Socially fair adjustment in hard times

Labour needs to have a frank exchange with voters about fiscal responsibility and the scale of the economic predicament the whole of Europe is now in

The authors of the pamphlet, ‘In the Black Labour’, are to be congratulated. They have kicked off a debate on fiscal responsibility that Labour needs to have. The central pillar of the UK Chancellor George Osborne’s deficit reduction plan has collapsed. Drastic cuts in public spending have not opened space into which private sector investment and jobs were supposed to grow. However the poll numbers still make depressing reading for Ed Miliband’s Labour party. We are a long way from recovering the economic credibility which was once a proud boast. That credibility was based on a firm commitment to fiscal discipline that Gordon Brown, as Chancellor of the Exchequer, bravely battled to establish throughout the 1990s. It is a credibility that has now to be re-won in new and much more difficult economic times if Labour is to become a serious contender for power at the next election.  

If the Office of Budget Responsibility (OBR) is right, their dismal economic forecasts will frame the political debate between now and then. Their best independent assessment , give or take (large) margins of error, is that a further £30billion fiscal adjustment will be required to eliminate the deficit in the first two years of the next Parliament. The OBR also conclude that there is much less spare capacity in the UK economy than previously assumed; reducing Labour’s potential to argue that faster growth as a result of a demand stimulus would close the fiscal gap. What should be Labour’s response?

We could of course simply dismiss the OBR arguments as an “establishment view” into which Labour should avoid being trapped. But why proclaim Labour’s support for the principle of an independent fiscal authority, as part of a new framework of long term fiscal rules, if we choose wilfully to disregard its conclusions?

Yes, the Labour government was right to go ahead with a Keynesian stimulus in the wake of the 2008 banking crisis. This worked. We achieved an economic upturn in 2010 – partly because the stimulus was coordinated across the European Union and United States, but at a great cost in expanding public sector deficits and debt.

Yes, Ed Balls showed courage in standing out against the crowd on the economy in last year’s Labour leadership election. I personally remain convinced that by cutting ‘too deep, too fast’ the Coalition has destroyed confidence and made the economic outcome worse than it would otherwise have been.

Yet is now time for Labour to stop looking back to what might have been had we won the 2010 election. The plan put forward by Alistair Darling, Labour’s last Chancellor, was posited on a healthy world recovery and strong British growth. While George Osborne has miscalculated catastrophically, other factors have also been at play in worsening the economy’s performance. The Conservative party are wrong to heap the blame for last year’s policy failures on the eurozone, which only now is depressing demand in our most important export market. But the rise in oil and commodity prices pushed up inflation in the UK more than in other countries, demonstrating the downsides of a policy of deliberate devaluation to which much of the British economic policy establishment remains committed as an article of faith, despite little evidence that it has done much long term good. As a result family purchasing power has been subject to a vicious squeeze. Life would have been very difficult for the British economy, whichever government was elected in 2010. People simply will not believe us if we exaggerate the real difference we might have made.

Is there still scope for a new Keynesian stimulus? The limits of “Keynesianism in one country” are all too clear to those of us who worked for the Labour governments of the 1970s. As Tony Crosland was forced to admit in the IMF crisis of 1976, the intellectual case against deflation should have won the day, but the pressure of the markets left no alternative to cuts. In the 35 years since then, the power of the markets has grown hugely. Also our economy has become much more integrated with Europe and the rest of the world: if we take stimulus measures on our own, and others don’t, a good deal of the extra demand simply leaks into imports, not into creating jobs in Britain.

“Euro-Keynesianism” may still in principle be feasible, but there are obvious limits with today’s eurozone crisis. The financial markets hold enormous, often irrational sway. Consumers, banks and governments across Europe (in this Britain is no different) are dragged down by debt. And there is little political support. European social democracy is a long way from offering a coherent alternative to the centre-right’s insistence on collective austerity: yet a future growth policy for the EU is the strategy Labour should be developing for the future.     

Today Labour’s approach should be to argue for targeted measures to save jobs, raise demand and promote investment that will not raise the deficit and debt, but over time reduce it. Firstly, we should promote social investments that largely pay for themselves: maintenance payments for over 16s to stay in education rather than drop out into costly idleness; incentives for employers to take on apprentices and create new jobs; an effective community work programme for unemployed people that would be the foundation of a ‘something for something’ welfare state.  Secondly, when the economy is in an tail-spin, we should back deficit-neutral redistribution from well off people who save, to hard pressed families who consume – for example raising new revenues from the under taxed property and capital of the top 1% to sustain tax credits for low paid working families. Thirdly, Labour should support Robert Skidelsky’s proposals for a National Investment Bank (with regional arms): not just as a temporary pump priming measure, but to tackle an underlying structural weakness in the British economy in the supply of finance to growing businesses and for long term infrastructure. George Osborne’s growth measures have the feel by contrast, of deeply inadequate, public relations-driven window dressing. Fourthly, Labour has to accept the broad scale of the Tory cuts but speak a new language of priorities. What is progressive about top taxpayers receiving winter fuel payments and concessionary fares when hundreds of children’s centres are being closed?

So the starting point of Labour’s economic debate has to change. We have to accept more openly that cuts have to be made. We have to acknowledge an absence of quick fixes to restore growth. This is not just necessary for Labour to restore its badly damaged economic credibility with the voters. It is the right thing to do intellectually, ideologically and morally.

We can only restore public trust by talking frankly about the scale of the economic predicament the whole of Europe is now in. People can sense that economic power is shifting in the world. People know we face unprecedented competition from emerging global giants who wrongly believe our welfare societies over-protect and discourage hard work. People know that European and American material living standards and current life styles cannot be achieved world-wide without putting impossible pressure on the world’s natural resources and sustainability.

Returning our societies to some golden age of ever rising material standards may not be a credible promise. But nor need we adopt an anti-growth politics of absolute economic decline.

We need a new economic paradigm: a responsible capitalism; a reformed developmental state that promotes investment in the infrastructure, skills and innovation we need to compete in a globalising world; socially fair adjustment in hard times; all within a framework of firm fiscal responsibility.

This article is a response to Policy Network's discussion paper In the black Labour: Why fiscal conservatism and social justice go hand-in-hand

Roger Liddle is chair of Policy Network and a Labour member of the UK House of Lords