In These New Times

A new paradigm for a post-imperial world

Devolution and the welfare crisis

Posted by seumasach on December 19, 2014

Cailean Bochanan

19th December, 2014

The Smith Commision report on more devolved powers to the Scottish government contradicts the wider asserted claim by the the “Yes” campaign that a “No” vote would lead to a roll back of devolved government. Many of them are now attacking the report as inadequate and calling for greater devolution of financial powers to Scotland. I wouldn’t rule out that happening but I would question the assumption that such devolved powers, even if they amounted to Devomax i.e. full financial control devolved to Edinburgh, would lead to increases in social spending as claimed.

We are, still, part of Britain, the world’s most indebted nation and this debt is growing as never before despite government austerity. Such is the level of debt that were interest rates to rise to normal levels it would be near impossible for  as us to service the debt. Too much of our tax revenue would be required to pay the interest on the debt. At existing interest, however, their is little incentive for our usual creditors to keep buying our government bonds. Indeed, they may have largely ceased to do so and that would explain why we embarked on a programme of quantitative easing(QE) i.e. monetization of the debt. We simply print money to buy our own bonds. Certainly, this can be confirmed with regard to the USA where China,its principal creditor, ceased Treasury bond purchase in 2010 and converted its long term debt into short-term debt. 2010 was also the year of QE1, Britain is a far more opaque country than the US and we can’t know whether the same thing has happened here but logic dictates that it has.

The printing of money to cover your own debt naturally devalues that money and so QE has lessened any incentive our creditors may have to hold sterling denominated assets- which are not in any way “sterling”. Sooner or later QE would leads to a run on the pound and a massive fall in our spending power on largely imported goods accompanied by widespread social distress.

It is astonishing to listen to the terms of the debate in Scotland. Everyone really seems to believe that we cover our expenditure through taxation rather than just through more debt. They’re living in a fantasy nation – one which is breaking even. The question they should really be asking is whether a Scottish parliament,even with Devo max, would be able to borrow enough to cover spending. The answer is “no”. The same answer can be given for the UK parliament as it is, taking on board the points made above. But the answer is doubly “no” when you devolve all financial powers away from the centre since then neither the Westminster government nor the Scottish government has sovereign power. The Westminster government is less creditworthy for having lost control over the UK tax base: the Scottish government controls its tax base but is not sovereign and doesn’t control, for example, the currency or defense spending.

The truth is that devolution of financial powers is a consequence of the bankruptcy of the UK- it is part of an informal default.  It is the moment when the bankrupt hands back the credit card. The SNP has admitted itself that borrowing is now only a stopgap to overcome a periodic tax shortfall. But a Scotland with a balance budget sounds a terrifying prospect. How are we all to survive?

We are certainly heading for more hard times but there are mitigating factors which means things won’t be quite as apocalyptic as they might otherwise have been. In the first place, thanks to the wisdom of the current administration both in Scotland and England who have signed partnership agreements with China, we can look forward to massive inward investment. Already, a 100 bullion is expected in infrastructure alone over the next ten years. But there will be more: China could recapitalize our perennially bankrupt banks after we  bail them in rather than bail them out again. They will invest in utilities, which are already receiving substantial European investment and they will probably begin to relocate factories producing for our markets to Britain, as is only logical.

But how will this resolve Scotland’s need for massive social spending? By reducing other costs. The incoming investment will be partly in lieu of debt or interest thereon. China, as well as other creditors no doubt, has no wish to continue building up reserves of potentially worthless pounds and pound denominated assets. Britain is already issuing Renminbi debt in response. But China can also insist on getting real assets instead of paper. They have by now well over 300 bullion in sterling reserves which they can spend in Britain on real estate, industrial estates, infrastructure, takeovers etc. They are also buying up our gold at prices artificially lowered through manipulation of the paper gold market. Foreign takeovers of utilities have been widely criticized but foreign state-controlled companies, as opposed to our own home-grown oligarchs, are actually carrying out widespread capital investment. This is also a nice twist to the tale, poetic justice: contrary to neo-liberal mythology, the state does have to play a central role in the economy. It’s just that in this case it’s not our own state. Such is the fate of declining empires!

Foreign direct investment means covering capital costs we can no longer make and stops the hemorrhaging of public funds to the oligarchs. Unfortunately this may well go beyond utilities into the domain of public services. It’s not for nothing that the SNP is one of Europe’s most neo-liberal parties, praising the TTIP in terms that no European party would dare match even if TTIP is dead in the water after the French government rejected some of its key clauses. The SNP insists  on defending the NHS as public service. Whether they stand by that or not, what about schools? The problem here is that privatization has already started via PFI and it’s clear that paying off these contracts is an impossible burden on public spending. But the councils could default on the contracts if they had a buyer for the schools. Let’s credit the authorities with some intelligence and assume that the Orwellian- sounding “Curriculum for Excellence” is merely a stratagem to discredit forever state controlled education rather than a serious attempt to improve it – and that privatization is their real goal. This , like it or not, will constitute another saving.

But, even this debt reduction will be insufficient if we continue to run a massive trade deficit month in month out. The remedy is in productive investment either for export to Europe or for good old-fashioned import substitution. Undoubtedly, this will be forthcoming unless we ruin it all by voting for UKIP and to leave the EU.

It is notable that the government has not deigned to advertise this inward investment strategy to the British people. This is unsurprising if you consider that no one has ever told them that their living standards have been dependent on inward investment already for several decades in the form of fiat pounds obligatorily received in payment for goods being obligatorily reinvested in UK government bonds. This little scam is the ultimate in the so-called invisibles we’ve been living on for centuries. It is imperial privilege pure and simple and it has to be said that like the Roman plebs we have not been overly concerned to look into the provenance of whatever goodies come our way. Anyway, the important thing to understand is that it is merely the form of inward investment that is changing. Instead of foreigners financing our debt they are financing our reconstruction after the depredations we inflicted on ourselves via the Thatcherite revolution reduced us to the state we’re in now.

There is no need, however, for us to stand by as hopeless onlookers. There will have to be further budgetary cuts and we need to make sure they don’t come from front line services and necessary capital investments. We need to establish redlines in terms of provision of an adequate supply of food, shelter, heating and security to everyone. Apart from anything else inflation is steadily eroding everything to the extent that almost everyone is now struggling financially whether in work or not. We urgently require a reliable inflation index that costs, salaries and benefits can be tied to- inflation is obviously about 10% rather than the official joke figure of about 2%.

A massive amount of the public sector budget is being spent on highly-salaried managers, advisers and bureaucrats who do nothing other than make things worse with their corporate nonsense. Either they’re mad or they’re just preparing the ground for privatization. whatever, the case the results are disastrous: speak to any front-line public service worker and you’ll hear how they can’t do their job due to endless paper work. We need more front-line workers who aren’t bureaucrats and less bureaucrats who  impede service provision.

In the end, not everything is just down to money. If incoming investment staves off total economic meltdown the problem still remains of social disintegration. Since we have been essentially an imperial oligarchy, rather than a nation, the British people have never been a citizen body: rather we see ourselves as an agglomeration of “interests” or lobbies, as the oligarchy does, laying claim to our “rights” against the state, getting what we can according to the influence we can exert. We are divided according to identity, according to race, gender, class , sexual orientation etc. It is behind the mask of identity that our ferocious individualism plays out in the war of all against all. These divisions have paralyzed and will continue to paralyze all social movements ostensibly aimed to protect the weakest. They are also being quite obviously used as a tool in the dismantling of what remains of the public sector and the destruction of the very notion of public service. The left/liberal paradigm is just as destructive in our domestic policy as it has been in our foreign policy. It must now be discarded and replaced by a policy which defines, as far as possible, the rights of all as citizen rights.

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