13 June 2011

Labour's Credibility Problem

Labour are being labelled 'deficit deniers' because they are not fully backing the demolition of public services being performed by the coalition government. The government backed by the media are claiming that only reductions in spending will reduce the deficit. The public generally agree with this analysis. It sounds sensible. Surely if you are in debt, you have overspent? And surely, the best way to redress this is to cut spending?

This is the 'person' analaogy and quite understandably it works for a lot of people, but let me explain why this is rubbish when applied to government spending.

The TUC has estimated that for every pound spent on employees employed in the public sector the government immediately gets back 84% in extra taxes and lower benefit payments. The extra economic activity of public employees also generates extra boost to the economy which helps the private sector. The key is, if this is larger than the 16% shortfall in immediate expenditure, the deficit will be reduced despite the extra government expenditure. For example a company supported by government agencies or grants might boost exports or increase the size of a domestic market, generating more GDP and more tax revenue. Or a company who supplies to local or national government contracts might win an export order through the extra expertise it has gained from the government contract. So we can immediately see how cutting public expenditure can be counter productive in reducing the deficit.

This is all classic Keynsian economics and has a proven track record of reducing government debt. This government is however trying a different approach, the austerity approach tried after the 1929 crash which led to the great depression and eventually to world war. Why are the government trying this? Despite all the attention given to the deficit, their main reason is clearly ideological. They want to reduce the size of the state. Is this a good thing on its own? Won't this reduce taxes for the median earner? Well it could do if the government was interested in reducing inequality, but the omens are not good. The last Tory-led government trebled inequality and poverty in the recession hit 1980s. They also signally failed to reduce the deficit despite the massive oil revenues coming on stream and privatisation of large swaths of government assets generating billions. Which leads me to the government approach today.

I personally feel that this present government, both Tory and Lib Dem are very aware that their austerity drive will not reduce the deficit. The theory they cite in defence is called 'crowding out'. They claim that the private sector will fill the gap in jobs and GDP and expand into the void where the public sector once was. They are less vague on what will happen to inequality but sort of hint at a neoliberal 'trickle down' solution of wealth descending down the wealth hierachy and helping all. This failed in the 80s as already noted inequality exploded under Thatcher. And as government jobs tend to be more equal in terms of pay and conditions and treat gender and race more equally we can expect inequality once again to start to explode.

So my point is, it is extremely likely that the austerity drive will not reduce the deficit, indeed it might make it worse. The government are not pinning their hopes of deficit reduction on reducing the state (like I have said, that is a ideological cause). No, they are pinning their hopes on a weaker pound helping exports - this will undoubtedly help reduce the deficit, but would have happened whatever happened to government spending. The other way they are going to reduce the deficit, is once again selling off public assets. The housing minister Grant Shapps has recently announced the sell off of £10 billion of land to housing developers. The sell off of forests was thwarted by public opinion. The government are also looking to sell off NHS services, but this is likely to be watered down after the recent uproar. All of these will help reduce the deficit. My best guess is that the deficit will be fractionally lower come 2015, but nowhere near the government targets as these rely on strong economic growth which all the indicators are showing is disappearing as fast as the public sector.

So not only are the public misguided in believing that cutting public spending will correspondingly reduce the deficit. They are also wrong to believe that Labour are responsible for the deficit in the first place. For that to be true, Labour would have had to have caused the global banking crisis. Even for hard right commentators this is one hell of a claim, yet somehow they have persuaded people of this.

In actual fact the deficit had been reduced by Labour in its first 11 years, only when the banking crisis hit in 2008, did it start to rise. And still our deficit is lower than most other developed countries. So none of the claims of the right stack up, yet if you repeat them often enough the people can believe them. It is quite a complicated argument to rebuff their claims and the left have little access to the media to get this message across.

My advice to Labour and Ed Miliband is to keep on banging on about how a lack of growth is ruining deficit reduction. Those on the right of the party hanker for a short term media pleasing hardline on cutting spending. Like I have explained this is the wrong strategy. Sometimes you have to face ridicule and ostracisation, but when eventually proved right, your resolve is rewarded. Labour also have the problem that without spelling out exactly how their milder spending cuts plan is going to work and what exactly is going to be cut, they are open to the 'opportunism' accusation.

Labour should make the case for 'progressive' cuts. They should be supporting Ken Clarke in reducing legal aid, prison sentences and number of prisons. They should be supporting Theresa May in reducing police budgets and numbers. They should support any reduction in defence spending especially nuclear. These are difficult policies for Tories to hold to in the face of tabloid hostility. They are essentially left of centre policies and if Labour is supposed to be left of centre they should be supporting them. There is also scope here for tens of billions of savings that will relieve any cuts in other areas. It is a win-win for Labour, except in terms of the criticism it would recieve from the right-wing press. But the right thing to do is not always the easiest. Ed should remember that.

1 comment:

  1. I broadly agree with what you write but fail to understand how a reduction in police numbers is a good thing. My experience tells me that most people want a visible police presence and want wrongdoers punished. I cannot see how this against what the democratic left (of which I am a part) wants.