Friday, 25 July 2014

What does Labour's commitment to Tory spending plans mean?

Andrew Fisher, author of The Failed Experiment, analyses the Labour leaderships' economic strategy

At Labour's National Policy Forum (NPF) last weekend, Ed Balls triumphantly declared:
"Party members have endorsed the tough fiscal position Ed Miliband and I have set out. We will match the government's overall day-to-day spending totals for 2015-16."
As he said those words I wonder if part of him recalled the 'Bloomberg speech' he gave when running to be Labour leader. In that speech he described the coalition government's day-to-day spending plans as:
"unnecessary, unsafe for our economy and unsafe for our public services too."
Now apparently they are, as a good New Labour politician might say, "the right thing to do".

I think Ed was right in 2010. But it reminds me of a joke about the devil convincing politicians to choose hell over heaven. When the politician chooses hell and realises it to be just that, he says:
"I don't understand. Yesterday I was here and there was a golf course and clubhouse, and we ate lobster and caviar, drank champagne, and danced and had a great time. Now there's just a wasteland full of garbage and my friends look miserable. What happened?"
The devil looks at him, smiles and says, "Yesterday we were campaigning ... Today you voted."
Ed Balls' devilish tricks didn't work on the Labour Party electoral college, but last weekend in Milton Keynes they seem to have worked on all the leaders of the major trade unions affiliated to Labour. At the NPF, the union delegates of Unite, Unison and GMB all voted to back Labour's pledge to extend austerity for an extra year if Labour wins. One can only imagine the confusion in their member's minds as their leaders back them to strike against austerity, but welcome Labour's embrace of the same policies for 2015-16.

It was left to member delegate George McManus along with a few fellow members and the BECTU union delegation to mount an honourable but ultimately futile rearguard action. Left Futures covers the NPF story

But what does it mean that Labour has endorsed Osbornism for an extra year? Firstly, it's an insult to the people who have voted to kick out the Tories that they will be lumbered their policies for the first year. And once you've stuck to austerity for one year, it means breaking from that logic will be that much harder.

As Ann Pettifor and Jeremy Smith point out in a must-read article, it also reveals a wider paucity of economic thinking in the Labour leadership. In fact they sound a poignant warning:
"Mr Miliband and his colleagues would do well to remember the fate of the 1929 to 1931 Labour Government. Its binding commitment to “balanced budgets”, and its genuflection before classical economics, caused its outright collapse and the disintegration of the Labour movement."
Even if the union leaderships could be bought off last week, it's unlikely that their hard-pressed memberships will be when facing another year of falling living standards and the threat of redundancy or privatisation.

The most important thing though is what will this mean in real economic terms. And the chart below, from the OBR, shows that it means a falling share of national wealth going to public services, including the NHS and education.

But while a falling share based on the assumption of rising growth may not imply real terms cuts, it is not as if there are not significant financial difficulties even in the supposedly ringfenced NHS budget. Remember, the Blair/Brown governments increased NHS spending as a share of GDP from one of the lowest health spends in Europe to the European average.

As the table below (again from the OBR) shows, departmental expenditure limits (RDEL) are going to fall by over £5 billion in 2015-16. So while the last three years have actually seen a roughly constant level of expenditure, from 2015-16 severe cuts are forecast:

You might think 2015-16 isn't that bad and the shackles come off in future years, meaning Labour can deviate from Osborne's plans from 2016-17 onwards. However, as Pettifor and Smith point out the two Eds are further committed to not just balancing the books, but creating a surplus on the current budget, and getting the national debt falling.

To put wider this in a wider economic context, the OBR helpfully produce this chart showing government consumption as a contribution to UK GDP. The drop from the Major/Blair/Brown years to Osborne's austerity has been severe, but government consumption is forecast to be a drag on growth for 2013-2018.

Labour's commitments mean that they are sticking to austerity throughout their term of office, even if they moderate Osborne's sharp downward trajectory. And don't forget that the last time Osborne tried this level of contraction (2010-12) it failed and he moderated it himself, but in doing so he kicked the can down the road and deferred the sharpest cuts for 2015-18 - cuts which Labour now accept in part, having welcomed his moderation!

In the early days of the coalition government, Labour was relentlessly saying that the government was "cutting too far, too fast". Yet just as austerity accelerates back to and beyond the levels of 2010-12, Ed Balls now endorses the policy. 

In reality, even if the Conservatives won outright the 2015 election, it is doubtful that he could deliver the level of harsh austerity scheduled for the first half of the next Parliament. This final OBR graph shows just how unprecedented is the level of cuts still to come:

If there is one saving grace to Labour's spending plans it's that they have excluded capital investment from their austerity spending commitment. And so the next Labour government is fiscally free to splurge from day one on council housing, renewable energy, high speed rail and all the other infrastructure investment the UK desperately needs.

The problem is though that infrastructure spending on any scale takes time to be realised - and will be cold comfort for losing their jobs and failing to see any rise in living standards.

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