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Andrew Glyn

Why capitalists want the cuts

(September 1976)

From Militant, No. 333, 3 September 1976, p. 5.
Transcribed by Iain Dalton.
Marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

Militant has explained many times that the basic reason why the Confederation of British Industry has been demanding cuts in public spending on social services is to reduce the share of total production of goods and services which goes to the working class.

But with the Labour leaders constantly harping on the enormous sums which the government is borrowing to finance the expenditure – around £10 billion this year, or getting on for £1,000 for each family in the economy – those who argue for a socialist alternative to the cuts are constantly faced with the question of whether the present level of public spending really can be afforded.

In answering this it is important to be clear how government borrowing actually works. All government spending must be financed in the sense that the government has to have the cash tp pay out as wages for those who work in the public sector, as social benefits etc.

Most of the cash comes from taxation and the rest if the famous “public sector deficit”. Part of this deficit is covered by the government literally printing extra pound notes and spending them. But to finance a massive deficit through printing more money would result in a huge expansion of credit, leading to an inflationary boom, speculation etc.

So most of the deficit is financed by the government borrowing cash in return for government bonds. These bonds are in effect IOU’s saying that the government will repay the money (with interest of course) at a certain date in the future. The sum of all these IOUs outstanding is the national debt (currently it is worth about £35–40 billion).

Fictitious capital

The public sector deficit does not mean that the country is overspending by £10 billion per year. Rather if state spending is greater than taxation of workers (and capitalists, such as it is), the government has to go cap in hand to the capitalists to borrow the rest. From the capitalists’ point of view, instead of ploughing back their profits into investment in new plants they lend part to the government.

The individual capitalist makes a killing out of doing this (provided the interest he receives is not cancelled out by inflation which reduces the amount of commodities he can buy when the government pays back what he is owed).

But from the point of view of the capitalist class as a while the accumulation of government bonds is no substitute for productive investment. Investment in industry will, if successful, increase the productivity in industry and thus the profits received by the capitalist class. But government bonds are what Marx called ‘fictitious capital’ – they are IOUs which are not backed by productive assets. Expenditure on the health service or the dole, although socially essential, does not increase output like a new factory does.

To use its profits to accumulate fictitious capital, to finance social services rather than productive assets, spells ruin for the capitalist class in a particular country. For it will be unable to match its competitors on world markets as its machinery becomes more and more ancient in comparison to its rivals.

The result will be loss of markets, industries decimated by import competition, familiar features of the British scene. It is the realisation of this by the capitalist class that has led to the demand for cuts in “unproductive” state spending and thus the government deficit.


This is not aimed at the immediate improvement of profit margins (wages policy is directed at that), but at the long-term growth of profits based on a massive investment boom to ‘regenerate’ British industry and recover lost markets at home and abroad.

But does that mean that the spokesmen of capital are right when they claim that productive investment is low because the public deficit is so high? In the present situation of recession it is absurd to say that government borrowing automatically cuts the amount of industrial investment undertaken by the capitalists by removing funds from the banks.

As the financiers pointed out themselves, in their outcry against Labour’s proposals for nationalising the banks, there is no shortage of credit, despite huge government borrowing. What is holding back investment from their point of view is the prospect of an inadequate rate of profit.

In the short-term, cutting public spending, or increasing taxation, would make prospects for investment even worse as the size of the market was reduced. In fact, in the short-run, far from the government deficit causing the low investment, it is more the case that the low investment, and therefore employment and incomes, actually accounts for much of the government deficit by reducing tax revenues and increasing government expenditure on the dole etc.

But the capitalist class learned the lesson of “short-run” thinking in the disastrous ‘Barber boom’ of 1972. Then an expansion of the economy on the basis of an “inadequate” rate of profit and “excessive” public spending, collapsed in a welter of inflation and property speculation without a substantial increase in productive investment. The capitalists realise that such a short-term policy is no solution at all.

The latest figures from the Department of Trade and Industry show the rate of profit in industry to have been 3.9% in 1975 as compared with 11.2% in 1965. So the CBI is demanding a massive increase in the rate of profit as an absolutely necessary precondition for an expansion of investment, and this has been accepted by the Labour leaders – very clearly by James Callaghan in his Blackpool speech to Labour Party Conference.

But the capitalist also see that there is no future for them in accumulating higher profits in the form of fictitious capital, as would tend to happen if the government expanded social services. They are relying on an export boom to provide the growing markets necessary to justify their ploughing back their higher profits into investment.

When (or if) this happens they want as little government spending as possible so that their boom will still maintain a pool of unemployed. They hope this “reserve army” will play the traditional role of maintaining profits through holding back workers’ efforts to improve their living standards.

Nor does the demand from the IMF to cut public spending arise from some obscure connection between public spending and the mysteries of international finance. An ex-IMF official recently pointed out in The Guardian that the standard tactic of the IMF is to push the policies of the most orthodox domestic financiers, and for just the same reason of restoring the health of the economy in capitalist terms.

These policies can then, conveniently for the government, be blamed on what one Labour Minister recently referred to as our “friends” abroad.

The government has been forced to borrow abroad (a total of $14 billion by the middle of this year) because the capitalists are incapable of selling sufficient exports to meet the import bill, But the “country is failing to pay its way” not because public spending is too high, but because production is so low. It is precisely by expanding production, rather than reducing it, that the balance of payments would be dealt with in a socialist plan.

To this miserable prospect of declining living standards and services, socialist must counterpose the fundamental point that the full utilisation of society’s idle resources would increase production by anything up to 20%.

This would allow increased public services and take-home pay as well as much needed exports and investment. This is leaving aside all the possibilities opened up of eliminating the wastes of capitalist competition, and of increasing productivity under a socialist plan.

What the country can afford is what workers can produce, not what the capitalists see fit to finance. Only by removing control from capital can this potential by realised.

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