"Myth 2: But the government has to borrow over €20 billion and so cutbacks are necessary. If we don’t take the ‘hard medicine’ now, it will be worse later.
The huge government deficit is a symptom but not the cause of the crisis. Before 2007, for example, there was no deficit as government revenue was €65.1 billion and spending was €64.6. The economic crash has wiped out many tax revenues. VAT rates have fallen; PAYE taxes are down, property taxes tumbled and more is being spent on social welfare payments. But the cutbacks have made matters worse. You can see this easily through simple figures.In October 2008, the government claimed that the budget deficit would rise to 6.5 percent of GDP and that cutbacks were needed. But in January 2009, the budget deficit had risen to 9.5 percent – and so more cuts were demanded in an April budget.Yet, after all these rounds of cutbacks, the budget deficit has now risen to 13 percent. In other words, all the sacrifices have been wasted because the debt is even higher.
The reason why this occurs is simple. If personal consumption is already depressed through unemployment and wage cuts, reductions in government spending only add to the slow down in the economy. There is even less money to go around and a spiral of economic depression sets in. So instead of digging a deeper hole, we need to embark on a jobs programme that puts people back to work"
The above argument was recently written by Kieran Allen and published by the SWP. It is based on underconsumptionist assumptions. The underconsumptionist ideology suggests that economic downturns are caused by a lack of demand. This means that the solution to the problem is increases in demand and thereby consumption. This,it is believed, increases demand which in turn leads to increased commodity production. Increased production means an increase, generally speaking, in the creation of value and thereby economic growth.
If this theory is correct it means that capitalism never need experience economic downturns. To prevent recessions all that is needed is continuous increases in demand (or consumption). If this theory is correct there is no need to abolish the law of value and create a communist society.
Falling demand during an economic downswing is caused by the overproduction of capital which manifests itself in the overproduction of commodities such as houses, building materials, household goods, cars etc. This overproduction is caused by falling profitability. Falling profitability is a product of the failure of capital to compensate for the fall in the general rate of profit by increasing the volume of surplus value. Capital can only overcome its crisis of overproduction by increasing the rate of surplus value through the devaluation and even destruction of capital while pushing the price of labour power below its value. This has to be done on a scale large enough to increase the general rate of profit so that there is growth in total surplus value. Success here means that as the general rate of profit rises profitability starts to rise. Under these new conditions production of commodities begins to increase. Recovery sets in and the cycle gets underway leading to recovery, boom and bust which ultimately takes things back to the overproduction of capital again. The problem is located within the capitalist production process and not in the circulation process as Kieran implies. In order to bring to an end economic crises the production process must be transformed. This means that the capitalist production process must be abolished and replaced by a process of production liberated from value relations.
In an economic crash, when profitability has fallen, artificially increasing demand cannot solve the problem. Printing more paper money as a means of increasing consumer demand abjectly fails in an economic downswing. The result is merely inflation. The more paper that is injected into the economy the more inflation rises. Rising inflation means that real demand has not increased.
On the other hand if the government can freely borrow money as a means of making up for the budget deficit then the upshot is that crashes are supefluous. If this argument is correct then the conclusion is that not excessive credit, but the lack of it, is the cause of the current crash in Ireland. Borrowing, credit, is now the panacea for all economic ills. This being so capital need no longer be concerned over both rising wages and costs. Class struggle is thereby rendered unnecessary and the objective conditions necessary for communism cease to exist.
Economic recessions are a product of the inherently limited and contradictory nature of capitalism. It is this limitation that renders borrowing at will impossible. Such borrowing was undertaken during the "Celtic Tiger" period. We see the results of that economic experiment today -- stockpiles of houses, building materials, furniture household goods, cars and a large reserve army of unemployed workers. Along with bank and factory closures this is evidence of the overproduction of capital that Marx discussed in his work on political economy.
Overall to argue, as Kieran Allen and the SWP do, that a programme of increased state spending is the solution to the national debt crisis is a misrepresentation of reality. It is a bourgeois argument that suggests that the Irish state is progressive. Kieran is suggesting that the state (that, according to him, has been taken over by the corporations) can sort out and even, based on the logic of his position, prevent the emergence of crises in the national debt. Demands made by the Socialist Workers Party calling for increased state spending are (bourgeois) nationalist demands. They are demands that obstruct the struggle for social revolution. Kieran does not seem to understand that it was that very thing, increased state spending, that played a key part in the emergence of the massive current budget deficit. How can what was a source of the problem form part of the solution? Within the framework of capitalism the only solution to the budget deficit and the economic crash, as a whole, is one that entails the devaluation of capital and the pushing of the price of labour power below its value (this must include the devaluation of labour power as variable capital too). Essentially this is the only solution available under capitalism. This is why the Irish government has beeen pursuing harsh anti-working class policies. It is not because it is an evil Party that enjoys engaging in economic sadism. These left wing parties, such as the SWP and the SP, claim that there are pro-working class solutions available to the Irish state within a capitalist paradigm. In making such reactionary claims they are merely attempting to fool the working class. There are only two solutions: a capitalist or a communist solution.