Let’s be honest; we all know that cuts are coming

The Times today leads on the fact that the Civil Service are preparing ‘doomsday cuts’ of up to 20% in public spending in order to get government finances back in order after the next election. Prime Minister’s Questions of course has focussed on little else in recent weeks but the increasingly desperate struggle on both sides to open up clear blue water between investment or cuts on the Labour side, or parsimony versus profligacy on the opposition benches.

Whatever your position on the political spectrum, the size of the budget deficit is truly worrying. This year alone, public spending will constitute 48% of GDP yet only 38% of GDP will be raised in tax receipts. That gap, an eye-watering 10% of GDP, has to be met by borrowing, something that is contingent on people wanting to continue lending money to us. The signs here are looking less than favourable.

In the first instance let me be clear that I think that the counter-cyclical spending is necessary; the aggressive actions of the Government have undoubtedly lessened the impact of the contraction. To paraphrase the Nobel laureate economist Paul Krugman, ‘public debt bad, economic depression worse.’ So, in this instance, the Tories incessant bleating about the size of the national debt misses the point*. However, politics cannot exist independent of economics, nor can economics ignore politics; confidence in the political system reinforces confidence in markets and vice versa. In short, it’s the deficit stupid. In setting up a false argument, and seeking clear ground between ourselves and the Conservatives we are not only abandoning the centre-ground; we risk playing fast and loose with Britain’s solvency.

And I don’t make this claim lightly. The first duty of any government is to be an effective steward of the nation’s finances. Labour must start to face up to the facts now that we are going to have to pare back spending; pet projects will have to be put to sleep, the credits cards will have to put cut up, and we will have to face an era of living within our means.

Whilst all this is happening, let’s not talk about another bankers ramp, or treat commiting ever larger slabs of money to public spending as a test of virility. And let’s not go for easy or politically palatable targets; Trident for example is actually surprisingly good value for money constituting only 3% of the defence procurement budget. Besides, defence spending only makes up 5% of public spending so talk of defence cuts all you like but even spending nothing on defence would still leave a massive hole in public finances.

We need to grit our teeth and look at the three biggest areas of spending; welfare, health and education. These are areas of great achievement for the government but we shouldn’t be blinded into thinking that things couldn’t be run more economically or that every penny spent has achieved value for money. And in the coming age of austerity, value for money is what will count.

In short, the till is nearly empty; let’s face up to cuts now rather than offer a false prospectus of ever-increasing spending. The public don’t buy it and neither should we.

______

*Besides, much of the debt was accrued taking stakes in banks that will eventually be resold, hopefully at a net profit to the taxpayer.

Revisiting Ramsay MacDonald

In the history of the Labour Party, no one is quite as reviled as the ‘turncoat’ PM Ramsay MacDonald. In the face of the Great Depression, rising unemployment, and a growing budget deficit, MacDonald proposed cutting public spending and raising taxes to defend the currency and balance the budget: this saw the collapse of a Labour government (and near destruction of the Parliamentary Labour Party) and in so doing furnished the left with one of it’s most treasured legacies: that it is only through betrayal that socialism has never been realised. Moreover, it explains the psychology of how Labour is responding to the current crisis.

Keynesian economics gained much credence in the wake of what was seen as MacDonald’s austere deflationary programme: thus the idea that ‘something must be done’ in the current crisis is perpetuated. That Keynesian economics (at least as practised) was ultimately proved wrong, that purchasing a little economic stability now stores up huge dislocations later, and that in trying to pump-prime a retail sector bloated will only perpetuate the causes of instability seems beyond the point: the most corrosive element of Keynesian thought to make a comeback is the obsession with the short-term. Rather than focussing on how to keep unemployment low today, the focus should be on what will create the new jobs of tomorrow. UK R&D spending, along with productivity, lags behind other developed countries and it is these that will impede a recovery when it comes.

The most apposite comparison is Germany (which recently dismissed the pre-budget report as irresponsible). In the post-war period Germany focussed on having a stable currency and low inflation. Britain focussed on Keynes instead, and set eye-wateringly low level of unemployment as the primary macroeconomic target. This came at a huge cost in terms of productivity which ultimately led to the collapse of much of UK manufacturing. We are in danger of making the same mistakes now in response to the credit crisis, and though it is painful for a Labour supporter to admit, we may see the destruction of a reputation for economic competence that New Labour worked hard to achieve as a Labour government once again approaches the exit door with high unemployment, a devalued pound, and a budget deficit running out of control.

So, what is to be done? I cannot claim to have any easy answers, but given a historical trade deficit something must be done to return the UK to a position of being a net exporter. We can only finance more debt if there is a prospect that we will, as a nation, have the means to service it. This means supporting innovation, cutting regulation and taxes where necessary, and promoting research and development. It also means updating Britain’s dilapidated transport infrastructure. This however, may all prove to be academic.

The continuing collapse in the value of the pound predates the news that a second bailout may be required for the banking sector. How this bailout is financed is important. It has been calculated that the UK’s external debt is now 400% of GDP so extra borrowing is going to be extremely difficult to finance unless you consider the politically toxic option (for Labour) of going cap-in-hand to the IMF (there is the other option of ‘quantitative easing’: printing new money like wallpaper in laymen’s terms but how this prevents a further slide in the value of the pound is beyond me). So, if the economic situation worsens and more specifically liquidity in the banking system dries up, Labour will be faced with the option of cutting public spending dramatically or bankrupting the country. Faced with that alternative, it might seem that Ramsay MacDonald wasn’t so wrong after all. Would the left admit as much? Of course not. However, it would be a pyrrhic victory for orthodox economics if this came to pass.

5 reasons not to vote Labour

After the mammoth last post, this one will be shorter, I promise. Anyway, I was just revisiting some of the impressions that voters had of the party in the early 1980s that made it so unelectable. The top responses by lapsed Labour voters for not voting Labour were:

1. Extremism (commitment to widescale nationalisation, general Militant dicking-about).

2. Trade Union domination.

3. A lunatic defence policy (unilateral disarmament).

4. Weak leadership.

5. The perception of being against aspiration/not caring about the economy.

Certainly something to think about, especially by those who would rather retreat to the comfort of a full-blooded socialist programme. The dangers of talking to ourselves rather than to the public, searching for some elusive ideal of a true faith rather than understanding the hopes and concerns of the average person, have been amply demonstrated in the past. We repeat them only at a great cost to ourselves and the country.

How to lose an election

John McDonnell and his cohort are piping up with a recipe to save Labour from disaster with a petition for a ‘May Manifesto.’ One thing that amused me when I Googled this was being asked the question, ‘did you mean McDonnell Mau Manifesto?’ A wise search engine that Google…

As a highlight, here are some uncosted policies for starters:

1. An increase in the basic state pension, immediately restoring the link with earnings, lifting people off means tested benefits and providing free care for the elderly.

2. An immediate start on a large scale council house building programme and assistance for those facing repossession.

3. Immediate end to programme of local Post Office closures and liberalisation of postal services

4. An end to the privatisation of our public services.

5. A new pay deal for public sector workers to protect their living standards and tackle low pay.

6. Abolishing tuition fees and restoring maintenance grants for all students

7 and 8 were something about more days of sunshine and a free puppy for everybody to stroke. That said, I’ll put my hand up and say that some of the proposed ideas, such as looking at defending agency workers and scrapping ID cards, are sensible.

As for Post Office closures, it’s a populist point to oppose them but usage patterns are changing: people always express a preference to have a local Post Office but when you ask them the last time that they used it, they rarely remember. Certainly there is a case for some level of provision, but the Government cannot simply spend the sums it is currently spending to keep open offices that have 5 customers per day: it’s not sustainable.

On tuition fees, we inherited a HE sector in crisis in 1997: in twenty years, numbers had increased by 45% whilst per student funding had fallen by 40%. A difficult circle to square. Again, nobody likes paying for something but by and large tuition fees are reducing some of the drain on central funds so there is more money to do top class research. On top of that, they are not regressive (as some would suggest) as they are also freeing up money for bursaries for the poorest students.

We can all probably agree that it would be nice to pay public sector workers more, increase pensions, scrap tuition fees or provide more social housing. But the problem, as I say, is that these plans are uncosted. It is a hall-mark of McDonnell, and an innumerable number of well-meaning people before him, to make repeat demands on the public purse without any clear idea of how to pay for it. There is, of course, mention of ensuring that the wealthiest and corporations pay their fair share but given the levels of mobility in the world today, punitive tax rates will simply mean that the rich leave the country and corporations relocate. Hardly a recipe for success.

The necessity of New Labour

Compass [1] amongst others are proclaiming the death of New Labour. They, amongst others, claim that a shopping list of new policies (or rather reheated old policies) such as more redistribution via punitive tax rates and renationalisation of the railways are what is needed to get Labour back on track towards winning a fourth term. They say that we should accept the fact that the South East is naturally Tory and go back to energising our core who seem to being peeled off by parties to the left (if the success of numerous socialist parties in Wales is anything to go by). We may not have liked New Labour, they say, but we could stomach it as long as it was winning elections. Now it doesn’t even do that, it’s time to return to a full-blooded socialist agenda.

There are several things about this argument that are wrong: firstly, New Labour wasn’t just about winning elections, important as that is. Besides, even if it was this argument tends to be based on the fallacy that New Labour targetted the middle and aspirational working classes at the expense of the core vote. It didn’t: it had policies that appealed to both. The need to maintain our position on the radical centre is as important today as it was in 1997 if we want to hold off the Tories in the south and the various attacks from the left elsewhere. Ulimately, disunity now will lead us back into opposition for a generation and that will be a disaster for the people we all entered politics to help.

However, as I say, my point isn’t about elections alone. New Labour was born out of a reading of the history of previous Labour governments: you only have to look at this history to see how, even with the best of intentions, Labour ultimately let down those people we entered politics to help. Whether this was done by having unrealistic policies or plain irresponsible attitudes towards the management of the economy, the fact remains tht Labour acquired a reputation for being an economic disaster zone.

So, where does this leave us today? As the title of the blog suggest, I think that New Labour is still absolutely necessary. It’s necessary for people who want low and stable interest rates; necessary for the people who need help to find work; necessary for the people struggling to raise a family on a low income; necessary for those who are sick, or infirm; necessary for those people who need a good local school for their child. We abandon these people if we think for one minute that ideological purity is more important than getting things done on the ground. We abandon them by wallowing in self-indulgence rather than trying to rebuild a progressive, election-winning, coalition.

The lesson of New Labour is that social justice and economic efficiency are compatible: the trick is to find new policies that are both popular and don’t undermine confidence in our ability to run the economy. The thing about modernising is that it never stops: the needs of 2008 are different from the needs of 1997. We have to reflect that in policies that recognise the hopes and aspirations of people here and now. I for one entered politics to make life better for the vast majoirty of people, not to prove my left-wing virilty.