Look to Biden’s fiscal stimulus and more, says Dennis Leech, who finds Labour’s alternative lacking
Labour’s front bench is not promising the radical economics that we urgently need. In affirming “Labour’s cast-iron commitment to delivering value for money” in her Mais lecture, the now former shadow chancellor, Anneliese Dodds, stuck with an essentially neoliberal and resolutely anti-Keynesian approach to economic policy.
She sees the economy as a giant household with a limited budget. She talks of public spending rather as George Osborne would, as if it is something desirable if it can be afforded, to be costed from a limited budget. But in present circumstances, with the UK facing multiple challenges – the biggest Covid recession of the G7; the slowest recovery from the crash of 2008 – a more radical vision is needed. Priority should be to maintain a high level of effective demand and thereby generate income for unemployed workers and businesses, both directly and indirectly through the spending multiplier: a stimulus package, in other words.
But in using words like “responsible” and “prudent” in relation to government debt and deficit, rather than the real economy, she shows no evidence that Labour has learned lessons from Osborne’s repeated failures. Indeed, she cites the fact that government debt increased under Tory “budgetary responsibility” not as evidence of the failure of austerity policies – that the economy does not work like a household, as Keynes taught us – but of the Tories’ mismanagement. We are left to assume Labour will manage the household budget better, getting better value for money. This resembles more something intended to impress a focus group of ‘red wall’ swing voters than a serious recipe for getting out of the current crisis. Labour will not succeed in ending austerity if it persists with this essentially conservative economics – which has, in any case, failed to inspire electoral support repeatedly in elections from 2010 on. What is needed today is something much more radical to address the short-term post-Covid recession. That means fiscal stimulus.
Dodds has said, quite rightly, in response to chancellor Rishi Sunak’s budgetary proposals, that now is not the time to raise taxes. This sounds like a good Keynesian principle of demand management: just what is needed because a general tax increase would reduce spending and choke off the recovery. But she was actually objecting to Sunak’s proposal to increase corporation tax, a tax on profits, to 25 percent, from its present 19 percent, which is among the lowest in the world. It meant Labour seemed, surprisingly, to be advocating trickle-down economics: hoping to incentivise profitable companies to invest more in productive capacity.
As the Nobel laureate economist Joseph Stiglitz pointed out, profit taxes fall on the most profitable firms and do not disincentivise spending, so it is a fallacy. Taxing profits, which are largely received as income by the wealthy, and tend to be saved not spent, is redistributive and progressive. It is disappointing that Starmer’s Labour appear to be triangulating by sounding radical while acting the opposite, and being able to claim Labour as business-friendly.
Labour should be supporting higher taxes on profits, lower taxes on families, as well as higher wages, decent benefits, and increased social spending generally, not just to reduce poverty and inequality, but as a strong fiscal stimulus to reduce poverty and inequality. That would be truly responsible and progressive because it would prioritise the health of the real economy, the circulation of income and spending, in the knowledge that the budget will take care of itself as we know from past experience. There should be no risk of inflation in present circumstances with the economy in recession.
Meanwhile, with Labour in the UK talking the language of fiscal prudence and responsibility, in the USA the Democratic Biden administration is following the Roosevelt New Deal of the 1930s, with a fiscal stimulus package aimed directly at supporting low-income families, infrastructure investment aimed at jobs and productivity and greening the economy. It is also raising taxes on business. Biden is following the overtly Keynesian policy that international bodies like the IMF have been saying are vitally necessary. But much more is needed.
One of the greatest failures of the New Labour government was to offer the truly alternative economic policy that the country needed (and still needs). Instead it continued the neoliberalism of Thatcher and Major, relying on the fat profits of the deregulated, booming financial sector for tax revenue to pay for more spending on education and health. But this was short-sighted and bad for the economy as a whole. Economic policy should have been directed to developing former industrial and mining towns.
Essentially Britain was (and still is) suffering from what has been called ‘the finance curse’, where the City is so successful that it crowds out the rest of the economy. Thus, in the UK there is now very little industry and serious manufacturing jobs in ‘red wall’ towns are scarce. Addressing this failure of economic policy – which is not simply a matter of regional infrastructure investment, but requires both regulating the City and a regional industrial policy – ought to be at the centre of Labour thinking.