Economic stagnation underlines error of Labour policy retreat

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TUC March For The Alternative 26 March 2011

By James Wilkins

The latest economic figures showing that the British economy shrank in the last quarter of 2011 underlines the damage that Tory economic policy is causing – both to growth and living standards. A clear alternative to its ‘austerity’ policies is needed, but the Labour front bench’s recent further capitulation to the Tory economic framework weakens both the struggle for such an alternative and its own electoral position.

The first estimate of fourth quarter 2011 UK GDP saw a fall of 0.2%. This is a development totally consistent with the period of protracted stagnation – regardless of whether the economy returns to recession – which provides the key feature of the economic landscape.

Responsibility for this slow growth is clear. The chart below shows how Tory economic policy has flatlined the economy, with only 0.3% growth since the third quarter of 2010 – that is once the policies outlined in George Osborne’s emergency austerity budget in June 2010 began to take hold.

Prior to this, and as the direct result of Labour’s inadequate but nevertheless clear stimulus under Gordon Brown’s government, economic growth had resumed, recovering 3% of the 7.1% slump lost during the 2008/9 recession.

The contrast between these two post recession periods could not be starker. But it is a legacy that is now being undermined by the Labour’s new policy.

The position being outlined by Labour’s front bench of siding with austerity also runs contrary to the experiences of other European countries where cuts are even deeper than those carried out by the Tories here. These have sent these economies into a downward spiral from which it is much harder to repay debts. 

Labour’s front bench yielding to austerity even conflicts with warnings from whole range of economic agencies and serious economists such as Joseph Stiglitz and the Financial Times’s Martin Wolf who correctly acknowledge that a growth agenda needs to take priority and who are expressing concerns over the damage that austerity poses to the Western economy. As Joseph Stiglitz explained in January, Europe’s austerity drive is ‘is a mutual suicide pact.’

As noted previously, at the core of the Great Recession has been the collapse in investment, which proceeded and then drove the economic slowdown. As the economy has continued to stagnate a collapse in consumption has also become a dominant feature with living standards under assault from real term pay cuts, increased unemployment and regressive government polices such as increased VAT and public service cuts. Tory austerity policies, which are slashing both government investment and consumption, are clearly making economic matters worse. 

Resuming economic growth requires the investment collapse to be reversed. The investment collapse came about because capitalist companies refused to invest even their own financial resources. Reversing this could be achieved either or both through the state investing directly or by the government simply forcing companies which are currently sitting on huge cash reserves to invest. 

As the FT explained on 22 January, big business is choosing to puts its current huge cash reserves to non- productive use, at the expense of the economy as a whole:

‘Dividend payments from listed UK companies rose by almost one-fifth last year, reflecting both the stronger health of company balance sheets and caution about using the cash to embark on large-scale corporate spending sprees. The research by Capita Registrars put gross dividends paid at £67.8bn in 2011, the highest level in cash terms since the division of the outsourcing specialist began covering this area five years ago…

Analysts say that the positive trend for dividends comes because companies have repaired their balance sheets, while the uncertain economic climate means they are coming under pressure from shareholders to return cash instead of spending on expansion.’

That the Tories do not want to see the state – that is, a non-private actor – directing and taking over sections of the economy is totally obvious. To do so would mean removing from the capitalists their ‘right’ to dominate investment decisions and control the economy.

Capitalism’s alternative policy therefore is to drive down the share of the economy going to the working class, and thus increase profits for capital, in turn hoping that this will encourage the capitalist companies to invest. As growth falters as a direct consequence of this strategy, capitalism seeks to extract an even greater share of the economy from the working class to coax the capitalists to invest.

In contrast to this failed strategy, the fastest growing economies in the world, notably China, have large state sectors. China’s economy has expanded by well over 40% since the global recession began in 2007, in contrast to contraction in Europe over the same period. As the Guardian recently explained, China is:

‘the most astonishing development success story in the world today’ which ‘provide[s] a potent example of how growth can come from investing in new plant… with a finance and banking sector that is in state hands’.

A separate Guardian editorial also explained that a state investment programme is perfectly affordable for the UK as:

investors [are] actually paying to lend the British government money… With the UK poised to go back into recession, the government ought to be borrowing more to invest. Directing cash into public housing or into huge time-limited tax incentives for business investment would create jobs, as well as being good in themselves.’

Labour’s yielding to the Tory austerity policy leaves it less able to shift the economic debate from the current hopeless position which is causing stagnation and onto an ‘investment not cuts’ line that is the only way to restore significant growth to the British economy – which in present circumstances means a state-led investment policy. This in turn will have a serious impact on millions of people’s living standards, and as a result, will cut Labour off from millions of potential supporters.

As noted elsewhere on this website, the immediate impact of Labour’s policy of backing a pay cut in real terms for public sector workers, and to make keeping all the cuts a starting point for economic policy, saw a drop in Labour support. Labour is significantly down on the levels of support it was attracting last year before such policies were adopted.

Other polling backs up the obvious conclusion that whole sections of the working class – which votes on the basis of self-interest – will be turned off Labour following its adherence to an economic policy that conflicts with their own material position. For example an ICM/Guardian poll revealed that Labour’s position on not reversing Conservative cuts was a net vote loser among every single socio-economic and age group.

Separately a Comres poll showed that current Labour voters disagreed by 40% to 33% with a Labour government keeping all the Coalition government’s spending cuts. In stark contrast Labour voters agreed, by 43% to 29%, that Unite leader Len McCluskey was right to criticise Labour shadow ministers who ‘endorse savage spending cuts’.

This indicates why the pressure for Labour to adopt a more right-wing line from big business and the Tory  press should have been resisted, most importantly from the point of view of the interests of the working population, but also even from the point of view of Labour’s electoral self-interest.

The aim of capital is to ensure that no matter who wins the next election, there will be austerity policies to suit its interest and to drive up the profits share in the economy. But given the Tories are a still more reliable vehicle to carry out the required policies, capital will do everything to ensure the Tories remain in office – Labour will be relegated to the reserve team to carry out the same policies.

By accepting this Tory framework, Labour’s front bench has made the struggle to throw the Tories out of office at the first opportunity more difficult and also weakened its own position. Far from the ‘credibility’ that Labour’s front bench claimed that the new policy would bring, it has also undermined its own electoral position.