Sunday, 20 March 2011

Keynesian consensus equals a constructive advance

John Grieve Smith says Labour must argue for properly funded investment in the nation’s future

The two key objectives of Labour’s economic strategy should be to reduce unemployment while maintaining and improving public services. That would be in stark contrast to the coalition’s policy of cuts that will increase job losses and cause serious difficulties for education, health and other vital services. As all this becomes apparent, there should be growing support for alternative policies.

The last Labour Government was one of the international leaders in using increases in public expenditure and cuts in taxation to increase demand for goods and services in order to fight the recession. The consequent budget deficits led to extra public borrowing and hence higher interest payments on public debt. But this was money well spent in minimising the reduction in output and employment, with all the waste and personal suffering that involves.

The trouble now is the widespread hysteria about the deficits, exemplified by the Greek and Irish financial crises, as financial markets panic about governments’ ability to meet the future interest and repayment costs of their increased debt. The consequent cuts in public expenditure to boost financial market confidence will prolong, rather than reduce, high levels of unemployment. The latest Office for Budget Responsibility report suggests that unemployment will continue rising until it reaches a peak of 8 per cent next year.

As far as the United Kingdom is concerned, no one should seriously suggest that we are in danger of defaulting on our public debt. The coalition Government does not need to take precipitate action to reduce the deficit when it is likely to exacerbate the unemployment problem. Cuts in public expenditure involve a direct reduction in employment in the public sector and the firms supplying it. In addition, as people lose their jobs and spend less, companies supplying consumer goods and services will suffer – and cut their labour forces.

When we are safely out of the recession, careful action should be taken to achieve a gradual reduction in the deficit. This should not involve cuts in expenditure on public services, but increases in types of taxation which have the minimum effect on employment. Tax increases on people with lower incomes can lead to a corresponding drop in their expenditure. Tax increases on those who are better off may well lead them to dip into their savings in order to maintain their spending on consumption. Moreover, taxes on capital, such as an increase in inheritance tax, may have little or no effect on consumption. So an increase in progressive taxation is the best way to tackle the deficit, with the minimum – if any – effect on employment.

Such an approach would match the public mood of discontent with the growing inequality of incomes, as exemplified by the much-publicised high salaries and bonuses of top bankers and company directors. Britain has the fourth highest level of inequality of all the countries in the Organisation for Economic Co-operation and Development. Again, it seems a safe bet that there will be increasing concern with present policies as local services, such as schools and hospitals, begin to feel the pinch – both from cuts in current spending and delays in new investment.

The size of the public debt would be seen in better perspective if it were more widely recognised that borrowing is the normal way to finance investment in improved infrastructure such as transport, and public services such as health and education. It would help if the Government’s accounts were to distinguish debt arising from new investment and ascribe it to the sectors which are benefiting – for example, education.

Labour is in no way being irresponsible or opportunist if it takes serious issue with the coalition over the cuts. We should make it clear that a Labour government would not be prepared to accept a continuation of the present high levels of unemployment. It would make the reduction of unemployment a key objective in determining its approach to the budget deficit, public expenditure and taxation. This would signify a return to the Keynesian consensus that existed in the days of full employment before Margaret Thatcher’s reign. Such an approach would be consistent with promoting progressive taxation, rather than cuts in public services, as part of a campaign to reduce the current level of inequality and establish a fairer society.

  • John Grieve Smith is the author of There Is A Better Way: A New Economic Agenda For Labour
  • This article also appears in the current issue of Tribune

1 comment:

Anonymous said...

Compound interest doesn't care whether you take it seriously or not. It will keep exponentiating and you will default, whether you take exponents seriously, or not.