The state of Labour’s fiscal debate

Across different Labour circles there is a rumbling debate about the type of fiscal policy that should be adopted in response to George Osborne’s fiscal rules. It’s an important issue that tells us much about the troubled state of the party.

On one side are economists who argue that targeting an overall fiscal surplus, as the government is committed to doing, is simply bad economics. They highlight that borrowing for productive investment — which the rule prevents — can often be sensible; never more so than in today’s investment-deprived Britain when the Treasury can raise funds at a rock-bottom 1.6%. Tethering the possibility of a looser fiscal stance to GDP growth falling below 1%, as the Chancellor’s rule does, is highly arbitrary. And given the lack of room there is for monetary policy to respond to an economic slow-down, the idea that fiscal policy should be unduly boxed in is particularly foolhardy.

Labour’s fiscal rules at the last election — centred on hitting current balance before the end of the Parliament — may not have been perfect but, the argument goes, were broadly sensible. Some version of them should accordingly be maintained.

All this is met with something like scorn by others who start from a more political perspective. They point out that Labour was viewed as fiscally incredible at the last election and things have got worse since. The party comprehensively lost the debate on the economy in general and on the deficit, tax and spending in particular. Sticking to the same fiscal approach will, it is claimed, lead to the same result.

These two sides speak past each other. Both are right, and wrong, in important respects.

To build your political strategy on a position that you privately believe to be economically misplaced is unwise (and the list of critics of the surplus rule keeps growing: the Economist, the FT, the Treasury Select Committee to name a few). John McDonnell fell into this trap when he initially supported the Chancellor’s target before later recanting. Some Labour moderates stick to this position, though you tend not to hear them defending a commitment to running permanent surpluses on economic grounds. It’s a hard argument to sustain.

But leaping from the economic shortcomings of the government’s surplus commitment to the political judgement that the central lesson of May 2015 is that Labour needed a more stridently anti-austerity ‘narrative’ is to commit a grave error. The idea that this was the blockage to Labour winning over the voters who swung the last election is without foundation. And it’s not just an electoral mistake: it also distracts attention from the underlying issue of the gap that existed between Labour’s fiscal stance and its governing posture.

Turn the clock back eight months and recall that Ed Balls’ fiscal policy would have meant that a Labour government would have had to cut spending or raise taxes by far less than the Conservative’s — roughly £40bn less. That’s a big number and think-tanks like the Resolution Foundation and the IFS, along with the media, not surprisingly highlighted it: the claim that there was no real difference between the parties was always risible. (Note, however, that post-election George Osborne reduced the scale of his cuts and we’ll never know how Chancellor Balls would have reacted to the OBR’s ‘windfall’ last November: arguably his looser fiscal stance would have meant he would have felt more pressure than George Osborne did to use this headroom to reduce the size of the deficit, thereby chipping away at the size of the difference).

The bigger truth, however, was that — despite this big gap — Labour would still have started the Parliament signing up to what would have felt like years of unremitting fiscal restraint. It faced the likelihood of a whole Parliament of no (or very modest) increases in public service spending (meaning deep cuts in some non-protected areas) amid population growth. Much less severe than George Osborne’s plans, but bloody all the same.

A herculean effort would have been needed for a Labour administration to live within its own fiscal limits while achieving key progressive goals. Relatively little, however, was done over the life of the Parliament to convince the electorate it had what it took to govern successfully in these circumstances. There would have had to have been widespread public service savings; a constant flow of low-cost, service-improving innovations; and a resolve that the state would have to change shape, shrinking in some areas to generate head-room in others.

Yet these themes never really animated Labour’s politics. Creative solutions pioneered by leading Labour cities weren’t put up in lights to illuminate the path ahead. Decisions weren’t taken that would have helped create a sense that Labour was ready to walk through the fiscal fire that even its own rules implied. Big ideas about how the state should operate in straitened times didn’t materialise.

Sure, if you go back through the speeches of the leaders you will find lines making clear that some tough choices lie ahead and late on some specific cuts were proposed. But the shortcoming wasn’t what was said during the election campaign: it was about whether, over the whole Parliament, a political identity was forged that suggested the party would be diligent stewards of tax-payers’ money. That vital electoral sniff-test wasn’t passed. Voters knew that whoever won things were going to be tough: inevitably they formed a judgement on Labour’s readiness for that task. And because Labour was in such a defensive posture on this whole issue, it ended up lacking the confidence to make a future-oriented case for the growth-enhancing investments that its fiscal rules would have permitted.

All this is, of course, ancient history. Except it’s still depressingly relevant. The new orthodoxy is that the key task is simply to raise high the banner of anti-austerity politics: the language of priorities is now a hallmark of betrayal rather than the religion of socialism. Pitted against this are some who feel so utterly defeated on the economy that they would sign up to a damaging fiscal rule that they don’t believe in.

Both are blind-alleys. No opposition will be remotely in contention until a critical mass of the public judges that its instincts as well as its policies mean it can be broadly trusted on public spending and tax. As for the idea that you can take a short-cut to fiscal credibility via a gruelling surplus rule? That would only replace one type of error with another.

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