Socialist Worker

Does debt drain the economy?

The government has spectacularly failed in its mission to reduce the deficit. Dave Sewell shows that even if it achieved its aim it would do nothing for ordinary people

Issue No. 2354

A cleaner sweeps the floor after the Wall Street Crash in 1929

A cleaner sweeps the floor after the Wall Street Crash in 1929

Tory George Osborne often claims that government cuts are vital to save the economy by reducing the deficit.

The deficit is the difference between money that the government spends—on everything from healthcare to interest payments on its debt—and the money it gets through taxes.

Despite slashing billions from public spending, the deficit went down by only £300 million over the last financial year. It sounds a lot until you know that the annual deficit was £120 billion.

Britain’s national debt actually increased to £1.19 trillion, or 75 percent of the GDP measure of economic output.

George Osborne has had to repeatedly revise his debt forecasts to match the gloomy reality.

Why has this been such a problem for the government?

After all, while Britain’s national debt is higher than it has been for decades, it was much higher for most of the 20th century.

It peaked after the Second World War at almost 250 percent of GDP. That debt took until 2006 to pay. But it didn’t cause a crisis. 

The three decades that followed the war were one of the golden ages of capitalism in Britain and elsewhere.

Back then banks could keep lending more and more money, and bosses kept finding profitable ways to invest it. Today it’s the other way round.

Bank lending has declined steadily since the crash of 2008. And bosses are sitting on their cash. The cash hoard of non-financial corporations in Britain grew from £304 billion to £318 billion in the first three months of this year.

Lending and borrowing can seem to be the fundamental driving force of capitalism. But this puts cart before horse. Karl Marx showed how the money markets grew out of capitalist production, not the other way around.

Capitalists only create profit by taking surplus value from workers. It hires them to work for less than the value of what they produce. 

The money they spend on wages and on things like buildings and machines will be less than the money they get back from selling their products. The difference is where the bosses’ income comes from.

This is the source of capitalist profit.


To make that income they need something to invest in the first place. But if a would-be capitalist finds someone with money to spare, he or she can borrow it in order to invest. Of course this comes at a cost.

Lending rarely goes straight from one capitalist to another. Savers put their money in banks and the banks lend it out to firms who promise to make a profit. 

That’s where interest comes from. It’s the share of profits from production. And like all profit, it is ultimately generated by workers.

At times when the system is booming and profits are high, the banks can lend out more money than they’ve taken in. 

They are so confident in the capitalists’ profits that they know they’ll keep getting interest back. Marx called this kind of investment “fictitious capital”.

It doesn’t stop at simple lending and borrowing. A whole industry has grown up treating debts as a commodity to be repackaged and bought and sold.

This can even, for a time, help keep profit rates artificially high.

Each of the booms in the so?called neoliberal era of ­capitalism since the late 1970s has been marked by an expansion in fictitious capital. This ranges from stock exchange deregulation in the 1980s to “credit default swaps” and sub?prime mortgages in the 2000s.

But when profit rates go down banks are left with massive debts they can never pay. This can only be resolved by capitalists collapsing and going bankrupt, destroying both real and fictitious ­capital in the process.

That didn’t happen in 2008.

As capitalism has developed, firms have grown and merged and taken each other over to the point where a single bank or manufacturer can represent hundreds of thousands of jobs and tens of millions of pounds.

 Their collapse could shake the system to its core, bringing chaos to bosses as well as misery to ordinary people.

This makes crises much harder to resolve. Some neoliberal economists called for big firms to be allowed to go under to revitalise the system.

But when Lehman Brothers investment bank collapsed it was the biggest bankruptcy in US history. 

It threatened to destabilise the whole economy and made the government decide that certain other companies, like General Motors were “too big to fail”. Instead of leaving them to be dragged down by their debts, they took those debts on.

That’s how Britain’s current national debt crisis came about. It has nothing to do with the last Labour government spending too much on public services. 


It has nothing to with an ageing population or migration increasing the demands for welfare. These are all convenient myths for an establishment keen to obscure the much simpler truth.

They got us into debt to keep their system from falling apart. And they continue to strain every sinew of public finances to hold it together.

The Bank of England has held its own interest rate at a record low of 0.5 percent since 2009, and injected the banks with free money through so?called “quantitative easing”. 

The Bank is trying to encourage others to lend and firms to make new investments—but it has failed.

And, while it hasn’t helped new “green shoots” to emerge, the Bank’s policy has prevented dead branches from falling off. Because if they did, it could bring down the whole tree.

The International Monetary Fund warns that Britain has allowed banks to keep up their loans to “non-performing” companies. In other words Britain’s debt exists to subsidise the so-called “zombie firms” and “zombie banks” that would otherwise have perished in the 2009 recession. 

Osborne’s hope that cuts in the public sector can be offset by a recovery in the private sector is a joke as long as these “zombies” survive.

So does his hope of paying off the debt. The investors who trade in government debt on the financial markets know this. 

That’s why credit rating agencies are warning the investors who trade in government bonds to be less confident that Britain will be able to pay them back.

So far this hasn’t actually increased the cost of borrowing for Britain, because investors fleeing the eurozone need somewhere to go. 

But it’s a constant danger for Osborne, so he is under massive pressure to get rid of the debt.

And if he throws it back on the banks and the bosses they will be even less inclined to invest. So he’s making workers pay instead.

Private household debts have increased by £245 billion since 2010 as ordinary people struggle to get from one payday to the next.

This isn’t just about cutting spending. Some of the worst cuts could cost more—such as the bedroom tax, which will divert housing benefits from councils and housing associations to private landlords.

But they will also rob workers of the few protections they still enjoy, and make it easier for bosses to push down wages and boost flagging profits.

Britain’s debt is a symptom of the dilemma that capitalism’s crises thrust on its rulers. 

They can either let hundreds more firms collapse with devastating consequences, or stifle the economy under the burden of keeping them afloat.

But there is more wealth in the world today than ever before. The financial crisis didn’t mean that there were suddenly fewer homes, or less food and medicine. 

It’s only the anarchy of the market that turns it into a housing crisis, food price inflation or healthcare cuts.

Only workers can stop the madness, by fighting back.

We must not accept a single cut to pay the debts of a system built on exploiting us.

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Tue 21 May 2013, 19:16 BST
Issue No. 2354
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