Search This Blog

Sunday, 2 January 2011

It's Labour's Debts AND the Coalition's Cuts - not OR

The new Labour leader Ed Miliband has been getting plenty of advice recently on how to take his party forward. "Abandon New Labour", some say. "Attack the Coalition's cuts as ideological, too fast and too deep" say others. These are simple strategies that could work in the short term.  "Deny all responsibility for the trillion pounds of debt the country is in and the £150 billion budget deficit", say many more. This is far more dangerous, and gives the Tories in particular a massive hole to drive a truck through like a knife through hot butter every time the Coalition strategy is questioned. A far more effective long-term strategy, and one more likely to result in Labour being returned to government in 2015 would be to 'admit and explain'. Here's why.

Without meaning to be morose, imagine your parents died, leaving a massive amount of debt that you hadn't known about. You and your family had always planned to move into the house they had owned when they died, but now the bank wants the house sold to pay off those debts. Are you simply going to say that the bank is being unreasonable? What about your parents leaving that amount of debt? What if they even left a note with their will saying "I'm afraid to tell you there's no money left"? At what point would it come into your head that there are two issues - one is how you feel about your parents leaving so much debt, and the other being whether the bank is being reasonable in expecting their house to be sold to pay it off?

Now look at the politics of the deficit and the policies to deal with it. The Labour government left a £168 billion deficit and a debt of £1 trillion. Liam Byrne, former Labour Chief Secretary to the Treasury, left a note for his successor saying the exact words in the above paragraph. The Conservative-led Coalition have decided to get rid of the deficit by 2015, at which point they will need to start paying down the actual debt.

Labour politicians are attacking this strategy, saying that it is too fast and too deep. The Coalition is responding with "there is no other alternative" given the deficit left by Labour. Labour, and many on the left of the political spectrum then tend to splutter something about the banks causing the deficit, which is, quite frankly, economically illiterate at best, lying at worst. It is as if accepting their part in creating the current problem would mean that they can't then attack the policies the Coalition are choosing. But I don't think this is true.

Let's go back to basic economics. When there is economic growth, you would expect to build up a budget surplus, as tax revenue should be more than government spending. When there is a recession, you would expect to drop to a budget deficit, as you will spend more than tax revenue to keep the economy out of depression. This is a cycle, which is why it is assumed that a budget deficit of 3% of GDP is a "cyclical deficit" - in that it is something that happens when a country goes into recession. The EU stability and growth pact suggests that budget deficits shouldn't go over 3% and net debt over 40% of GDP.

The Labour government, however, spent a lot more than tax revenue from around 2001. This meant that we entered the recession in 2008 with a deficit of around 3% of GDP and with debt of around 40% of GDP. So, in order to spend our way out of a recession the UK had to borrow more money, which is why we find ourselves with almost a trillion pounds of debt (72% of GDP) and a deficit of around 11% of GDP - second highest in Europe. This, then, is a 'strucural' deficit, which is where government spending is above tax revenue for other than cyclical reasons. The structural deficit can't be blamed on the recession. 

So, there is a charge, which can stick, that Labour didn't "mend the roof while the sun is shining". There is also a charge that the Conservative-led coalition is making 'ideological' cuts, which means they are shrinking the size of the state purely because that's what they believe in doing rather than as a response to UK finances. The charge that could come back would be that the building up of debt even during a period of sustained economic growth was also 'ideological' on Labour's part, in that they believe the state should be as large as possible. The jibes at Gordon Brown's comment in the 2006 budget - "No return to boom and bust" - are important here because going into a recession in so much debt can only happen if you weren't expecting a recession.

Labour answer that they had to spend a lot of money to improve public services after many years of chronic underinvestment during 18 years of Tory government from 1979 - 1997. This is true, particularly with schools and hospitals, both of which were in a terrible state in the mid-1990s. They then point to the fact that the recession was caused by a 'global financial crisis' - which was not their doing and nobody expected, a charge which is less easy to justify, given that Gordon Brown had created a tri-partite financial regulation system which basically failed to regulate our banking system. But essentially it is possible to blame the banks for the recession, which increased the size of the deficit.

Chris Mullin
BUT attempting, as Chris Mullin, ex-Labour MP, author of some brilliant diaries ("A View from the Foothills" and "Decline and Fall") does in an open letter to Ed Miliband in the Times recently, to say that the financial meltdown was not Gordon Brown's doing but  "a crisis of capitalism", and “It was the bankers, stupid”, is showing, again, either economic naivety or politically-motivated mendacity. I hope it was the former.

There is a reason why it's called a "public debt". It's because the public sector was spending more than it was getting in from taxes. Had, when the financial meltdown hit, the UK had a budget surplus then perhaps Mullin would have a case. He doesn't, and as long as Labour and others on the left use this line of attack they can never regain economic credibility.

So Ed, why not instead admit that the country's finances are in such a bad state for a good reason. The financial crisis was caused by the banks, but the deficit and the public debt were caused by the need to invest in the country's future. Talk of all the successes, talk of all the differences made when Labour were in government.

Give concrete examples. It is quite possible, and Ed Miliband has the time to do so, to argue that the country's financial position is partly the result of Labour policies which were necessary.

If you want to say how necessary, ask anyone whether this country was a better, or nice place in 1997 than it was in May 2010, I'm not sure you'll find many even die-hard Tory supporters who would prefer to go back to 1997.

If you can separate the two arguments, that the deficit and debt was necessary for the long-term good of thr country, and that the Coalition's fast and deep cuts are the wrong way to go about dealing with them, you may be able to win both of them.

If you don't know how to do this, ask Ed Balls to do it for you. He's good at it, which is why it's a shame that you chickened out of making him Chancellor.

No comments:

Post a Comment