Greece-bashing is hiding the obvious: monetary union urgently needs economic union

Ronald Janssen
“Bashing the Greeks” has become a very popular sport these days. The main thought on the minds of the financial markets as well as a lot of politicians in Europe is that Greece has only itself to blame for the trouble it is in. After entering monetary union by rigging the statistics, it is argued, Greece went on a huge “spending binge”, making public finances unsustainable. This is now even threatening to undermine the financial stability of European monetary union as such. The more “moderate” version of this sort of thinking suggests that Greece should take its medicine and drastically cut all government expenditure and all wages (in both the public and the private sector). The less “moderate” version simply says that Greece should never have been allowed to join the monetary union in the first place and should now be thrown out of it.

Undoubtedly, Greece does have some “demons” that it needs to tackle, such as the functioning of its statistical office and the transparency of public sector pay. However, the sort of thinking now being developed in Europe is overly simplistic and is a recipe for disaster, not only for Greece but also for workers throughout Europe. Let us examine some of the inconsistencies and contradictions surrounding the case of Greece.

Don’t blame the speculators, blame the Greek “fundamentals”

The financial markets’ attacks on Greece have not come out of the blue. After all, if Greece is under attack because of its deficit running at 12% of GDP, there are others with a comparably high deficit, such as the UK or the US. And even if the Greek deficit has doubled over the past year, almost all other countries in Europe have done the same to prevent a new Great Depression. So why Greece and why right now? The answer is that, since the beginning of November last year, central bankers and finance ministers have been spreading negative rumours, with the ECB no longer providing liquidity in return for Greek government bonds and the finance ministers of the Euro Group writing a letter which was leaked to press, urging emergency consolidation measures. This “megaphone diplomacy” focussed the financial markets’ attention on Greece. In return, central bankers and finance ministers gained a powerful ally (including the same Wall Street agencies that previously gave triple A’s to “toxic assets”) in pushing through their policy agenda: enormous pressure from financial markets to cut deficits, expenditure and wages, not only in Greece but also in other countries.

Governments saving banks, not saving themselves.

There is a major double standard at work here. Governments, realizing that banks were caught in a vicious circle of their own making, massively bailed out the banking sector. In Europe alone, the stunning amount of 3 trillion (3000 billion) euro in state support was mobilized, and this without much in the way of conditions, such as keeping the credit flow to the economy going. In fact, and thanks to central banks pumping liquidity into the banking sector at zero interest rates, banking profits (and bonuses!) are as high as they were before the crisis! Greece - and others are likely to follow - now finds itself in a similar situation: financial markets, fearing a default, are bidding up interest rates, thereby actually increasing the risk of a default. As was the case for the banks, this vicious circle can only be broken by a powerful and convincing European intervention. Europe, however, seems to prefer to leave Greece out on a limb or, alternatively, is only willing to promise help if Greece (which has a socialist government!) implements a standard liberal programme of cutting wages and reducing the size and the role of the state.

Rewarding the speculators.

By showing such reluctance to close ranks with Greece against financial market herd behaviour, Europe is actually rewarding the speculators and boosting their profits. With the price of credit default swaps on Greek sovereign debt soaring, hedge funds are making big bucks on their credit default positions, even or especially if these are “naked” credit default positions (in other words, without hedge funds actually holding Greek sovereign debt). And the same goes for operations on futures markets, where banks and funds are selling Greek sovereign debt, hoping to pick the papers back up again later when prices have collapsed further. Hidden behind the dogmatic “no bail-out” attitude of financial Europe is the very pragmatic policy of continuing to redistribute income and profits to those who caused the crisis in the first place. This, by the way, is not only true in a general sense. Indeed, there are more and more reports that Goldman Sachs - after setting up, for a big fee, a structure that enabled Greece to hide part of its debt - is now heavily involved in betting against Greece.

Greece not doing enough?

Greece has already announced a tough consolidation programme, promising to cut the deficit this year alone by 4% of GDP. Even Germany, a traditional champion of fiscal consolidation, never went that far in so short period of time. Moreover, Greece is also detailing the measures taken to back up this consolidation effort. These do concern public jobs and wage freezes (for the higher incomes), but also measures to tax the rich (reintroduction of a tax on high fortunes, raising tax revenue on business profits). Nevertheless, this is not enough to appease European politicians and finance ministers. (A related issue is that they may not like a progressive consolidation programme targeting the rich and wealthy). Instead, Greece in their view needs to gush “blood, sweat and tears”. Again, a cynic might observe that if Greece did what it was told and cut everything (much as the American minister Andrew Mellon advised in the Great Depression that all businesses, farmers and workers should be allowed to go bankrupt), it would in any case be plunged into an economic depression. As a consequence, relative debt would still remain high, since what was being gained on the side of the nominator (lower deficit) would be lost on the side of the denominator (falling GDP).

In short, Europe is on a collision course with itself. Europe already seems to have forgotten the important lesson from the financial crisis that casino capitalism urgently needs to be tamed. Instead, some policy circles inside Europe are actually using financial market herd behaviour to push through a neoliberal model that otherwise would be hard to achieve in European democracies. Europe is also completely losing sight of the fact that the internal market is an integrated and mutually dependent economy. The debt of Greece and some other countries, such as Spain, is held to a large extent by German, French and British banks, implying that any default would be costly for these banks. And if orthodox economists succeed in inflicting a long depression on the South of the monetary union, who will be buying the export goods from those countries forming the European core?

So instead of this simplistic and populist “Greece-bashing”, Europe should urgently develop instruments promoting solidarity between member states against the global casino. We need a common Euro bond limiting speculation on sovereign debt and breaking this cycle of self-fulfilling prophecy organized by the financial markets. We need major European investment programmes, making it possible to offset the contractionary impact of fiscal consolidation plans in Greece and other countries. We need a bigger European budget so that differences in business cycles between member states can be smoothed out without wages having to play the role of the “single variable for adjustment”. We need a European ratings agency to break the monopoly of Wall Street agencies which are too often biased in favour of free markets and against labour. We need a European Central Bank (ECB) that respects the European Treaty and supports member states’ finances in the same way as it supports the banking sector. If the ECB continues to relieve the banking sector by buying and holding their “toxic assets”, then the ECB should also announce that it will continue to take in BBB rated sovereign bonds from countries such as Greece. Finally, we need a European Central Bank which raises its inflation target from “less than 2%” to a range of “at least 3% and maximum 4%”, thereby increasing the potential impact of wage adaptability on the economy without having to resort to deflationary wage cuts.

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Ronald Janssen works as an economic adviser in Brussels.

The international economic crisis and development strategy: A view from South Africa

Neva Makgetla

South Africa has been harshly affected by the international economic crisis, which led to a fall in the GDP and an even sharper contraction in employment. While job losses levelled out in the last quarter of 2009, the crisis will continue to shape long-run development. In particular, it points to the need for a development strategy that builds more on domestic and regional demand and that focuses explicitly on employment creation as central to a cohesive and equitable society.

South Africa’s GDP declined by approximately 3% between the last quarter of 2008 and the second quarter of 2009, and then increased in the third quarter of 2009. In comparison, the fall in employment proved steeper and more prolonged. The economy lost around a million jobs, or 6%, between the fourth quarter of 2008 and the third quarter of 2009, and gained only 90 000 back in the last quarter of 2009.

The loss of employment took place in a context of extremely high joblessness. South Africa has long ranked as one of the ten countries with the lowest employment levels in the world. Less than half of all working-age adults earn an income, and the unemployment rate has been over 20% since the government began measuring it with the transition to democracy 15 years ago.

The employment losses following from the global crisis aggravated the deep inequalities that have long characterised the South African economy. They had the heaviest impact on low-income workers, especially in marginalised sectors like informal, domestic and agricultural work. In addition, very high levels of job loss amongst young workers had particularly negative implications for social cohesion and long-term development.

Government’s short-run response included a counter-cyclical fiscal policy and substantial infrastructure investment. This response moderated the drop in investment and growth and presumably the loss of jobs. Still, the employment loss remained very large, and the government’s response did not provide direct support to the self-employed informal and domestic workers who lost their incomes. Nor did it address the rapid recovery in capital inflows, which as discussed below led to a stronger rand, making the economy as a whole less competitive.

The international crisis was associated with far-reaching structural changes in the global economy. That, in turn, has implications for South Africa’s longer term development strategy. In particular, profound shifts in international markets make it seem even less likely that South Africa can in future grow on the basis of manufactured exports – the traditional approach to industrial policy that has been at the centre of government’s economic strategy since the end of apartheid in 1994.

The emphasis on exporting manufactured goods has largely shaped the discourse on industrial policy worldwide as well as in South Africa. It reflects the belief that the rapid economic growth in East Asia from the 1960s was rooted in vigorous industrial policies to support manufacturing for markets mostly in Europe and the US.

Even before the crisis, this analysis of East Asian industrialisation neglected three factors that enabled effective industrial policy there – and that were noticeably absent for South Africa:

1. East Asian countries generally enjoyed relative equality and social cohesion , which meant both capital and workers were more likely to agree on economic growth as a social panacea. In particular, measures to raise productivity prove more acceptable in economies with high levels of low-wage employment than in economies with low employment, where growth through rising productivity in export sectors may be associated with very limited employment creation.

2. The United States provided extraordinary levels of support to the East Asian countries, which it saw at least until the 1990s as a bulwark against communism.

3. Over the past half century East Asia as a whole gradually developed logistics and market systems that vastly reduced the cost of exporting to and communicating with the global North.

The international economic crisis laid bare a fourth obstacle to a growth strategy based on manufactured exports. That strategy explicitly assumed virtually unlimited demand in the global North, and particularly in the United States. It required that if countries could produce competitively, their sales would be assured.

Yet the downturn of the late ‘00s could be understood as a crisis of inadequate demand. On the one hand, it resulted from deepening inequalities in much of the global North, offset in part by excessive household borrowing. On the other, it reflected the suppression of wages to support continued exports in much of East Asia, including China, as well as some European countries.

The growing global imbalance in demand that underpinned the boom of the ‘00s was reflected in the huge balance of payments surpluses enjoyed by the rapidly growing economies of East Asia. The recycling of those surpluses laid the basis for the credit bubble that led to the financial crisis of late 2008. Once the credit bubble burst, demand for imports by the global North contracted sharply.

The prospects for resuming export-led growth remained unclear at the end of 2009. While economic expansion resumed in China and other Asian economies, exports remained far below the levels of 2008. To replace foreign demand, these countries embarked on extensive programmes to stimulate domestic sales, including subsidies for purchasers of consumer durables as well as massive investments in infrastructure.

These developments had significant implications for the prospects of South Africa and other resource-based economies in the global South. South Africa participated in the boom of the mid-‘00s essentially by exporting mining products to world markets. The relatively strong rand of this period, based primarily on huge short-run capital inflows, largely blocked manufactured exports. While the economy continued to depend mostly on mining-based exports, employment growth occurred mostly in the services and construction, essentially to meet the needs of the small high-income group and state infrastructure and redistributive programmes.

The international economic downturn meant that South African efforts to expand exports of consumer and capital goods faced even steeper obstacles than during the boom. To start with, demand was suppressed in the global North. But the inflow of short-term capital resumed nonetheless, apparently largely due to measures to enhance liquidity in industrialised economies. South Africa saw an inflow of almost USD6 billion in the third quarter of 2009 alone. As a result, in real terms the rand strengthened to values last seen in 2004.

This situation called into question the basic thrust of South Africa’s industrialisation policy. For most of the period from 1994, whether implicitly or explicitly, the government’s industrial policy centred on supporting manufactured exports. It contained virtually no projects to meet domestic or regional demand or to create employment while raising living standards. The auto industry enjoyed by far the largest subsidies of any industry, with tax relief used mostly to encourage exports. In contrast, the more broad-based Reconstruction and Development Programme (RDP) adopted by the ANC before coming into power expected housing construction and provision of government services to prove central to driving economic growth as well as improved welfare.

In the event, the conventional industrial policy pursued from the mid-1990s proved singularly ineffective. In part, that reflected inadequate resourcing and inconsistent implementation. The share of total government spending going explicitly to support agriculture, mining, manufacturing and construction fell from 4% in the mid-1990s to 3% in the mid-2000s. Moreover, the failure to limit short-run capital inflows and the consequent appreciation in the rand outweighed the limited policy support to manufacturing outside of autos. In these circumstances, exports from the mining value chain, including refined but not fabricated base metals, continued to contribute over half of all South African exports.

The global structural problems laid bare by the economic crisis point to the need for more innovative approaches to development. For South Africa, a viable growth strategy should focus on meeting needs in the domestic and regional market, including basic consumer goods and infrastructure effectively funded through the state. In addition, it would need stronger measures to enhance the overall efficiency and inclusiveness of the economy by continuing to improve core economic infrastructure; addressing the serious problems with general education systems serving most black communities; and reducing the cost of living for working people, especially for food, public transport and healthcare. Finally, it should include institutional changes to mobilise domestic resources to fund priority investments while reducing dependence on short-run inflows of financing through the stock and bond markets.

This relatively modest growth strategy might seem second-best to establishing a world-class modern industrial economy. Given the emerging constraints on global demand, however, it is more likely to succeed in laying the basis for sustained growth than a classical export-oriented industrial strategy. Moreover, it would do more to generate opportunities for the majority of southern Africans in the short to medium term, helping to overcome the employment backlogs that the international economic crisis aggravated.

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Neva Makgetla is lead economist at the Development Bank of Southern Africa (DBSA). She has previously worked for COSATU and the South African government.

Riding Your Luck and Adopting the Right Policies: Why the Australian Economy is Rebounding Strongly

Bob Kyloh

The global economic crisis that commenced in 2008 has had devastating effects across rich and poor nations. But the impact on growth, employment and incomes has not been uniform across countries. Economic performance has depended critically on the policy response adopted by governments. Other authors writing for this Column have made a convincing case for an income led growth strategy in response to the recession. At least one country has clearly demonstrated the benefits of this approach.

Australia is often referred to as the “lucky country”. The recent economic performance of this resource rich nation has helped reinforce this notion. Indeed recent economic achievements down-under may be partly due to the good fortune of rebounding commodity prices and expanding Asian markets. But the terms of trade actually moved against Australia in the last eighteen months and net exports detracted significantly from economic growth in 2009. Economic recovery is actually the result of public policies that boosted the disposable incomes of low and middle income families when aggregate demand was plummeting.

The Australian economy has performed better than any other advanced economy since the onset of the global financial crisis. Real GDP increased by 1.1 % in 2008-09 in year-average terms. The economy remained resilient and recorded moderate growth when most other advanced economies were experiencing a deep recession. Looking ahead (in early November 2009) the Australian Treasury was forecasting economic growth of 1.5% in 2009-10, 2.75% in 2010-11 and projected growth of 4% over the period 2011-12 to 2014-15 before returning to trend growth of 3% in 2015-16.

The Australian labour market is rebounding strongly. Employment increased in the latter months of last year, creating 95,000 additional jobs between September and December 2009. There are now grounds for optimism that the unemployment rate, may have peaked.  As of December 2009 the national unemployment rate stood at 5.5%, having declined 0.3 percentage points since October. If unemployment has peaked at this relatively moderate level this will be a remarkable achievement. Back in May 2009, when the National Budget for 2009-10 was announced, the Government had projected that unemployment could peak at around 10% without any stimulus measures. But because of the actions taken by the Government the unemployment rate was expected to reach a high point of 8.5% in 2010. This forecast was cut to 6.75% in early November 2009. Since this last projection was released conditions have again improved across the economy and in the labour market in particular with the recovery gaining significant traction. All indicators now suggest that the jobs market has stabilised – 136,000 jobs have been created since the labour market upturn began in August 2009. A significant proportion of these new jobs (60/40) are full-time and average working hours have recovered from a recent trough. This is important because much of the contraction in labour demand in 2008-09 had taken the form of declines in average working hours rather than increases in open unemployment. These trends and other partial indicators have prompted several independent economic observers to suggest that the labour market has passed a turning point and consequently incomes, consumption expenditure and aggregate demand may strengthen more than anticipated in the official Government forecasts of November 2009.

The Australian Government introduced fiscal stimulus measures in three stages: in October 2008, February 2009 and May 2009. The total package contained a variety of measures which can be summarised under three headings:  first, increased transfer payments to low and middle income groups which were rapidly disbursed and had an almost immediate impact on consumption expenditure, retail sales and economic growth; second, relatively rapid investments in social infrastructure including schools, health and housing; and third major new investments in economic infrastructure which are more medium term in nature.  The stimulus measures adopted were broadly consistent with proposals made by the Australian Council of Trade Unions.

A striking feature of the Australian response to the crisis, compared to most other countries, has been the emphasis placed on increasing the disposable incomes of low and middle income groups with a high marginal propensity to consume. This approach is in complete conformity with the key aspects of the ILO Global Jobs Pact with its emphasis on income led growth and improvements in the social floor.

The initial substantive fiscal response to the global financial crisis was a 10.4 billion Australian dollar package of measures announced on the 14 October 2008. This package was tightly targeted at sectors of the economy showing particular weakness in the early stages of the downturn - household consumption and dwelling investment. In the second quarter of 2008 household consumption expenditure had recorded its first decline in 15 years. This package included one-off additional payments to pensioners of $A1400 for singles and $A2100 for couples. (Australia has a universal pension scheme with flat rate benefits funded by general taxation. This is supplemented by private contributory pensions or what is called “superannuation”). The package also included additional payments of A$1000 to eligible persons providing care to the aged or disabled and for each child in families receiving the Family Tax Benefit (which is a means tested transfer payment received by low and middle income families).

This package of measures generated significant multiplier effects as the payments were timed to be received by credit constrained families in the lead-up to the year-end holiday period, thus limiting the leakages expected through increased savings.  In Australia, like other advanced economies, consumption expenditure comprises around 60 % of GDP and has important implications for other areas of expenditure, including private investment. At the time of its announcement the Government projected that the above Strategy would boost real GDP growth by between 0.5% and 1% over a period of several quarters.

In early February 2009 the Government announced a second 42 billion Australian dollar fiscal stimulus package.   This included over 12 billion Australian dollars to fund a range of additional one-off transfer payments targeted at a variety low and middle income groups. Well over half the population of Australia received payments of just under a thousand dollars as part of this initiative.  These one-off increases in transfer payments were supplemented by major revisions to the aged pension system and other social security benefits in May 2009. These reforms have resulted in substantial permanent increases in welfare payments. The net impact of these revisions will be to increase expenditure on pensions and related social security payments by A$14.4 billion over the next 4 years.

The above mentioned increases in transfer payments, along with reduced interest rates resulting from monetary easing, helped retail sales remain buoyant in Australia when  economic and employment growth were at their weakest. In November 2009, retail turnover was 7.3% higher than in the pre-stimulus levels of November 2008, having remained largely flat throughout 2008. The contrast in retail spending trends between Australia and other advanced economies is depicted below.

The stimulus measures, and in particular the direct payments to low and middle income households, have also had a significant impact on business and consumer confidence. Consumer confidence is now around 40% higher than the pre- stimulus levels of October 2008, while business confidence is at its strongest level in over seven years.

The effects of the first stage of the stimulus packages, involving increased transfers, are now abating. But the second and third phases of the stimulus - involving significant investments in what was colloquially referred to as “shovel ready” social infrastructure projects and longer term national building projects like roads, rail networks and energy conservation, are now underway. One critical aspect of the social infrastructure projects involved a A$14.7 billion investment in school infrastructure and maintenance. This was part of the February 2009 stimulus package and included resources to: build or upgraded libraries and halls in every primary school and special school in the country; to significantly expand the number of schools with science laboratories and language learning centres; and to ensure every Australian school has resources to maintain and renew its buildings. Further substantial investments in universities and tertiary education were provided in the May 2009 measures, thus furthering the education revolution in Australia.

Deep economic contractions can permanently reduce an economy’s growth prospects through the erosion of skills and capital. The public investments in education plus other social and physical infrastructure were designed to mitigate these effects and position Australia for economic recovery by raising productivity and expanding the supply side potential. Fortunately, with the downturn now expected to be shallower and the labour market recovering rapidly the long term output loss should be mild and the economy should return to capacity sooner than expected.

Australia is in the vanguard of the economic recovery among advanced economies because it took swift and concerted action to boost the disposable incomes of working families and welfare recipients, who spent rather the saved these payments and thus sparked recovery. Australia has demonstrated the potential of an income led growth strategy as advocated by the ILO.  It pays to be lucky and also adopt the right strategies.

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Bob Kyloh is a Senior Economic Advisor in the Integration Department of the ILO. He has previously worked for the Bureau of Workers Activities in the ILO and the Australian Government.

Beyond “Stimulus” - Fiscal Policy after the Great Recession

(by Andrew Jackson)

As the communiqué from the Pittsburgh G20 summit put it, “it worked”. Unprecedented macro-economic stimulus in the form of ultra low interest rates and large government deficits has pulled the global economy back from the abyss, at least for now. But what comes next? Conventional economic wisdom is setting the stage for deep and damaging cuts to public expenditures if labour and the progressive left do not win the argument for public investment led growth and increased fiscal capacity.

Now is definitely not the time for a quick return to budget balance. Not only is the recovery very fragile, interest rates are likely to remain low. This means we can finance public expenditures which create jobs now while raising our productive potential and the future tax base. Debt incurred today to create a larger economy tomorrow is no burden on future generations.

The IMF, the OECD and most governments accept that stimulus should continue a bit longer while awaiting convincing evidence of a sustained revival of private sector demand. But spending cuts are clearly on the agenda. Citing the need to stabilize public debt in the context of rapidly ageing societies, the International Monetary Fund recently (November 3, 2009) painted a grim fiscal outlook for the advanced industrial countries, calculating that the primary budget balance (the surplus of revenues over program expenditures) will have to be increased by a hefty 8 percentage points of GDP from 2010 levels to bring government debt down to a tolerable 60% of GDP by 2030. The conventional view is that this move back to balanced budgets will have to come much more from deep cuts to public spending than from tax increases.

The dominant view is that both fiscal and monetary policy should tighten over what already promises to be a very sluggish recovery. That is a pretty dismal prospect. It translates into continued very high unemployment and substantial slack in the economy. Operating below capacity means low levels of public and private investment, which in turn lowers the potential for future growth. In human terms, an economy bumping along bottom means no jobs for young people, rising inequality and rising poverty. Moreover, fiscal retrenchment will translate into an unwelcome combination of public sector job cuts, cuts to public services and cuts to income support programs, all of which are central to the well-being of working people.

Workers face the imminent prospect of paying for the economic crisis twice, first in the form of job and wage losses, and second in the form of cuts to the already inadequate public services and social programs which existed in most countries before the recession.

While interest rates should remain low, there are major problems with any combination of fiscal austerity and loose monetary policy. Ultra low interest rates and major injections of liquidity into the banking system are already fuelling new financial asset price bubbles. Led by major institutional investors, the shift back into equities and other assets has got well ahead of any recovery in the real economy. Meanwhile, low interest rates alone will not revive private sector demand. In most advanced industrial countries, especially the US, the UK and Canada, households are already deep in debt. Because of global over-capacity and unbalanced trade with Asia, real private sector investment in the advanced industrial countries is likely to remain very depressed.  Thus fiscal austerity combined with monetary ease will not fix the underlying problem of stagnation.

One way out of this problem is to more closely control the credit process.  We could and should be limiting highly leveraged financial investments and controlling unsustainable credit flows. The other way out of the problem is to run productive fiscal deficits to ensure that the impact of low interest rates is felt through higher public investment. It is desirable that the overall credit creation process should be driven by investment rather than by speculation and debt financed consumption and, under today’s circumstances, this requires high levels of public investment.

Now is the time to launch major medium and long term public investments to drive job creation, and also to create new investment opportunities for industrial sectors which remain in deep crisis. We must address long-standing investment deficits in basic municipal infrastructure; build new urban and inter city transportation systems; invest in energy conservation; dramatically expand non-carbon based energy sources; expand basic public services such as not-for-profit child care and elder care; and invest much more in public education at all levels as well as in workers’ skills.

Well selected investments can yield very high rates of return on a number of fronts. For example, investment in transit and passenger rail can have large positive job impacts, significantly cut carbon emissions, and also generate high rates of return to individuals and businesses in terms of reduced travel time and reduced road congestion. We know that all of these investments – especially those in public services and energy efficiency – are labour intensive and create many more jobs than increased consumer spending, and simultaneously promote our environmental, community development and social justice goals.

What we need is a period of public investment led growth to drive the whole economy. Good public infrastructure and good public services are key drivers of private sector productivity. Public sector investments drive investment by private sector suppliers, especially if twinned to coherent industrial strategies. The key point is that deficits can and should be incurred so long as they are twinned to public investment programs which can be demonstrably linked to increasing overall economic potential and to furthering environmental and social goals. The challenge for labour and the left is to move from talking about temporary “stimulus” to promoting a pro active, longer term public investment agenda.

But how are we going to pay for major new public investments when deficits and debts are, supposedly, already too high? In the short-term, low interest rates make viable a huge raft of potential public and environmental investments which will more than pay for themselves over time. In the longer term, a decade and more of expensive and wasteful tax cuts mainly in favour of corporations and those with very high incomes means that there is ample room to increase government fiscal capacity to balance budgets without cutting spending, and without undermining the living standards of working people.

Labour and the left have to recognize that decent levels of public services and social programs ultimately have to be paid for from a high, comprehensive and fairly flat tax base including consumption and payroll taxes. If we want Scandinavian type welfare states, we will have to pay Scandinavian level taxes as a share of GDP. This reality is often ignored at our peril. In low tax countries like Canada, the US and the UK, we have to make the argument that we are all better off if we enhance fiscal capacity by raising money from a comprehensive tax system, and spending the proceeds on a broad array of equalizing public services and social programs. We have to make the case for a shift from private consumption to public services and public investment, rather than pretend we can deficit finance permanent increments to the social wage.

To be sure, we also need to enhance the progressive elements of the overall tax system. We could and should gain useful amounts of revenue by levying higher rates of income tax on the very affluent. True, the rich are few in numbers, but they do have a high and rising share of personal income in most countries. This should be reduced by raising their taxes and redistributing the proceeds as equalizing transfers. Corporations could also pay more, though there is a case for redirecting higher corporate tax revenues into more effective ways of supporting real economy private investment rather than into general revenues. The G20 agenda should include co-ordinated upward harmonization of taxes on all forms of capital and on high incomes, as well as a financial transactions tax which would hit unproductive but highly profitable financial sector hyper-activity.

To conclude, we will soon be entering a major debate in most countries over the pros and cons of fiscal austerity. The right will argue that we need to cut quickly and deeply in the name of future generations. Our argument has to go beyond the need for temporary “stimulus”. We must call for a deliberate strategy of public investment led growth, and the gradual enhancement of fiscal capacity to pay for a more equal society.

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Andrew Jackson is Chief Economist and National Director of Social and Economic Policy with the Canadian Labour Congress (CLC), where he has worked since 1989. He is also a Research Professor in the Institute of Political Economy at Carleton University, a Research Associate with the Canadian Centre for Policy Alternatives, and a Fellow with the School of Policy Studies at Queen’s University. He has written numerous articles for popular and academic publications, and is the author of Work and Labour in Canada: Critical Issues, published by Canadian Scholars Press (2005).