Austerity Labour will reap reaction

By Nicky Dempsey and Jane West

The announcement by Shadow Chancellor Ed Balls that the Tories’ spending plans would be the ‘starting point’ for Labour’s own budget post-2015, and Ed Miliband’s endorsement of a continuing ‘benefit cap’, clarify the nature of the coming Labour government.

Labour still stands poised to win the 2015 election on the back of divisions on the right between the Tories and UKIP on the one hand, and disgust with the Lib Dems on the other. But with no sign of an upturn in the world economy, renewed warnings from the IMF this week of increasing global ‘downside risks’, and austerity policies in Britain that are reinforcing long-term stagnation, Labour will inherit an economic situation unequalled in problems since 1929. In 1945 the immediate problems were deeper, but the entire world economy was on an upswing as it emerged from the war. Labour in 1945 not only took the right reflationary steps, but the economic cycle was working in its favour. The problems today are not as deep as 1929, but much more akin to then than 1945 in their intractable, long-term character. The failure to deal with the crisis after 1929 led in Britain to a split in the Labour Party, in Europe the rise of fascism, and globally to the Second World War.

With all proportions guarded, this is the responsibility facing Labour in 2015.

The announcements this week dramatically confirm the view that Labour will fail, with deeply unpleasant consequences. Labour in power will not only radically disappoint an electorate wanting an end to austerity, but will continue the Tories’ failure to take the necessary steps to turn the economy around, and therefore be forced into a new round of disastrous attacks on the welfare state. The spiral of decline in the NHS will continue, alongside new attacks on benefits for the weak and vulnerable. Living standards will continue to fall with no new expansion in employment. Promises of a ‘living wage’ and jobs for all will prove unachievable.

While this spiral of failure is likely to lead to a growth of the left, both in and out of Labour, the main consequence will be a carnival of reaction:– rising activity by the neo-Nazi EDL and BNP – as we see across Europe and prefigured in the recent spike in racist attacks and neo-Nazi mobilisations – a reinforcement of racist scapegoating and Islamophobic attacks, strengthened ultra-nationalist rhetoric from UKIP and a lurch to the right by the Tories.

Of course, it will be pointed out, that at the same time as endorsing the Tory spending plans, Balls still correctly stresses the need for investment to stimulate growth. But he, illogically and disastrously, argues that this will only be possible on the basis of further ‘hard choices’, i.e. cuts, which Shadow Cabinet members are being asked to prepare.

Balls justifies his proposed ‘iron discipline’ on current government spending (which includes welfare payments) in order to pay for increased infrastructure investment. This is nonsense.

Firstly, even the actions of this government show that money can be found. For example, Osborne has found £12 billion to support home buying – through the ‘Help to Buy’ scheme – even though, rather than expand the housing stock, it will simply have the effect of reflating the house price bubble.

Altogether the government has introduced schemes currently valued at well over £40 billion which provide subsidies to the private sector. Generally these remain untapped because of the uncertainty over realising profits. Labour could simply switch these funds and guarantees into state-led investment in home building, transport, infrastructure and education. No welfare cuts are required.

The reason for the government’s inability to lower the deficit is not because it has failed to make cuts, but because the economy itself is stagnating. The slump is the key issue facing the British economy, not the deficit which is merely a symptom of the crisis.

This underlines the incoherence of Labour’s new plans. Despite Balls’ previous strong arguments that all attempts to curb the deficit will fail without a growth strategy, it appears that, after coming under personal fire from the Murdoch press, he has capitulated and now endorses the Tories’ logic.

The shift in policy means that the shadow front bench has had to disavow even its own timorous policies. Ed Balls now rejects his own 5-point plan, whose centre-piece had been a temporary cut in VAT to benefit average income earners and the poor.

Moreover Labour’s investment proposals come nowhere near what is required. Labour justifies its proposed welfare cuts on the basis it will release £10 billion in infrastructure investment. But what does this really amounts to.

Currently, the decline in investment accounts for the entire recession in Britain. The shortfall in investment from the peak before the last recession is greater than the fall in GDP (as other categories have increased) and is £50 billion annually. Ed Balls refers to an increase in infrastructure investment of £10 billion over 5 years of a Parliament. £2 billion per annum in investment is a fraction of what is required simply to get back to 2008 levels.

Balls is not a fool in economics. He knows that a return to the previous growth rate of prosperity would require vastly more than that. It is hard to avoid the conclusion that talk of investment is merely window-dressing to disguise an adoption of the Tories’ failed austerity policy.

But the political consequences will be disastrous, for Labour and for the mass of working people in the country.

Bad politics

In its own political self-interest Labour should pay regard to experiences in Europe where the recent period is replete with examples of parties thrown out of office for implementing austerity. Some did not even get that far. Like Labour, Italy’s Democratic Left began this year on 41 per cent in polls. Its leaders told the world that austerity was necessary and it won just 31 per cent in the election a few months later. It has in effect put Berlusconi back in power.

In much less extreme circumstances this is Labour’s own recent history too. Between 1997 and 2001, and in the midst of a relatively strong economic expansion, Labour lost 2.8 million votes by implementing Tory spending plans. Labour’s victory in 2001 came with nearly one million fewer votes than it had gained in 1992, when it lost. The spending plans in 1997 were relatively mild compared Osborne’s plans and there is no prospect of a similar economic boom in 2015.

There have also been a number of polls on the heels of Balls’ speech and Ed Miliband announced cap on welfare spending. One poll shows that a majority are less inclined to vote Labour as a result of the plans. A separate poll shows that there is a net 11 per cent (48 per cent to 37 per cent) who favour increased investment even if that requires increased borrowing over those who accept further austerity measures to reduce the deficit.

As centre-left politicians like Peter Hain point out, whatever argument could be advanced to support spending cuts in 1997 to avoid throwing a recovery off course, there is no popularity to be gained by adopting the unpopular economic policies of a discredited Tory government.

All this shift does now is provide a green light for Osborne to intensify the cuts in government spending before 2015, raising the bar on what Labour has pledged to continue while disarming any Labour criticism of the government’s economic course.

At the same time the announced cut in the winter fuel allowance for better-off pensioners means Labour is contributing to the further undermining of ‘universality’ that underpins the acceptance of the principle of a ‘welfare state’ across all income groups.

The arguments for such cuts are spun as ‘why should the better off get a hand-out’. This was the argument the Tories used on child benefit. But the alternative to universality is not a bit of piecemeal ‘means-testing’ to cut out the wealthy. It undermines the whole basis of the ‘welfare state’ which rests on the principle that everyone pays in, and everyone gets back, especially through the NHS and pensions, but also in other support and social provision. The alternative is an insurance-based contributory system in which only the rich and the highly paid can feel secure, and where, as in the US, healthcare insurance costs are extortionate and treatment is delivered not on need, but who can afford to pay.

The upfront saving on reducing the eligibility for the winter fuel allowance is just £100 million, which does not include the cost of means-testing. It is an inconsequential amount when compared to a public sector deficit which is now stagnating at around £120 billion a year. Any anomalies created by the universal principle in welfare could easily be off-set by raising the top rate of income tax.

As Ed Miliband himself previously argued that ‘benefits for the poor lead to poor benefits’.

Opposition to this overall right swing by Balls and Miliband has been muted so far, but the break with universalism has raised concern even among centre-left forces within Labour like Hain and Compass.

Given the stakes if Labour fails after 2015, the priority for the left, inside and outside Labour, is to bring together all those who oppose austerity, to campaign against the Tory attacks now and to promote a clear alternative for Labour which shifts the burden of the crisis from the shoulders of workers and the poor.

The People’s Assembly Against Austerity is the major opportunity to take some real steps forward in this task. Register here.