Tuesday, 21 December 2010

austere things that have nothing to do with debt

One of things that European governments are in the process of doing is presenting austerity packages as being an objective necessity in the current climate. We must cut, they say, as the national debt problem has got out of control. Even if you buy this, and many people,don't. It's interesting that only a certain range of policies has been deemed viable by European governments. The most obvious of these being "cuts". Sneaking in, barely noticed has been a rise in VAT.

Now, if you weren't aware, VAT rises are a bad thing for the poor and most vulnerable. At the flip of a switch they raise the price of everything they need to buy. Poor families spend a much higher proportion of their income in VAT rises than they do on other types of tax. It's a "regressive tax" in that makes no attempt to ensure that the wealthiest contribute more of their income than the poor do.

Notice at the same time that governments around the world have ruled out putting up taxation on income or profits. But the VAT rise indicates that they do want to raise more money through taxes. So why choose one over the other? Particularly in the teeth of cuts in public services that disproportionately affect low-income families who are more likely to be service users. Rather rubbing salt in the wounds, isn't it? Raising the prices of everything they buy, whilst simultaneously reducing their access to resources.

Is there any economic benefit to a VAT rise as opposed to raising income or corporation tax? VAT raises prices, depresses spending/demand and could be argued to be detrimental to economic growth. Income tax on the other hand places the burden on people who ordinarily spend a smaller proportion of their money on goods and services, in effect putting money back into the economy that might otherwise be left in savings accounts. A corporation tax might have a slight negative effect on foreign investment (but wouldn't if it were co-ordinated continent wide by international lending institutions), but would in any case be taking money of corporations that aren't currently investing it anyway (as growth figures show they're hoarding it).

So, why a VAT rise? Well today's news from the OECD might give us a hint. Returning to their favourite theme, "let's bully weak Eurozone countries into doing what we say", they combine a stern warning to Spain about their deficit with a statement from Moody's rating agency saying they might downgrade Spain's banks' debt ratings. Do as we say or the bear (the small banks like Caja Madrid in Spain's banking system: see pic) gets it. Let's have a little look at what they've already done:

The moves include plans to sell off a 30 percent stake in the government-owned national lottery, the partial privatization of airports, cutbacks to a key jobless benefit, tax cuts for small businesses and an increase in the tobacco tax.
So privatisation, benefit cutbacks, tax cuts (!) for businesses, indirect taxes. What do they want now?

The government says that next month it will approve a highly contested plan to raise the retirement age gradually from 65 to 67, part of a drive to shore up public finances.

But the OECD said in a report that Spain should consider raising the retirement age even further by indexing the age to life expectancy increases.

The government is considering extending the period of a person's working life used to calculate retirement pensions — it is now the last 15 years. The OECD says people's entire working life should be used in the calculation, a move that would reduce the average monthly pension.

A rise in the retirement age and a decrease in payouts might help Spain's financial situation in the longer term, but it's not going to do much to sort out the immediate debt problems.

Measures passed in recent months make it easier and cheaper for companies to lay off workers, doing away with a system that provided some of the most generous severance payments in Europe.

The Paris-based OECD said that if these do not manage to boost hiring, the government should consider broader measures to make the labor market more flexible.

The idea that making it easier to fire people will increase levels of employment is a novel one. This despite the fact that there are already various methods to hire people on a temporary, precarious basis, if business were in fact looking to take on staff. The likelihood is that cheap firing, will in fact, lead to the more obvious rise in unemployment, when companies use it to, err, fire people cheaply.

Finally this:

The OECD said that if Spain's deficit-reduction measures fail to meet targets the government should consider raising VAT taxes on some goods and services.

If "stimulating the labour market" and cutting public services doesn't work, the next step is raising VAT on the shrinking amount of consumption.

So the collective voice of the rich, capitalist nations essentially has one piece of advice: do what right wing neoliberal ideologues argue for even when there isn't an economic crisis, conveniently using the debt as leverage.

Most of these measures have very little to do with paying down debt, beyond the vague economic theory of their advocates. They are very much ideological decisions. If they were simply concerned with debt, why would they touch on things like pension reform, labour market reform and specific types of taxes? Surely ideologically neutral economic advice wouldn't distinguish between the way taxes are raised or the type of services that are cut?

The kind of pressure being put on Spain isn't actually directly related to their debt They could with equal validity decide that the best way to reduce the public deficit was levy new taxes, cut spending on the military, pull out of Afghanistan and end corporate subsidies. It's related to various problems the international financial community have with their labour market and welfare state. They are concerned with the usual neoliberal hobby horses: less rights, less public services, privatisation, less pay for more work for workers and less taxes for business. "Austere" things that have nothing to do with debt.

The crisis of neoliberalism is turning into a massive example of shock therapy for an entire continent, the dismantling of the welfare state on the pretext of resolving a debt problem caused by neoliberal policies.

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