Labour’s austerity bind

Labour allowed everyone to give its spending plans whatever name they liked, writes Hopi Sen

On 2 November 1948, Hansard records that Michael Foot told the House of Commons, ‘I have not seen much of this eager enthusiasm among members of the Conservative party to support the austerity drive of the chancellor of the exchequer’.

If you want to understand the politics of austerity, you can do a lot worse than forgetting John Maynard Keynes just for a moment, and instead pick up a copy of Alice Through the Looking Glass.

Humpty Dumpty would have made a great political adviser. He understood that in politics a word can mean just what you choose it to mean – neither more nor less.

After the second world war, Labour was the austerity party. The chancellor, a former public schoolboy who used his middle name rather than his first, was severely attacked for his attachment to austerity. His opponents argued that his tight approach hurt families by continuing rationing, unnecessarily denying them anything more than the basics of a life.

Richard Stafford Cripps responded to these attacks by arguing that, while his economic strategy might involve sacrifices in the short term, it would secure prosperity in the future. The chancellor even produced a ‘long-term programme’ which was described by the civil servant responsible as ‘Britain’s first ever long-term economic plan’.

The language of these austerity debates feels familiar, but the austerity that Stafford Cripps was attacked for was a completely different economic and political concept.

As Jim Tomlinson wrote in the journal Renewal, back then austerity meant ‘holding back the growth of private consumption’. The postwar political debate was not about the national debt, but controlling demand. The Conservatives wanted to ‘set people free’ from limits on their consumption. Labour wanted to direct those resources to investment and exports.

So when we talk austerity today, remember that the word can change meanings. It can be slippery.

It is easy to see how this happens. Even the best writers on austerity can leave readers with questions about the very concept.

For example, while setting out how austerity damages growth in his pre-election essay for the Guardian on the ‘austerity delusion’, Paul Krugman argues that the coalition government ‘essentially stopped imposing new austerity measures after its first two years’. He also tells readers that the last year of major spending cuts was 2013.

Similarly, the leading British economist Simon Wren-Lewis said in December 2013 that ‘the recovery we have had has followed a suspension of austerity’.

The recovery has continued ever since, and yet Wren-Lewis has recently concluded that, ‘If Labour is to have any hope in 2020 it has to start attacking Osborne’s unnecessary and obsessive austerity, as well as getting the past history straight’. A casual reader might wonder how George Osborne can be unnecessarily obsessive about the austerity he suspended nearly two years ago.

Of course, Krugman and Wren-Lewis are not saying austerity is over. The pace of deficit reduction slowed after 2012, and it is this both are referring to when they say austerity was stopped or suspended.

But if experts on austerity can use the word for a range of meanings, what do the rest of us mean when we say a party ‘opposes austerity’ or ‘accepts austerity’?

Ask people in the street, or on a march, and I suspect a lot of the answers will be about spending cuts. In politics, ‘spending cuts’ and ‘austerity’ are often used almost interchangeably.

However, the measure Krugman used in his Guardian article is more precise: ‘the average annual change in the cyclically adjusted primary surplus.’ The higher the number, the higher the austerity.

This is a calculation of both income and expenditure. In other words, a tax increase that raises a billion pounds increases austerity, unless that money is spent elsewhere.

This has immediate relevance for the Labour party. The new shadow chancellor, John McDonnell, wrote last month that: ‘We accept that cuts in public spending will help eliminate the deficit, but our cuts won’t be to the middle- and low-income earners and certainly not to the poor. Our cuts will be to the subsidies paid to landlords milking the housing benefit system, to the £93bn in subsidies to corporations, and to employers exploiting workers with low wages and leaving the rest of us to pick up the tab’.

If this is correct, then instead of public spending reductions, McDonnell is proposing tax increases. As we have just seen, this would be a change in the composition of austerity, but would still be austerity, in the Krugman definition.

Our new shadow chancellor is not an advocate of austerity, of course. He simply has a wider conception of what ‘austerity’ really means than simply the cyclically adjusted primary balance.

For McDonnell, it is clearly possible to impose economic austerity while opposing political ‘austerity’. This is because it matters a great deal to him where the money comes from, and where it goes to. He is absolutely right to care about this. Distribution matters.

Choices about tax increases and spending cuts change people’s lives and public services. This is why shifting the balance between spending cuts and tax increases was a major part of what Ed Miliband and Ed Balls were planning if Labour had won the last election.

The Labour manifesto pledged to cut tax breaks for wealthier pensioners, tax mansions, increase the top rate of tax to 50 per cent, tax banks more and raise £7bn from tax loopholes. The total effect would have been, according to the Institute for Fiscal Studies an ‘increase in revenues of 0.7 per cent of national income by 2019.’

That is austerity through raising taxes. It is exactly what McDonnell proposed this summer, even though he seems to think his points contradicted the ‘dominant economic thinking’ of the Labour party.

The difference, I would argue, is that the manifesto numbers are more realistic. It is not as easy as all that to remove £93bn in tax allowances. Especially when you are already proposing to spend that same money ‘to establish a National Investment Bank to head a multibillion pound programme of infrastructure upgrades’.

Remembering that tax revenues are just as crucial a part of austerity as spending plans also helps explain why the Scottish National party are no radicals. Their tax-raising plans were almost the same as the Conservatives’, as Office for Budget Responsibility data has shown. How come? Because they were planning a £3bn tax break for businesses.

There is another reason this matters. As Wren-Lewis pointed out in 2012, the growth impacts of raising taxes and cutting spending can be very different, even when the cyclically adjusted primary balance is roughly the same. Cut public sector wages rather than pensions tax relief and the economy will respond differently. These choices matter.

The other essential question of austerity is timing. Before the general election, the Tories were proposing a sharp drop in borrowing over the next two years. Labour rejected this.

The difference was hugely significant. If we had won the election, we planned to increase total spending each year in real terms, ending the parliament with total spending more than £40bn a year higher than the Tories.

Far from accepting a Tory ‘austerity narrative’, Labour planned to do things very differently indeed.

A Labour government would have taxed more and spent more than the Tories and the SNP. That would have meant more money for public services in real terms, and the richest paying more, and no slashing of tax credits.

What is more, after the election, Osborne slowed the pace of deficit reduction, increased spending and cut taxes. Once again, he ‘suspended austerity’ to secure growth, as Wren-Lewis put it.

If anyone was ‘conceding the economic narrative’, it was the chancellor. Worse, being a Tory, he gave the rewards to the corporations, and the bill to the workers.

Labour was in the perfect position to claim credit for the fiscal step back to sanity, while attacking twisted Tory priorities. Osborne had conceded we were right on growth by moving his fiscal policy closer to ours, but had hurt the poorest while rewarding big business.

Instead, it allowed everyone to give its plans whatever name they like. For some it was austerity. For others, waste. We did not claim words for ourselves, either. Perhaps we could not be prudent, but we might have been the investors, or the innovators.

Rather, we were just what the Tories were not. If there is one thing Osborne knows, it is how to make that uncomfortable. He has learned to use the language of austerity any way that suits him. Perhaps he had understood Lewis Carroll’s other good political advice: ‘“The question is,” said Humpty Dumpty, “which is to be the master – that’s all.”’

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Hopi Sen is a contributing editor to Progress

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Photo: Arthur Boughey/National Archives

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Comments: 2...

  1. On September 24, 2015 at 5:44 pm Trebor123 responded with... #

    The Guardian article should be mandatory reading for all Labour MPs! It unpicks much of the mythology that has appeared since 2008 and highlights how most politicians, the IMF and the media were perhaps initially misled but continue to push historic theses, even after their primary sources have since been discredited and their predictions have proved erroneous.

    http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion

    There are several factors, implicit in the article, that should make many MPs, of all parties, uncomfortable:

    1. Relative innumeracy, among MPs, is not something to be proud of but many appear to regard this as virtually a badge of honour. The consequences, when in a position of power, such as a Ministry include:

    a) The inability to properly evaluate risk – fixating on insignificant but exotic risks, while ignoring more significant but mundane risks.

    b) Confusing correlation with causality and misunderstanding conditional probabilities.Both (a) and (b) allow for the possibility of the individual being easily fooled or misled on a regular basis.

    c) An inability to present a coherent and logical position, rather than an emotive or rhetorical one. Good briefing by Civil Servants can only take you so far, when up against those less deficient in this area. Blustering and repeatedly refusing to answer questions appears to be the favoured approach but can and does sometimes backfire.

    2. A perception by the public that many, if not most, MPs are lacking in integrity and basic honesty. The default position is to assume that much of what they tell you is going to be partial at best, or dishonest to varying degree.

    Some of this criticism is justified when politicians are seen to avoid answering the most difficult questions on tax and spend, or planning beyond a 5-10 year horizon. Tax will almost inevitably have to be raised, in order to support the demographics of an aging population and Should also be raised when there is an economic boom. Politicians shy away from these realities, having reduced some forms of taxation, significantly below their optimum revenue generating levels, and are now afraid to say that this was a mistake.

    For the Tory argument to be logically consistent: that Labour should have saved more in the good times, in order to be prepared for the 2008 downturn, there would have only been two ways to accomplish this objective: raise taxes and/or reduce spending. Conservatives were, at the time, advocating greater defence spending, broadly similar expenditure on education and the NHS and with no significant proposals to cut pensions, welfare or other areas that would significantly impact the budget.

    The rational solution, from both parties perspective, would have been to raise taxes. However, ideological constraints prevented this, in the case of the Conservatives and Labour have a case to answer. Was it fear, of how this would be perceived, overconfidence that the economy was never going to falter, as a consequence of either domestic, or external, events?

  2. On October 1, 2015 at 9:43 pm BKendler responded with... #

    The article is right. In politics, words mean what the speaker or the recipient choose them to mean. Austerity derives from the word austere or plain. In economic terms it means living without things, sometimes necessary things due to tight financial constraints. In World War 2 the War Department ordered a fleet of 2-8-0 goods engines classified WD (War Department) but universally known as “Austerity”engines. They were severe looking, no effort to make the engine look good. Since 2008 we have not really had Austerity. Shops still sell and people buy. When Dalton and Cripps were Chancellor people were rationed and matters were grim. My Mum could not get enough coal to keep her home warm during the winter of 1946-47 because of rationing. That was Austerity. What we have today is not Austerity except for the public sector. What we’ve had is a root and branch attack on public services hidden by an argument that the nation must cut to reduce the national deficit. It is an economic debate but, while I am concerned that the Leader and the Shadow Chancellor may have a credibility problem on the economy I do think that the Centre and Centre Right of the Party have seemed like rabbits caught in headlights about austerity and the rate we cut the deficit.
    The Economist, recently, almost said that having a national deficit at 3.2% of GDP is a safe position which implies that further cuts are unnecessary and possibly deflationary. We need to develop a narrative that reassures the British public that it is safe to borrow, especially of the investment is in housing and infrastructure. The revenue benefits will be enormous. The current Government, stupidly in my view, have cut social housing rents and forcing RSL’s to sell social housing which will further cut the pathetic supply of affordable housing. While that will drop the pressure on DWP re: the HB bill what the Government have missed is that if they pushed up the supply, just as Harold Macmillan did in 1952 of social housing and rents dropped that would stop the overheating in the private rented sector and drop the HB bill more effectively than strangling affordable housing supply. It shows the Tories (inc Osborne) are economically illiterate. Labour have had a feeble response on the economy over the last 5 years it’s time to wise up.

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