The leadership candidates need to remind themselves and the public that the deficit was caused by responsible action in dire straits, but also prepare a progressive economic policy without simply opposing everything
George Osborne's so-called ‘Emergency Budget' was grim. His keenness to accelerate the pace of fiscal tightening will not be celebrated by those most dependent upon public services. The cult of austerity is ruling at present. Yet Labour needs to take some lessons from the experience of reacting to a Lib-Con Budget. It is high time the leadership campaigns woke up and started getting to grips with the need for a new, simple, and progressive economic policy. Oh yes, and one that's rooted in the real world too.
Labour had already planned a significant fiscal tightening for this parliament. The last of the stimulus was unwound in this new tax year (2010/11) and looking further out the deficit cutting amounted to £73 billion. In itself this was large. Osborne has targeted an additional £40 billion on top. Most of this will come from further spending cuts (most not defined) but there will also be a rise in VAT to 20 per cent from January 2011 and a bank levy. Some of the spending cuts will be in welfare. For example, benefits will only rise in line with the CPI inflation measure and not the higher RPI. These new Budget measures will hurt and the scale of the harm has yet to be fully determined.
The net effect on the deficit this year, despite the rhetoric, is only about £6 billion when compared to what it would have been under Labour, taking into account surprise improvements in public borrowing since Alistair Darling's March Budget. That is a side of the story that is getting little attention. A look at both the borrowing figures and forecasts from the new Office for Budget Responsibility (OBR) shows that Darling was in fact being quite prudent. The deficit for 2009/10, Labour's last year, is estimated to have been £23 billion lower than Darling projected in December. Higher than expected tax revenues and lower than expected unemployment were key factors. That puts some of the new changes into context.
The Conservative ideological aim to shrink the state has combined with the Establishment's fear that the UK might face a Greece-like experience with financial investors turning against it. There are good reasons to think these fears overdone but it is probably likely that had Labour won, we would have had to spell out in more detail our spending cuts well before the autumn spending review. The problem with ‘bond vigilantes' is that though they are not always right, but they are often powerful. Austerity is now popular across Europe.
In the UK, the Lib-Con government believes that by shrinking the public sector, the private sector will expand to fill the gap. This is a contested economic theory and Osborne has appointed people to his OBR who share his view, or gave it to him, so he faces no challenge there. He is also conveniently ignoring how we got here.
Have we really forgotten that it was an enormous banking crisis, brought about by the irresponsible behaviour of a few financial institutions, which got us into this mess? Labour could have followed a 1930s ‘Treasury View' (as Keynes called it) and balanced the budget, plunging the private sector into a depression. It took the more responsible approach and bailed out the banks to save the banking system, introducing stimulus measures focused on jobs. Now, the Treasury View is alive and well. But there is no guarantee the private sector can continue to recover if hit by new austerity measures. The risk is that growth gets hit significantly.
Our leadership candidates must now expound an economic policy fit for the next decade. That will mean a critical re-examination of past Labour economic policy. It will mean going beyond simply opposing most spending cuts and defending a big state. Two mistakes loom. Candidates could focus too much on small policy changes, ignoring the fact that we have lost the election and need a new economic policy overall. Alternatively, they could be seduced by 1970s-style industrial policy irrespective of the economic realities. There is a third mistake that could be made. The leadership campaign could effectively ignore serious discussion of the economy altogether. But surely we wouldn't make that mistake?
First published on the Progress website, 23 June 2010