The UK has just experienced a deep recession and government debt levels have risen. At some point, and to some extent, spending will have to be cut (see my article in the latest Progress magazine). Ultimately, growth is the answer but that doesn’t mean keeping government spending at current levels indefinitely.
After the financial crisis, GDP fell 6.6 per cent from its peak. It is still down 4.8 per cent. Unlike past recessions, many sectors of the economy experienced a large drop in confidence at the same time. Labour in government responded, by preventing the banking sector from collapsing and with measures to stimulate the economy. Failure to do so would have seen us in a Depression, with even basic payments systems unable to operate.
These measures cost. The bailouts and the stimulus measures increased the public debt. As the business and household sectors adjusted their balance sheets by cutting borrowing and investment, so the government balance sheet had to adjust (towards a larger deficit). Rising unemployment triggered ‘automatic stabilisers’ ie. more people claiming benefits injected a stimulus into the economy. The increased public debt has to be reduced at some point. Can we not do this with growth?
The official estimates of GDP growth for the second quarter of this year surprised economists on the upside, at +1.2 per cent. Borrowing figures this year seem on track (and in July were lower than expected). The deficit in 2009-10 was £23 billion less than expected in December as government spending under Labour helped growth and unemployment did not rise as much as feared. It would seem that growth can indeed cut debt levels. Over the summer, markets reacted to fears that there may be a ‘double dip’ recession. The outlook is uncertain yet a look at the recoveries of the early 1980s and 1990s shows that economies do not return to growth in a straight line. The odd quarter of negative or lower than expected GDP growth should not be a surprise.
It is here that we need a reality check. Labour should not base its entire economic strategy on expectations of another recession. The underlying evidence has yet to point to that. For example, although the claimant count rose 2,300 in August, that month also saw the largest quarterly increase in employment for over 20 years. It is not surprising perhaps that consumer confidence recently dipped, with government talk of austerity. However, a slight improvement in credit availability and bank confidence could lead to a pick-up in consumer spending. The average consumer (ie. still in full time work) has not been as affected by the recession as he or she might have been in the past whereas companies have been paying down debt aggressively. When that slows or stops, vigorous growth could be the outcome (not the view of the conventional wisdom). Under that scenario, the annual deficit will fall faster than predicted, making some spending cutbacks unnecessary (some will never be achieved anyway).
Saying we need an economic policy that promotes growth is not the same thing as calling for existing spending levels to be sustained. We need the stimulus to continue for a while, rather than cut spending too soon and too far for ideological reasons as the Tory-Liberal Democrat government plans. Those plans may seriously limit growth two to three years out. But if we’re thinking about a five year plus economic policy we have to think some more. Such is the scale of the annual deficit that we need a more radical vision to combine with necessary cuts in spending.
The ‘Labour investment versus Tory cuts’ mantra served well for some years but came to seem outdated. Not least it was difficult to sustain when we planned to rein back capital spending aggressively (though in 2009 government investment helped support the economy). Labour left behind a creditable record on investment, such as new schools and hospitals and better infrastructure. Yet we sometimes confuse spending with investment. If we can avoid this, a focus on investing in the future is not a bad approach. The Tory-Liberal Democrat coalition would like us to argue for more spending against their cuts. But instead we should argue for spending to be reoriented towards making the UK more productive. That means more infrastructure development and green tax incentives. It means a stable business tax regime to help businesses plan ahead. It would mean some current spending gets redirected. It should always mean investing in jobs. A Britain with a growing economy and finding its identity as a vibrant trading nation once again should be our goal.
Stephen Beer’s article on a new Labour economic policy touches on a really important strategic question for Labour – what happens if the government’s deficit-reduction plan, one based heavily on cuts, works? I certainly have a nagging and uncomfortable ‘fear’ that the government’s deficit reduction plan may, in time, just do that. That doesn’t mean that there won’t be losers from the cuts that have now been announced. Nor does it mean that the composition of cuts they have chosen were the right ones. However, if in five years time the deficit has returned to surplus and Britain’s financial credibility has been restored, the Labour party will have been – to use a popular phrase at the moment – ‘on the wrong side of history’. There is a historical precedent I think Labour should reflect on, and that is Bill Clinton’s 1993 deficit reduction programme. Clinton was criticised from the left for reducing spending, and from the right for not implementing middle class tax cuts. Clinton’s take though was different – he felt that progressives should aim for balanced budgets- government’s that perpetually run deficits and do not address them give succour to those (on the Right) who want to prove that government can’t pay for itself and is inherently flawed. In this country if the cuts do eventually work that view of the state being ‘flawed’ will resonate with the electorate. In five years time, offered a choice between the Tories’ smaller, partial state but with tax cuts, or the promise of a Labour one that aims to make peoples’ lives better, but one remembered as being unable to pay for itself – which one will voters go for? We will need to be as clear on what we would have cut as much, as what we rightly believe should be spared.
might work ? but most definitely at the cost of five /ten years pain for very many peoples lives probably destroying them .’History ‘has changed,’wrong’ side? good side /bad side ,a very undecided position taking everything into consideration ( and how the energy erm, competition pans out ?) .I think most are aware of the plans Alister Darling had ?