Fiscal sense is a key tenet of centre-left political economy. But Labour must retain agility in economic policy and avoid conceding ground
Designing a good economic policy is very hard at the best of times. Designing it when the world is in turmoil and frankly most economists have little clue what is going to happen next is harder still. But designing an economic policy that works politically – not least when you have been thrown out of government after a long period in power is a truly thankless task.
The authors of ‘In the black Labour’ are therefore right to focus on the reality we find ourselves in and try and link it with some understanding of how the public understand economics. Much of what they say strikes a chord and is helpful. I am largely supportive of the line they are taking – and indeed that the Labour leadership is following. I too get frustrated by naive voices on the left that want to completely wish away the fiscal position we are in. But in some places I think that, in making their case, they inadvertently give too much away.
In Britain in the 1980s Labour tried to argue for broadly Keynesian policies. One aspect of this was that how one paid for things was not a major part of the discourse. When I first began working for the Labour party – after leaving the Treasury in 1989 - part of the goal was to get away from the idea that while Labour meant well it had no idea how to run the economy, as evidenced by its endless shopping lists of desirable projects. Uncosted promises were therefore slowly removed from the policy documents and the speeches of the Labour leaders of the day.
It was a hard slog. It had not worked by 1992, perhaps because the public thought we did not really mean it. After that election defeat, the Brown policy of being incredibly tough fiscally really did start to influence the shape of debate and help make Labour electable.
So do we need to do the same again?
In my view we need to do a bit of it but we don’t need all of it. Of course thoughtful people like Adam Lent, Graeme Cooke and their co-authors are right to point out that being on the left is not just about spending money. Socialism is the language of priorities and there are hundreds of policies that can help us create a fairer society that do not solely involve tax and spend or even borrow and spend. The laziness of the left in equating doing good with spending money has always been a problem.
But it is wrong to suggest that this characterised the Labour Government between 1997- 2010. While there is a trend, embraced by far too many on the left, to say that New Labour achieved very little in office in what was just a temporary fix of increased spending, the record suggests that in fact major steps were taken to create a more just version of capitalism within the constraints of a fast changing, globalised world.1
Yes, there was an increase in spending after the early years that was substantial and that in retrospect looks like too much. This spending – or more accurately the failure to realise that the revenue that supported it (from the city and from real estate taxes) was the consequence of a financial bubble and so vulnerable to a financial crash and slow down - was one of the reasons why it was hard to sustain a Keynesian policy when we needed it most. Almost everyone agrees that with hindsight we should have been running a more healthy balance on the structural deficit.
But this can be mightily overstated. As a paper I recently co-authored with John van Reenen and Anna Valero of LSE made clear, the ‘structural’ element of the deficit, excluding investment spending, that was not related to the cycle was only about 1% of GDP in 2008. In any case there are few serious economists that have dared to argue that the world would really have been that different if it had been just a bit lower, and virtually nobody was arguing for a substantially different policy at that time.
So it is bad economics and bad politics to argue that Labour were mad borrow, tax and spend merchants and that we must now apologise. It is also wrong to suggest that the investment in public services achieved almost nothing and that we must again apologise. Simply put, if we embark on a course of saying we got it all wrong in a vain hope that having apologised the public will now treat us with a new respect, we close down important elements of what a progressive policy should be.
On the other hand, it is certainly right to hold our hands up for getting financial regulation badly wrong and for going - strongly - with the worldwide grain for light touch regulation. In a government that did pretty well, that was a terrible miscalculation.2 But do not throw out the baby with the bathwater.
The future is uncertain
Having looked at positioning with respect to the past, it is of course crucial to look to the future. Cooke et al are right to say that UK politics will continue to be dominated by the need for deficit reduction for some time and probably until the next election.
A Labour government would have made tough cuts – at the very least those set out in the painstakingly agreed Budgets of 2009 and 2010, often referred to as Alistair Darling’s deficit reduction plan. And that would have been revised one way or another as time went on.
But our essential argument that deficit reduction is achieved only by cutting back – while all other countries are doing the same – is an insane way to reduce the deficit and maximise the cost in terms of unemployment must continue to be made. In economic terms, if there is still an output gap then the economy can cope with more demand without inflation taking off, and most analyses shows that there is such a gap.3 The UK, outside the single currency (and so able to devalue), and with a profile of debt that means there is less need for refinancing in the short term, would not collapse with a bit less front-loaded debt reduction – something even the Lib Dem leadership apparently understood until their view miraculously changed post the election.
Should Labour be precise about what it would cut? Nearer an election it will have to be a bit clearer – but I see that as much for political reasons as economic. In government, until you actually start cutting it is hard to know how to go about things. In opposition it is even harder. Getting into precise arguments about exactly when a Labour government might want to eliminate some measure of the structural deficit (itself an artificial construct) is not a sensible way forward. Better than a fully worked out alternative set of budgets (and I still bear the scars of the infamous Shadow Budget of 1992) is something closer to the illustrative switches of the 1997 campaign – although today they will have to add up to a bit more than the tens of millions that those represented.
Another thing to be clear about is the obvious but oft-ignored fact that the future remains uncertain. The Coalition’s policies have unnecessarily set back the UK economy. Of course it was going to be tough and was made harder still by the euro crisis and the failure of the US to rebound hard. But domestic decisions have caused havoc that were not necessary nor fair; far too much Coalition policy has the feel of an ideological drive to use fiscal opportunity to shrink the state.
But having said that, my reading of history is that bounce-backs do happen in market based economies and the UK will be no different. At present it is hard to see a way out of the current predicament but nobody should ever take economic forecasts beyond a year out too seriously – all macro forecaster can do, be they the OBR, IMF or Bank of England, is to suggest reversion to long run means. And that is almost certainly not what will happen. So agility in economic policy is important – getting stuck into positions this far out from an election is not wise even if you have to take some stick from commentators and others in keeping that flexibility.
In opposition you do have to go with the flow. If the zeitgeist is against you it usually pays to swing at least a bit with it. Keynesianism is hard at present and (any) government is unpopular. Nevertheless it is dangerous to concede too much ground be that around Keynesianism itself, the Labour record, the idea that spending is an important ingredient of achieving social and economic goals, and implicitly that the state is an important player in the quest for progressive values.
Fiscal sense, and avoiding fiscal mistakes and laxity is a must. Serious lessons need to be learned from the financial crisis not least about being more cautious on both tax revenues and what the state can and cannot afford to fund sustainably as we go forward.
Strong discipline is needed to stop opposition spokespeople suggesting in every word they utter that they would spend more, reverse every cut, and spend the same saving three times over. And Labour would benefit more than the Tories from having a genuinely powerful Budget Office along Swedish lines and replacing the OBR with something much more credible and genuinely independent. We ought to reframe the fiscal rules to make them both more intelligent and binding and at the same time illustrate how malleable Osborne’s position really is. We need to be honest about the real challenges to the country’s long-term fiscal position that things like global tax competition, an ageing population and increased pressure on health services bring – without succumbing to the pitch that Cooke et al go for which is that we cannot really spend in various social areas at all for the “foreseeable future”. We might even want to look again at nominal GDP targets for the Bank to replace crude infalation targets.4 But if the aim is to win elections, and create jobs and equity, then fiscal conservatism is no better in the hands of the left than in the hands of the right.
In 1983 Labour was in a desperate state. We were totally mistrusted on key issues like inflation and unemployment. We took too long to modernise and change and we, and the people we care for, suffered. The defeat in 2010 was grim and it was about a loss of economic credibility which we will have to fight hard to get back. But it was not of the degree suggested by the authors of ‘In the black’. We need to think, act and present ourselves intelligently, respecting where the electorate is at, at present. But we don’t need to go over the top.
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
Dan Corry is a former Downing Street and Treasury economic adviser
References:
1: Dan Corry, Anna Valero and John van Reenen, “UK Economic Performance since 1997: growth productivity and jobs”, Centre for Economic Performance, LSE, November 2011 http://cep.lse.ac.uk/conference_papers/15b_11_2011/CEP_Report_UK_Business_15112011.pdf
2: Dan Corry, “Labour and the Economy, 1997–2010: More than a Faustian Pact”, in Reassessing New Labour: Market, State and Society under Blair and Brown, eds Patrick Diamond and Michael Kenny The Political Quarterly Volume 81, Issue Supplement s1, pages S123–S139, September 2011.
3: Dan Corry, Anna Valero and John van Reenen, “UK Economic Performance since 1997: growth productivity and jobs”, Centre for Economic Performance, LSE, November 2011 http://cep.lse.ac.uk/conference_papers/15b_11_2011/CEP_Report_UK_Business_15112011.pdf
4: Dan Corry and Gerald Holtham, Growth With Stability; Progressive Macroeconomic Policy, IPPR, 1995 London.