Political economist Hugo Radice is a Life Fellow at the School of Politics and International Studies at the University of Leeds. He spoke to NLP’s Alex Doherty in the wake of the Comprehensive Spending Review about the nature and implications of this defining moment.

Part two will follow shortly

Firstly can we just get your initial reaction to the CSR – how has it differed from what might have been expected?

Very little really – I think this has been trailed ever since the emergency budget. Obviously there are lots of detailed specifications that we didn’t have before, but in broad outline it’s very much what we expected.

The coalition have been talking a lot about fairness and the progressive nature of the cuts. What is your take on that?

It seems pretty straightforward – their conception of fairness seems to be very different from most people’s. What Osborne is focusing on is the percentage reduction in people’s actual available money, but of course if you take 5% off a millionaire they can still live an extremely nice lifestyle, whereas if you take 5% from someone on the breadline then they starve. So it’s a very mechanical concept of fairness and I think most people would see the cuts, as the Institute for Fiscal Studies pointed out some time ago, as deeply unfair.

Who is going to be particularly affected? Which sectors of the population are going to be most vulnerable to these cuts?

I don’t think I really have anything to add there to the position that Alan Johnson has articulated, or Polly Toynbee in the Guardian, or indeed the IFS – that it’s women, the old, the young and the poor who will be most affected. They’re the ones who depend most upon the welfare regime which is being shredded.

The cuts are particularly focused on welfare spending – what are the economic and social implications of that?

In economic terms, the consequence of the welfare cuts is to reduce aggregate household incomes and therefore reduce expenditure by households and that’s bound to have knock-on effects on the businesses of all kinds that rely on that expenditure. So this is where the argument about a possible double-dip recession comes in: if people are having to reduce their spending then clearly there are knock-on effects on businesses, which will reduce their employment and their investment, leading to further reductions in employment and household spending.  The social consequences would then be those normally associated with higher unemployment:  increases in homelessness, interrupted careers, blighted hopes.

Why do you think the private sector is prepared to risk a double-dip recession? George Monbiot in the Guardian has suggested that this is an ideological thing – business is prepared to accept the possibility of a double-dip recession now in order to re-shape the entire society to its own advantage further on.

I think broadly speaking that’s true. It’s also the case that most of the people who take positions in business are at a level of income and wealth where they themselves will not be much affected by the austerity programme. So I do see it very much in class terms. What this is about is permanently reducing the real living standards of most working people: either by reducing the amount of money they have available through stealth taxes, such as the change in the measure of inflation that’s being used to calculate welfare benefits, or by reducing the availability of public services which form a significant part of people’s living standards. So I think it is a class act, if you like. However, I’m not saying that there are men in suits rubbing their hands together saying “yes! Now we can screw the poor!” There is a very widespread belief in the business community in the economic nonsense that George Osborne preaches – in particular this idea that if only the state were smaller the private sector would automatically be investing, stimulating and creating jobs at an unprecedented rate.

Yes I was going to come on to that – what is your view then of the ability of the private sector to take up the slack in terms of job creation? Do you think then that that is entirely unrealistic?

On the face of it it is not realistic, because the emergency budget already relied upon forecasts from the Office for Budget Responsibility, in which the projected rates of growth of in particular private sector investment and exports were way above anything that has been achieved in recent decades in this country. These projections depend very much on an extremely favourable international economic environment, and when you think that many other countries are going through, or will be going through, the same processes that we’re going through, then it’s very hard to see where this unprecedented growth is going to come from. 

On the other hand I do think we have to be a bit cautious about this. Those who are generally opposed to neoliberal capitalism are very quick to recognise, as in the original crisis of 2008-9, that when business confidence is knocked there is a very sharp reduction in business expenditure, in investments and new hirings in particular. Now those critics are repeating the same argument, saying that public spending cuts are bound to knock business confidence again.  But Osborne is hoping that his strategy of cutting back the public sector will have the opposite effect of restoring confidence to the business sector - that once businesses realise that the road is open before them, they will put their foot down and there will be a very sharp improvement in business confidence and therefore in business investment and employment. So that’s the gamble that Osborne is taking – it’s one that is in principle plausible, if confidence is really very volatile and unpredictable. It’s just that it happens to be historically unprecedented.  There is also the additional argument that we are being too gloomy about the international economy, because growth in the “emerging economies” has been so fast in the last twenty years that they can now provide sufficient demand to pull the rest of us along.

The cuts are being justified in order not to spook the financial sector – in particular the bond markets. How accurate is that? Is the financial sector really desperate for these cuts?

Well I don’t think they are. I think the support of the city for the cuts is part of a more general ideological offensive. As far as the bond markets are concerned, my view is that throughout this crisis there has been clear evidence that there is a global savings glut. In other words there are funds available that are looking for a safe and well-remunerated outlet, and what we are seeing is that countries like the UK have actually been able to borrow with very little difficulty throughout the crisis. And this is largely because over the last thirty years or so there has been a very substantial redistribution of income from labour to capital, from wages to profits. What that has generated is a massive amount of capital available for investment in all sorts of activities. With the collapse of business investment after 2008, investors simply transferred their funds to the government bond markets instead;  and in the course of this year UK bond yields – in other words the costs of government borrowing - have remained at remarkably low levels. There doesn’t seem to be any difficulty in meeting the expectations of the bond markets.

Even if this claim about the bond markets is unfounded, as you say, what does it suggest about the power of the financial sector over the political sphere that this claim is even made?

I don’t think it’s particularly helpful to see it in terms of a power relation or a power struggle between the two. The political sphere has been moulded over several centuries around the primary task of maintaining the power of private property, maintaining the power of capital. Now there’s no honour among thieves, and so because certain sections of the ruling classes benefit from certain policies and other sections benefit from other policies there are always going to be arguments about how to move forward.  It has often been argued that the city somehow has excessive power vis a vis industry, but really there is a symbiotic relationship between the city and industry, making up a more general business interest – the interest of capital as a whole. And the same applies to what we can call the political class:  the system of government, the main political parties, the state apparatus, will only break with the basic interests of private property in the most exceptional circumstances.

What is your view of the coalition’s approach to the banking sector - both in terms of raising revenue from the banks but also in terms of encouraging the banks to act as an economic stimulus to the broader economy?

Well I think we have to be careful in what we wish for. Let’s make the assumption first of all that we’re talking about scenarios in which we continue to have an overwhelmingly private banking sector, where we continue to have overwhelmingly private ownership of business in general and therefore the pre-existing financial model in broad terms runs on. In other words, you have investment banking activities that exist to mobilise funds for business investments, mergers, and so on, and you have commercial banking activities providing day-to-day working capital to business and helping with the financial transactions of households.

If we assume that broadly speaking we’re going to have the same model, perhaps with a bit more regulation, then I think there is a real dilemma, because the more you tax the banks or impose levies of one kind or another on them, the less funds they have - first of all to put into lending, and secondly to restore or increase the levels of capital reserves that the new regulations being crafted internationally are going to require. If you think about the profits coming into the banks, there’s basically a series of things that can be done with them – some will go to shareholders, some will help to build up capital reserves for the bank, some will go to support expansion in lending and some will go in taxes to the government. There are therefore quite complicated choices to be made.

Some felt that when the financial crisis first blew up in 2008 there would be a genuine opportunity for a major change in the functioning of the economy. This of course is not how things have been developing. So are we being set up for further cycles of economic boom and bust?

Well I think it’s been clear from the very early stages, certainly from the middle of 2009, that “business as usual” was going to be the most likely outcome. True, there was a revival of Keynesianism that set in when the banks had to be rescued, but that was the easy bit. It’s very obvious if a huge hole opens up in effective demand, to use Keynesian language, if the banks are suddenly refusing to lend money to anyone, including each other, and if the economy is in free-fall, then the government has to step in and do something about it. And that’s the easy bit. But I don’t think that the Keynesians, led by economists such as Paul Krugman, Joseph Stiglitz and David Blanchflower, have made any case in terms of how they think the economy could function in a really different way. So what has been notable is that the Keynesians have, with few exceptions, not called for outright public ownership of the banks. They still believe that capitalism could be cuddlier – we could have a nice friendly capitalism in which the rich restrain themselves,  and the poor are treated with generosity. But I think history shows that the periods when working people have made substantial gains – the period before the First World War and then especially after the Second World War with the creation of the welfare state – those gains have not arisen primarily because well meaning academic economists have argued a convincing case for changing the nature of capitalism. They’ve come about because working people have struggled, fought and argued for those changes.

I think the real difficulty is this: we have had thirty years of neo-liberalism, going back before Mrs Thatcher to the Labour government of the late 1970s, which rejected Keynesianism in favour of a return to an earlier belief system.  Frankly the idea that Osborne can argue with a straight face that in conditions of high unemployment the government is crowding out the private sector is absurd - these are arguments that Keynes demolished 75 years ago. But the problem is that the common sense has shifted. This is where Antonio Gramsci’s work is so useful, by emphasising how, for a particular political bloc to come to be hegemonic, for capitalists to have such power, it’s not just a matter of deploying the coercive force of the state. It’s also a matter of developing and maintaining ownership of the common sense, of the way ordinary people think about what’s going on.

The coalition have certainly made great use of the prevailing common sense regarding the question of deficit reduction, since ideas such as living within one’s means and balancing budgets is so widely accepted. So what’s your take on the apparent necessity for deficit reduction?

It doesn’t have to happen at all in fact, if we are prepared either to bear the cost of government borrowing, or if governments agree across the world to force borrowing costs down. But in any case, the reduction does not have to be so large and so fast. This is because rapid economic growth would reduce the deficit automatically. Essentially if we had a period of sustained economic growth, it’s remarkable how quickly, if you do the arithmetic, debt figures come down, as a result of the natural process of increasing tax revenues, and reducing welfare spending. These things happen automatically; you don’t actually need to set about cutting public spending because the deficit will correct itself.

People talk about there being a ‘structural deficit’ but earlier this year I tried to investigate what was meant by the ‘structural deficit’, and I asked economists at the Institute for Fiscal Studies about this. These are the people who are really expected to know how things work in the world of taxation and public expenditure.  The idea is that the structural deficit is that part of the deficit that would still exist if the economy was running at full employment.  But basically there is no scientific way to measure this, because the underlying determinants of the deficit in terms of productivity, export competitiveness and so on are constantly changing. The structural deficit is a bogeyman, used to frighten us into accepting cuts, but how big it is, we really don’t know. Estimates go anywhere from one per cent to six or seven per cent, depending on what assumptions you make.

There’s been a lot of talk about the unprecedented nature of these cuts. What is their historical significance?

If we compare it with previous periods of the post-war period, of the early 80s and the early 90s, it seems to be significantly more severe. And looking back on the rounds of cuts made by previous Conservative governments, they barely linked the cuts to changes in the nature of the overall state commitment. The real difference is not so much quantitative, but qualitative. It’s the chipping away at universal benefits, it’s the combination of the actual cuts in spending with substantive changes in methods of delivery, which have the effect of undermining the public sector.

So in the NHS for example, the move toward GP commissioning presents tremendous opportunities for the private sector to get involved in acting ‘on behalf of’ the doctors. And what we’re likely to see is a steady shift towards a model of healthcare provision in which the balance of power has shifted substantially towards profit-seeking private interests. So it’s not so much the quantity of the cuts, the numbers, but the more subtle questions of the texture of the public sector and the ways in which services are delivered.