By Jane West
The combination of the news that the UK economy remains in a double dip recession with July’s sharp and unpredicted increase in public sector borrowing were widely recognised as still further evidence that the disastrous ‘deficit cutting’ strategy of Osborne and the coalition government is failing.
Even with the revised figures on GDP contraction in the second quarter (-0.5 per cent rather than -0.7 per cent), the UK economy is smaller than it was a year ago while July 2012 saw a £600 million budget deficit compared to a £2.8 billion surplus in the same month in 2011. The two developments were linked as the cause of the rising deficit was the economic contraction – corporate taxes were 10 per cent lower than expected while spending on welfare, especially unemployment benefits, was higher than coalition predictions.
This fact, that the ‘austerity’ and cuts programme of the coalition government would tip the economy back into recession and fail to reduce the deficit, was entirely predictable, and was predicted. But while the left, and some economic specialists, warned of this, nevertheless for a prolonged period any pointing to this reality, or the airing of alternative policies, was ridiculed in the main media.
Stephanie Flanders, for example, the BBC’s economics editor, despite ludicrously being recently singled out for alleged ‘pro-Labour bias’ by the Daily Mail and Work and Pensions Minister Duncan-Smith over summer jobs figures, unfailingly endorsed the need for cuts to reduce the deficit. Her line at the BBC ridiculed any suggestion of the need for ‘Keynesian’ boosts to investment, generally failed to give a platform to serious economists who have questioned the government’s approach, and put the continuing problems in the UK economy down to ‘the hole in Britain’s public accounts, which all of the country’s main political parties believe we should fix – though Labour quibbles with the pace’.
As Ed Balls accurately noted in a speech to Bloomberg in 2010: ‘the political and media consensus has dictated that the deficit is the only issue that matters in economic policy, that the measures… to reduce it are unavoidable…
‘Interviewers look aghast when I tell them that cutting public spending this financial year… is economically foolish… “But what would you cut instead?” they demand.
‘So strong and broad is this consensus that a special name has been given to those who take a different view – “deficit-deniers”.’
There have of course been some honourable exceptions to this view even among mainline economists – Paul Krugman, David Blanchflower, and Robert Skidelsky among them. Even the Financial Times chief economics commentator Martin Wolf, as early as January 2011, warned: ‘I find it hard to understand why the government is so confident that the economy would withstand the sharp fiscal squeeze that lies ahead. This has depended on an inordinately optimistic view: higher net exports and corporate investment will offset the contractionary impact of tough constraints on public spending, declining real household disposable incomes, a high probability of further falls in house prices, massive household indebtedness, and negligible growth in broad money and credit. We are not talking about mere headwinds here, but head-gales.’
But, despite a few such prominent critics, Osborne was initially able to claim the support of the majority of bourgeois economists. For example a letter, published in the Sunday Times in February 2010 and signed by 20 leading economists, endorsed the Tory line going into the general election that year, arguing: ‘In order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-2011 fiscal year.’
This view was stubbornly clung to until the economy plunged into predictable double dip recession and the PSBR not only remained stubbornly high but began to escalate again.
Under the impact of these last blows this majority consensus even within the ruling class in support of Osborne’s policies is beginning to publicly erode. With output now lower than when the coalition was formed, and the Bank of England believing GDP will not return to its peak of early 2008 until 2014 (and predicting a 0.2 per cent economic contraction this year) this situation is beginning to provoke concern even among capitalists and not just the majority of the population who have suffered falling real wages, reduced welfare services and unemployment.
Even among the 20 economists who signed the original letter endorsing Osborne’s policy in February 2010, nine now say that the government must change course. Most of these call for further supply side ‘reform’ – labour market deregulation and tax cuts in particular – but some of them now argue that: ‘The key thing is to try and get the private sector to spend its money and that may require a bit of government spending to prime the pump’ (Roger Bootle, managing director of Capital Economics and one of the 20 signatories).
Outside the circles that supported Osborne in the first place Martin Wolf, one of the leading ideologues of the economic policies of big capital, has again put the case for ‘a bit of government spending’. He also launched a savage attack on the government’s economic policies in a May 2012 article with the self-explanatory headline ‘Cameron is consigning the UK to stagnation’:
‘With real interest rates close to zero – yes, zero – it is impossible to believe that the government cannot find investments to make itself, or investments it can make with the private sector, or private investments whose tail risks it can insure, that do not earn more than the real cost of funds. If that were not true, the UK would be finished. Not only the economy, but the government itself is virtually certain to be better off if it undertook such investments and if it were to do its accounting in a rational way. No sane institution analyses its decisions on the basis of cash flows, annual borrowings and its debt stock. Yet government is the longest-lived agent in the economy. This does not even deserve the label primitive. It is simply ridiculous.’
To give Shadow Chancellor Ed Balls his due, he argued from an early date that the government’s approach would lead the economy back into recession and that what was needed were more demand side stimulus measures. He stated this most clearly in his above-quoted Bloomberg speech during the 2010 Labour leadership contest.
But the Labour front bench is still shying away from any policies capable of adequately meeting the economic crisis. First Ed Miliband appointed Alan Johnson, rather than Ed Balls, as Shadow Chancellor – Johnson was a Blairite who endorsed the coalition’s deficit cutting approach. And although Balls soon replaced Johnson, there has been no robust argument for an alternative along the lines of the Bloomberg speech, and he has not strayed far from previously established Labour policy of supporting cuts, merely at a slower pace, and with no commitment to reverse any of the Tory measures.
A slight shift in policy at the end of last year produced Labour’s ‘Five Point Plan for Jobs and Growth’ flagged as a stimulus programme. But it included only very limited investment proposals – a commitment to 25,000 new homes financed through a further windfall tax on banks and a promise to ‘bring forward’ existing investment projects. It is mainly centred on a reduction in VAT from 20 per cent to 17.5 per cent to boost household consumption, which would offer some help to wage-squeezed consumers, but have marginal impact on an economy whose decline is primarily driven by a disastrous fall in investment. Reversing the latter would require the state stepping in to take investment decisions out of the hands of private capital – a policy totally unacceptable to the present policies of the Labour front bench.
While making a few calls for changes in details and timetables, Labour’s current policy has therefore been unwilling to step strategically outside the anti-state spending consensus imposed by the noisy chorus of media pundits, neo-liberal economists and right-wing ideologues.
As long as it does not challenge the pseudo-argument that Britain has ‘overspent the national credit card,’ with associated dire warnings that terrifying levels of debt will imminently take the country the way of Greece, Labour’s proposals remain hopelessly inadequate to the scale of problems facing the economy and working people.
Sadly, even with the pro-cuts, anti-spending consensus crumbling, Labour’s front bench has not radicalised its policies on borrowing and investment. Once again this lags behind even the views of big capital’s Martin Wolf who pointed out: ‘The fiscal costs of borrowing for a government able to borrow at a real interest rate of close to zero are, well, just about zero. Indeed, not to borrow when the real interest rate is zero is folly.’
There is clear space to the left of Labour’s present policies for a current arguing strongly for economic policies proposing a programme of reforms, improving living standards and shifting the relationship of forces in favour of working people – through creating jobs, expanding welfare provision and relieving the downward pressure on wages. This also requires the government leading a necessary programme of house building and infrastructure investment.
Such a policy includes support for current actions to fight austerity measures, acts as a left pressure on the Labour front bench, supports the more progressive components of the labour movement that favour such an approach and provide a broad political framework for those who progressively understand that Labour will not deliver the economic solutions that people want.
As Osborne’s credibility slips further, and Labour’s front bench fails to advance any proposals which can overcome the economic crisis, it is up to the left to formulate economic policies which can actually defend living standards and show an economic way out. So far the most coherent policies to do that are those articulated on Socialist Economic Bulletin, the long time publication of Ken Livingstone.