanied by sustainable demand. Since 2010, the government has been wedded to building a low-wage economy. Workers’ share of the GDP for the second quarter of 2018 stands at 49.3% of GDP, compared to 65.1% in 1976.

At the same time, the increases in gas, water, electricity, rents and travel costs have further eroded people’s purchasing power. The inevitable consequence of squeeze on household budgets has been the closure of shops such as Carpetright, Jamie’s Italian, Maplin, Marks & Spencer, Mothercare, Poundworld, Prezzo and Toys R Us, just to mention a few.

The Chancellor needs to find ways of boosting people’s purchasing power

This could be done by curbs on profiteering by utilities and train companies, raising the minimum wage and state pension, ending gender discrimination and pay rise for women and public sector workers, abolition of university fees, and ensuring that the tax-free personal allowances for income tax purposes match the minimum wage.

Sikka emphasises the urgent need for state investment in providing social infrastructure, transport, house-building, green industries, artificial intelligence, space and other industries and Hines proposes a Green New Deal infrastructure programme, offering jobs in every constituency.

In the Guardian, Colin Hines, convener of the Green New Deal Group, recently wrote about a GND infrastructure programme which would contribute substantially towards reducing Britain’s domestic carbon emissions and also address the serious threat of rapid and ubiquitous automation raised by Yvette Cooper.

Two major labour-intensive sources of local jobs were advocated: face-to-face caring in the public and private sector and infrastructural provision and improvements. Both are difficult to automate and can’t be relocated abroad.

Infrastructural provision and improvements are crucial to tackling climate change, prioritising energy efficiency and the increased use of renewables in constructing and refurbishing every UK building. In transport the emphasis would be on increased provision of interconnected road and rail services in every community, encouraging electric vehicles for private use. Hines added that the advantages of this programme include:

  • improving social conditions,
  • protecting the environment,
  • offering opportunities in every constituency,
  • requiring a wide range of skills for work that will last decades
  • and helping to improve conditions and job opportunities for “left behind” communities in the UK.

Sikka ends: “Neoliberals will no doubt respond with the usual comment ‘we can’t afford it.’ But can we afford stagnation, economic decline, social conflict and instability? The answer is a clear no. A government which can bailout banks with billions oquantitative easing, appease corporations and wealthy elites with tax cuts and guarantees profits through the Private Finance Initiative (PFI) and subsidies to film companies, can also find resources for economic welfare. If it chooses not to, it should make way for someone who can”.

 

 

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Green quantitative easing – good sense

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Richard Murphy and Colin Hines published the Green QE report, which is summarised below.

In March 2009 the Bank of England began a programme of quantitative easing in the UK – in effect, the Bank of England granted the Treasury an overdraft but to keep the European Union happy had to do so by buying Government gilts issued by the Treasury from UK commercial banks, pension funds and other financial institutions.

There were three reasons for doing this:

  1. To keep interest rates low;
  2. To provide banks with the money they needed to lend to business and others to keep the economy going.
  3. To make sure there was enough money in the economy to prevent deflation happening

No one was sure whether quantitative easing would work, and as we note, no one is sure for certain whether it has worked.

We do however suggest in this report that several things did happen:

  • The banks profited enormously from the programme, which is why they bounced back into profit so soon after the crash– and bankers’ bonuses never went away;
  • The entire government deficit in 2009/10 of £155 billion was basically paid for by the quantitative easing programme. If you wanted to know how the government met its costs, now you do; There was a shortage of gilts available for investment purposes as a result of the Bank of England buying so many in the market. Large quantities of funds were invested instead in other financial assets including the stock market and commodities such as food stuffs and metals.
  • The USA also undertook quantitative easing at the same time as the UK, which meant that despite near recessionary conditions commodity prices for coffee and basic metals such as copper have risen enormously. This has impacted on inflation, which has stayed above the Bank of England target rate;
  • Deflation has been avoided, although the relative role of quantitative easing in this versus the previous government’s reflation policies is unclear;
  • Interest rates have remained low.

However, one thing has not happened, and that is that the funds made available have not resulted in new bank lending. In fact bank lending has declined almost steadily since the quantitative easing programme began.

there is an urgent need for action to stimulate the economy by investing in the new jobs, infrastructure, products and services we need in this country and there is no sign that this will happen without government intervention.

For that reason we propose a new round of quantitative easing –or Green QE2 as we call it.

Green QE2 would do three things. First it would deliver the Green New Deal – the innovative programme for investment in the new economy the UK needs as outlined by the Green New Deal group in its reports for the New Economics Foundation. This would require three actions:

  1. The government would need to invest directly in new infrastructure for the UK.
  2. The government needs to invest in the UK economy, in conjunction with the private sector, working through a new National Investment Bank;
  3. The government must liberate local authorities to partner with the private sector to green their local economies for the benefit of their own communities, and it can do this by providing a capital fund for them to use in the form of equity that bears the residual risks in such projects.

A second round of quantitative easing should involve direct expenditure on new infrastructure projects in the UK.

For example there is a desperate need for new energy efficient social housing in this country, for adequate investment in railways, not to mention a reinstatement of the schools rebuilding programme. Undertaking these activities would give the economy and immediate shot in the arm as well as providing infrastructure of lasting use which would more than repay any debt incurred in the course of its creation.

This is the result of the ‘Keynesian multiplier’ effect. This is the phenomenon that occurs when government borrowing to fund investment takes place during a time of unemployment.

That borrowing directly funds employment.

That new employment does four things.

First it reduces the obligation to pay benefits.

Second, it means that the person in that new employment pays tax.

Third, it means their employer pays tax on profits they make.

And finally the person in employment can then save, which means that they help fund the government borrowing which has created their own employment.

As Martin Wolf, the eminent Financial Times columnist has said in this FT video: “Borrowing is no sin, provided we use the funds to ensure that we bequeath a better infrastructure to the future”.

This is what we believe the programme we recommend would do and this is precisely why it is appropriate to do it now when the cost of government borrowing is so low, a point Wolf and Skidelsky also make.

Borrowing now to spend into the economy is the basis for the first stage of Green QE2 – and of the Green New Deal.

Read the whole report here: http://openaccess.city.ac.uk/16569/1/GreenQuEasing.pdf

 

 

 

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