Monday, 4 December 2017

Longest slump on record – official

By Tom O’Leary

The latest official forecasts for the UK economy show the longest slump on record. But there is official silence on the cause of the crisis, signalling no intention to change course to end it.
Instead, the Office for Budget Responsibility (OBR), the UK Treasury and Chancellor Philip Hammond all hint that slashing growth forecasts over the medium-term is somehow connected to the weakness of productivity growth and this in turn is in vaguely related to the weakness of investment. 

Officially, the weakness of UK productivity growth remains a mystery or a ‘puzzle’. In reality, the UK is just one of the more extreme examples of a phenomenon across the Western economies of weak productivity growth. 

In all cases, the cause is the weakness of Investment which determines weak productivity, and the UK is among the weakest because its investment has been among the weakest. The claim that it is instead caused by ‘measurement problems’ of the service sector or other imponderables is belied by the fact that a large service sector is common to all Western economies, yet the UK has badly lagged behind even the G7 average growth in productivity since the Great Recession. Productivity is weak in the G7 because investment is weak, and both are weaker still in the UK.

UK Great Stagnation

The Great Depression of the 1930s lasted less than 3 years but was only definitively ended by the war boom in 1940, ten years later. The Long Depression at the end of the 19th century lasted 12 years. According to the official OBR forecasts the Great Stagnation in the UK will last at least 17 years, with living standards failing to recover their 2008 level until at least 2025. 

The current crisis is an unprecedented duration of weakness. On reasonable assumptions from the Resolution Foundation, real average earnings will not recovery their 2008 level until 2025. At the same time Government departmental spending will on average have fallen by 16% in real terms between 2010 and 2022. It also forecasts that the current outright decline in living standards will last longer than the fall in the recession, 19 quarters versus 17 quarters. Claims that ‘austerity has ended’ are utterly foolish. 

The consequences of such a prolonged depression will be severe. They are already beginning to accumulate. The OBR forecasts for per capita GDP and especially the level of debt would have been worse, except that longevity is beginning to decline. This is almost unprecedented in an advanced industrialised economy in peacetime. Further deterioration is almost inevitable, at least under current policy.

Einstein’s definition of madness

In the Budget, Hammond did suggest that low productivity was linked to low investment. He went further, “The key to raising the wages of British workers is raising investment – public and private. And Mr Deputy Speaker, we are investing in Britain’s future.”

This should all represent progress. Except the last part of that statement is untrue. The Tory government intends to cut public sector investment further.

The level of public sector net investment reached 3.4% of GDP during the crisis under Labour and was instrumental in supporting a recovery. The Tories slashed public investment to 1.7% of GDP in 2013/14 and has only recovered to 2% since. Hammond intends to cut it close to its low-point in the next Financial Year to just 1.8% of GDP and barely increase it subsequently. See Chart 1 below.

Chart 1. UK Public Sector Net Investment as Percentage of GDP, 2000 to 2023
 
It is important to recall, Hammond and the official forecasters are close to acknowledging that weak investment causes weak productivity growth, and that this in turn lowers the growth of wages and living standards. But the Tories intend to do nothing to reverse the weakness of investment.

As many analysts have pointed out, the big set-piece of the Budget in tackling the housing crisis will encourage no new home building and simply drive up house prices. This is at a cost of £3.2 billion, when 40,000 new genuinely affordable homes could have been built. The Tories have boosted demand for housing without boosting investment. The textbook response is higher prices (or in this case, softening the possible house price fall).

It is a serious mistake to believe the Tory leadership are stupid. Theirs is not primarily a failure of diagnosis. The intention is not to address a crisis whose proximate cause they accept; the lack of investment.

The intention of the austerity policy is to transfer incomes from poor to rich, from workers to companies. The policy’s ultimate aim is to boost profits. This is why, from the Tories’ perspective, the state cannot interfere in the economy by investing on its own account, as this would remove sections of the economy from private sector profitability altogether. The thrust of policy is the opposite, to privatise as much of the economy as possible. In the footnotes to the OBR documents, it seems as if the government intends to sell off its remaining shares in RBS at a huge loss to the public sector, for precisely this reason. The NHS, education, rail and other sectors are all being opened to the private sector.

Labour’s alternative

Under John McDonnell and Jeremy Corbyn, Labour has entirely the correct framework of borrowing for Investment, not for current or day-to-day spending. The latter can be met and even increased substantially by increased taxation. 

This follows from the fundamentally correct point that only Investment can add to the productive capacity of the economy. Consumption cannot. Therefore only Investment can sustain growth. Borrowing (and incurring debt and debt interest) for spending without a return was a factor in the Western government’s inability to deal with the end of the post-World War II boom in the 1970s. At the same time, Western governments were divesting assets (privatisation) that had been rescued through nationalisation after World War II.

Rather than make the state more responsible for Investment, the Western governments instead chose to slash current spending, led by Thatcher and Reagan. The verdict is clear. In the 38 years since Thatcher first came to office the economy has grown by 126%. The same accumulated change in growth took place in the preceding 26 years. 

Labour’s current economic framework is a sharp break from that past. In effect, to spur recovery, Labour is willing to make inroads into the private sector’s domain by increasing state investment.

However, the question is now posed of what will be the appropriate level of that investment, in light of the official expectations that weak productivity means a permanently lower rate of growth, something more like 1.5% than 2.25%.

One factor in the response is Labour’s own fiscal rules. According to the OBR, at some point in the next few years borrowing for current or day to spending will end, possibly in 2019. Table 1. below shows the forecasts for Public Sector Net Borrowing and Public Sector Net Investment over the next few years.

Table 1. UK Public Sector Net Investment and Net Borrowing, 2016/17 to 2022/23, £bn
Source: OBR

The same trends are shown in Chart 2 below. Pubic Investment is forecast to exceed public borrowing at some point in the next few years.

Chart 2. Public sector net Borrowing & Net Investment, £bn, 2016/17 to 20222/23
 
Given how realistically downbeat the OBR now is, and assuming unchanged government policy, only an outright recession could push the cross-over point for public investment and borrowing into the very far future. This means day-to-day or current government spending at some point in the next few years will be more than covered by government taxation and other revenues.

A crucial difference is that Labour would maintain and increase government Investment for growth in living standards. The Tory stated plan is to eliminate borrowing altogether.

At the last election, Labour’s costings manifesto outlined £48.6 billion in taxation and other revenue-raising measures. According to the OBR, it will also a have further £21 billion in 2020 in headroom to increase current spending without having to borrow. To address the real damage to public services and pay, as well as to maintain and build political support for a radical government of the left, then most if not all of this £70 billion spending is likely to be needed.

Therefore at some point all of the new government borrowing will be for investment. The Labour fiscal framework already includes a ‘knock-out’ option, where borrowing on all items of government outlays can be increased if interest rates remain close to zero, which provides flexibility in the face of a recession.

But in light of the official acceptance that growth will now be ‘permanently’ lower, at least lower over the foreseeable future there is room for reconsideration of the borrowing targets for investment. The National Investment Bank and Infrastructure Commission should both have as their mission statement the ‘permanent’ raising of the productive capacity of the economy.

This may well require going beyond the current commitment to borrow £25 billion in additional funds over each of the next 10 years to fund investment. Even if the private sector matches this increase, there will still be a requirement for prolonged rate of much higher Investment to return even to the previous growth path.

The Tories are likely to bequeath Labour an exceptionally weak economy. Labour’s fiscal framework already allows the correct focus on government Investment. At the same time, the effects of severe austerity and Labour’s own tax plans already mean there is will soon be plenty of scope to increase government Consumption (current spending) without increasing borrowing. But to deal with the severity of the Great Stagnation under current official forecasts, much greater increased in borrowing for Investment may be needed.

Saturday, 25 November 2017

John McDonnell is right, borrowing for investment does pay for itself

By Michael Burke

The manufactured furore surrounding John McDonnell in the wake of the Budget has a clear purpose. It is designed to distract attention from probably the grimmest set of forecasts delivered in a Budget in the modern era and to deflect criticism from the Tory government. 

This is not solely an anti-Labour, pro-Tory propaganda campaign. Contrary to widespread assertions, austerity is not coming to an end and is being deepened. Seven years of falling living standards are not over. The Institute for Fiscal Studies (IFS), very far from being a left-wing thinktank, says that living standards will be lower in 2023 than they were in 2008.

This is a doubling down on the failed policy of austerity. It is therefore important for all supporters of austerity to shift attention from the repetition of a policy that has already failed.

Borrowing to invest

The immediate focus of the criticism of Labour plans was the absence of a specified level of interest of government debt arising from Labour’s borrowing. This is perhaps one of the weakest grounds to attack.

This is because Labour’s Fiscal Responsibility Framework is committed to borrowing solely for investment, and balancing current or day-to-day spending on items such as health and education with current revenues which is mainly taxation. 

As a result, all of Labour’s borrowing would have a return. The combined effect of borrowing at low interest rates and investing with much higher rates of return is a net boost government finances, which can be used to increase Investment further. The level of government deficits and debt will fall automatically as taxation revenues grow along with increased economic activity.

Currently, government borrowing over any time period (or debt ‘maturities’ in the jargon) costs less than 2%. This is below the level of inflation, which alone means that the borrowing makes sense. Yet, at the same, the returns to commercial investment are on average around 12%. Any government, or business, which can borrow at such low interest rates for such high investment returns would be foolish to pass up this opportunity. It is reckless and extreme that the Tories have passed up this opportunity.

Of course, no-one can possibly know what the level of interest rates will be in a few years’ time. But the official forecasts from the Office of Budget Responsibility (OBR) suggest only a minimal increase on government borrowing costs (the yields on UK government bonds, or ‘gilts’) over the medium-term.

This is shown in Chart 1 below, with the green line in Chart 3.10 representing the latest forecasts of long-term borrowing costs. These barely move above 2% over the medium-term.

Chart 1. OBR Expectations of UK Interest Rates
 
In financial markets there is a calculation used to highlight where interest rates are expected to be in a given number of years’ time. Currently, using this calculation of the difference between 10year gilt yields and 20year gilt yields implies a market expectation that in 10 years’ time, 10year interest rates will be 2.3%. None of these forecasts can be relied on for pinpoint accuracy. Instead, they are shown to illustrate the point that it is reasonable to assume that government borrowing costs remain subdued for some time to come.

Rates and growth

The fundamental point is that when economies grow strong and especially when there is a risk of inflation, all long-term interest rates tend to rise. If the economy is performing strongly, then the pressure on Labour to borrow for investment when it comes to office subsides to some extent. But that is not what any serious commentator, the OBR, IFS or Resolution Foundation thinks is likely.

Instead, government interest rates fell sharply in response to the grim Budget outlook. This should be read as a ‘market signal’ that borrowing for investment should increase. Bond markets could absorb a lot more borrowing before gilt yields were pushed back up even to their very low pre-Budget levels.

The commitment of the Fiscal Responsibility Framework means it is easy to gauge whether the borrowing is sustainable. The decisive criteria is whether the return on the borrowing exceeds the cost of borrowing. As noted above, the average commercial return on investment in the UK is around 12%, a large multiple of the current cost of borrowing. Only if the cost of borrowing rose above that level would it become unsustainable. This seems unlikely in the foreseeable future.

In reality, the net returns to government from the same investment as the private sector are actually significantly higher. To take a clear example, a private developer who builds homes might get a return of 10-12%. But the same returns are available to government for the same project, while the cost are lower. This is because in the course of construction, income tax and National Insurance is paid by builders and other workers (and there is a return on their consumption too via VAT). This is a return to government which is simply not available to the private sector. 

So, John McDonnell is right, and his critics are wrong. Borrowing for investment not only makes sense, it more than pays for itself.

Wednesday, 8 November 2017

O Portugal: a esquerda no governo

Por Tom O’leary

A polemica recente sobre a politica económica no Portugal é muito importante porque tem importância para todos os grupos anti austeridades da esquerda. Os grupos da esquerda têm alcançado algo único no período atual, em que o governo do Portugal é o único que opera para terminar a austeridade. Nos termos mais generais, isto é o objetivo para o governo possível de Corbyn na Inglaterra, também deveria ser o objetivo para a esquerda completa da Europa, então precisa de observar o governo do Portugal. 

O periodista que e famoso na Inglaterra que se chama Owen Jones começou a polemica com uma afirmação verdadeira que a experiência portuguesa demostra que a austeridade nunca era necessária. As políticas que sustentam o crescimento económico são mais preferidas e também causam uma redução do déficit publico entre outras vantagens. Uma variedade de pessoas criticou Jones incluindo Jolyon Maugham, um comentarista de Twitter que publicou muitos tuítes que apoiam completamente as ações da União Europeia com respeito ao Portugal.

 O tuíte é um modelo de brevidade, contem ao menos três errores em menos de 140 caracteres e, mais importante, os credores do Portugal foram resgatados pela UE, não o país. O governo do Portugal ainda tem as dívidas dessa época que pioraram devida ao programa da austeridade que as acompanharam. Se pode culpar a comissão da União Europeia, o Fundo Monetário Internacional, o Banco Central Europeu, os políticos portugueses (alguns do Partido Socialista que agora estão na coalizão da esquerda), as agências de notação de riscos de crédito, os bancos domésticos e internacionais, e claro, os credores. Como o partido politico da Inglaterra, os ‘Liberal Democrats’, Maugham não só defende a adesão à UE, senão também a austeridade que a UE perpetua.

A recuperação do Portugal não vem por causa da imposição do programa da austeridade, mas apesar das políticas da austeridade. Mas os questiones mais importantes para a esquerda agora são como a recuperação económica pode ser alcançada e pode ser mantida.

O desempenho económico

O FMI prevê um crescimento do PIB real de 2,1% no ano de 2017, o que pode ser a taxa mais forte desde a começa da crise em 2008. Mas a taxa de crescimento foi de 2,8% na primeira metade de 2017 comparada ao mesmo período em 2016, o que ultrapassa a UE ou a média da zona euro. Não há dúvida que o crescimento económico tem acelerado desde a coalizão entre os democratas socais e os partidos extremas da esquerda em 2015 e isto continua.

O crescimento do PIB do Portugal, ano por ano
Fonte: Eurostat

A primeira conclusão deveria ser que a terminação da austeridade não cause desastres. De fato, tem causado um crescimento acelerando e uma redução nos deficits públicos do setor publico. A segunda conclusão é que o governo da esquerda pode terminar austeridade apesar da UE e ainda a zona europa ao menos nas limitas certas.

O crescimento é limitado pela acumulação do capital, que é o crescimento nos meios de produção. Desde a coalizão da esquerda, o nível do investimento (a Formação Brutal de Capital Fixo) subiu 7,7% (dados pelo segundo quarto de 2017 já não é disponível). Durante o mesmo período, PIB real subiu ao menos da metade dessa taxa. Por isso o investimento causou o crescimento económico.

O governo contribuiu ao aumento no investimento, mas a contribuição mais grande proveram do setor privado. Os lucros previstos são o fator principal dos investimentos privados então é provável que as medidas do governo português para aumentar o consumo e o seu incremento modesto dos investimentos causaram o acréscimo dos níveis previstos do lucro. Em breve, as medidas de incentivo têm estimuladas a economia portuguesa.

É mais preferido e mais efetivo que a austeridade, mas não é sustentável para o futuro. O aumento ao consumo não se sustenta por um crescimento dos salários e das rendas. Eurostat reporta que a proporção das poupanças caseiras tem mergulhada. Essas cifras se-pode ver na tabela seguinte.

A proporção das poupanças caseiras, %:
Fonte: Eurostat

Essa redução nas poupanças caseiras e os níveis do consumo atual (causado pelo investimento do setor privado) não são sustentáveis. Os salários reais estão em queda e em certo ponto, sem o crescimento real nos salários e nas rendas, as casas vão limitar seus gastos.

Para sustentar a recuperação económica e aumentar os salários reais, o crescimento do investimento deveria aumentar por maneira sustentável. É improvável que o setor privado vai fornecer o investimento se os gastos dos consumadores fraquejem. Então, o governo tem de procurar maneiras no que pode aumentar o investimento do setor publico.

Sem mais conhecimento da economia portuguesa não é possível para produzir um plano para o investimento do setor publico. Não obstante, há uma variedade das fontes potenciais para fundos que incluem:
  • O numero de corporações que são públicos que podem aumentar seu investimento (usando as reservas ou os empréstimos novos
  • Os pedidos para a comissão europeia para acelerar/aumentar seu programa dos gastos do capital
  • A nova infraestrutura e outros projetos que o Banco Europeu de Investimento custeia
  • Os novos impostos para os super-ricos e as companhias grandes para pagar os investimentos
  • A remoção dos subsídios para os negócios para criar fundos para o investimento public
  • Quando é possível, empréstimos adicionais pelo governo
A escala do investimento que é necessário é muita grande. Em 2000 a Formação Bruta de Capital Fixo como uma proporção do PIB subiu 28%, mas agora representa quase metade dessa. Entretanto todos os passos nesta direção asseguram que a recuperação tem uma base mais sustentável.

O governo português da esquerda demostrou que existe um alternativo à austeridade, mas os incentivos não funcionam de longo prazo. Para sustentar a recuperação e mostrar que o alternativo à austeridade é o investimento, necessita-se os medias mais fortes.

***
Este artigo é uma modificação do artigo que originalmente apareceu em inglês.

Thursday, 26 October 2017

The importance of trade for jobs

By Tom O’Leary

The Brexit negotiations are entering a decisive phase, with leading UK business organisations saying they will not invest and must consider whether they relocate if there is no agreement on a transition phase and there is clear progress on trade talks. For its part the Tory Cabinet is deferring any discussion on its key aims for EU trade talks, despite the pretence it is clamouring for them to begin. Any decision on the desired new relationship with the EU would probably lead to Cabinet splits, so discussion is being avoided.

The potential damage to the economy and living standards can be gauged in terms of jobs. Chart 1 below shows the number of UK jobs that are directly dependent on exports. In OECD jargon, these are the totals of ‘domestic employment in the UK embodied on overseas final demand’.

Chart 1. UK Employment Dependent on Exports, by region


 
There are 6.6 million UK jobs directly dependent on exports. The total could be far larger including jobs indirectly dependent on exports. OECD member countries account for 4.8 million of the jobs total, non-OECD for the remaining 1.7 million (numbers do not sum due to rounding). This is 2011 data, the most recent available and has probably grown since (for reasons discussed below).

Separately, the EU directly accounts for 2.8 million of the total. As elsewhere, this is only the direct total not including indirectly-supported jobs and has also probably grown since. Furthermore, through the EU the UK currently has some type of ‘free trade’ deal with between 50 and 60 countries. In reality, these deals are for lower tariffs and non-tariff barriers than would otherwise apply through World Trade Organisation rules, without being in the tariff-free regime of the Single Market.

The effect of leaving the EU Single Market would be threefold. First, any new tariffs or non-tariff barriers between the UK and the EU would raise prices of production that would lead to higher prices overall. Producers may try to mitigate these by lowering UK wages and relocating jobs to within the Single Market area. A relatively small increase in these barriers or tariffs may lead to a much larger fall in wages/loss of jobs. A car manufacturer’s profit margin may be, say, 10% but as the tariffs on components range from just under 3% to 10% for complete cars, this would be a large part of total profits, or all of it. The incentive to drive down wages and/or relocate would then be very great.

Secondly, similar considerations would apply to all those countries where the UK currently has a trade deal via its membership of the EU. They too would want to lower costs with lower wages and/or consider relocating. In addition, simple calculations about the respective size of markets may also prompt relocations from the UK to the Single Market area.

Thirdly, these various trade deals usually contain little or nothing at all about trade in services. Services tend to be more thorny issues, not least because freer trade in services means more liberalised immigration regimes, as services are essentially about people (finance, accountancy, law, education, and so on). Yet it is in the services sector where the UK economy has a clear advantage, and currently benefits from the highest level of liberalisation in the Single Market. In 2016, UK exports of services accounted for one quarter of total exports.

Brexiteers argue that the EU is one of the slower-growing regions of the world economy. This is correct. But nothing in Brexit will raise the level of exports or the jobs that depend on them. Table 1 below shows the growth in employment by exports from regions and countries from 1995 to 2011 (the full range of the OECD data).
 
Table 1. Growth in Employment Dependent on Exports, by Region and Country, 1995 to 2011
Source: Calculated from OECD data
In common with many other countries, the UK has an increasing proportion of jobs which are dependent on exports. This reflects the continuing growth in the international division of labour. This is despite the fact that the UK’s low investment and productivity rates mean that the growth rate of export-dependent jobs is lower than many other industrialised economies. 

Total UK direct employment dependent on exports rose from 20.9% in 1995 to 22.5% in 2011. This is a concrete measure of the growth of the international division of labour, or what Marx termed the socialisation of production. In key sectors the change has been dramatic, so that in 1995 roughly half of all employment in the machinery and equipment sectors was dependent on exports, by 2011 it was over 70%. For transport equipment (including cars) employment rose from just under half to more than two-thirds.

Total non-OECD export-related employment has been growing much more strongly than OECD export-related employment. This reflects the much stronger economic growth of the non-OECD economies. In all cases, these data belie the claim that ‘X country is taking our jobs’. The reality is that increasing trade is increasing UK jobs.

The two most important non-OECD countries in terms of creating jobs in the UK are China then India. Within the OECD bloc the US and then the EU itself are the areas creating the greatest number of UK jobs. Within the EU28, Spain has been the most important country for UK job-creation. The UK’s much lower level of competitiveness means it is not gaining German, French and other export-related jobs. Together these four, the US, China, India and the EU are responsible for more than 700,000 new UK jobs in the period 1995-2011, or 60 per cent of total new directly export-related jobs.

In Trumpenomics there is a reactionary idea that freer trade arrangements such as NAFTA have destroyed US jobs. In reality, the US has added about 1 million jobs based on exports to Canada and Mexico since 1995, a year after NAFTA came into force. Unfortunately, this type of crude mercantilism has much wider support than Trump and his delusional supporters. It is expressed as the idea that that the growth in imports exceed the growth in exports, then the decline in net exports is economically detrimental.  

But the growth in the international division of labour/socialisation of production represented by rising trade both increases jobs and their productivity, so raising living standards. As Adam Smith pointed out, if coal is produced in Newcastle and then it is used in smelting, the citizens of Newcastle may buy the metal products with the proceeds of their coal production. This is true whether the smelting takes place in Aberdeen or Amsterdam. In either case the smelting operations create jobs in Newcastle.

A withdrawal from the Single Market would go against the tide of economic development and current international practice. It would unilaterally replace a tariff-free regime with new tariffs and non-tariff barriers. It would therefore cost an unknown but large number of UK jobs.

Wednesday, 11 October 2017

No, Jeremy Corbyn won’t ‘bankrupt the UK economy’

By Tom O’Leary

In a textbook case of political projection, the UK economy continues to stagnate and the response of the Tories and their supporters is to create scare stories about an economic impact of a Corbyn government.

This is clearly a mark of political desperation. Having presided over the longest recorded fall in living standards, the government’s inability to lead an upturn means it is reduced to blaming the last Labour government and the next one for its own failings. Even thoughtful commentators such as Martin Wolf at the FT accuse Corbyn of ‘populism’ and ignoring the realities of a private sector-dominated economy.

But there is a serious point buried deep beneath the Tories’ wild claims. There are always constraints, which cannot be overcome with airy declarations that Labour can just print money. An incoming Labour government under Corbyn will face stiff opposition from its ideological opponents outside the Tory party, including the City of London. The pressures on the Wilson-Callaghan government were so great, even though circumstances were in many ways far more favourable and Labour was attempting only modest reforms, that they eventually capitulated and precipitated an entirely fake ‘IMF crisis’ in 1976 in order to slash public spending.

In the early 1970s the UK was not faced with a crisis of public finances. The real crisis was of profitability and therefore investment. In the current crisis, the public sector deficit as a proportion of GDP has averaged more than double the deficits of the 1970s period.

The real policy target was addressing the real problem; falling profitability. In common with other Western economies in the early 1970s, UK profitability fell, signalling the end of the long post-World War II boom. In the UK, highly unusually the total level or mass of profits fell outright in 1974. Slashing public spending and capping pay was the now-familiar policy adopted in response.

The scare story used then was that the country would be bankrupt if it could not borrow from overseas. A variant on this mechanism was actually used in the EU financial crisis, as the ‘Troika’ of IMF, European Central Bank and EU Commission. In the case of Greece, the Greek bank system was starved of funds by the ECB in order to impose austerity on the government.

The Labour leadership under Corbyn and McDonnell has already set itself a number of useful tools to cope with an economy that will have suffered both sharp recession and prolonged slow growth. In the first instance is borrowing for Investment, which leads to economic growth, while balancing current spending on Consumption, which does not. (Contrary to wild claims, this does not mean adopting austerity but reducing tax giveaways to businesses and the rich). Secondly, a National Investment Bank is an extremely useful vehicle for channelling an increase in public sector investment. Thirdly, through the fiscal responsibility rules it has given itself a ‘knock-out’ clause on current spending too if growth were so slow that interest rates were close to zero. Finally, it has not ruled out Quantitative Easing (money creation) to supplement an investment-led approach to economic recovery.

The charge from the Tories is that all of this is a ‘magic money tree’ fantasy, a variant on the claim that there is ‘no money left’. But this is untrue, and marks an important difference with the 1970s. Chart 1 below shows the ‘Investment Gap’, the difference between the level of investment in the economy and the level of profits. Investment is measured by Gross Fixed Capital Formation and profits measured by the Gross Operating Surplus of firms. Both are in nominal terms.

The Investment Gap. UK Profits versus UK Investment 1948 to 2016

The chart shows that an enormous gap has opened between the level of profits and the level of investment (even the latter is flattered because it included the investment of government and of private households).

The proportion of profit directed towards investment has also fallen dramatically, especially since the early 1970s when it reached its zenith. In fact, for the entire period 1966 to 1976 the level of investment in the economy as a whole exceeded the level of profits. In 1976 itself investment was equivalent to 125% of UK profits. This was particularly boosted by a much higher level of public investment than now. But there is no reason why business investment alone cannot exceed the levels of profits, at least for a period, when borrowing can be used to supplement profits as a source of funding (in anticipation of high profits).

As a result of this investment gap - the gap between profits and investment – there is plenty of money left. The gap between profits and investment in 2016 was £96 billion, equivalent to just under 5% of GDP. If the economic situation continues to deteriorate and Brexit has the anticipated further depressing effect, then these resources will be invaluable.

The argument that the company sector is too indebted to fund investment is factually incorrect. Company debt has been falling measured as a proportion of GDP, and especially measured against its own profits since 2010. Its interest bill has fallen to £8.5 billion in 2015 from £26.5 billion in 2007 (ONS Blue Book).

Yet if all the Corbyn leadership intended was to introduce further taxes on business or simply expropriate their profits, then the current investment go-slow would rapidly become an all-out investment strike. But that is not the policy. The economic policy also includes significant public sector investment, from which the private sector profits. It is simply that the non-investing, non-productive sectors of the economy will be worse off, while those businesses providing inputs to public sector investment and/or who benefit from it will be winners. If access to overseas markets is not disrupted, this is the basis of a successful reforming economic policy.