Dennis Leech says Labour needs to do more than promise to balance the books
The chancellor Rishi Sunak’s speech at the Conservative Party conference was the usual confection of ideological nostrums and economic fallacies that are expected at such events. It was the usual litany of Tory virtues: individual self-reliance rather than dependence on the state, aspiration, hard work and, for government, low taxation and budget responsibility. He said that strong public finances are the foundation of a prosperous future and that government borrowing to pay for the Covid pandemic had increased public debt to almost 100% of UK national income. All this was vague, of course, and he did not explain the economics of why debt matters so much.
Getting debt down is therefore a priority for him. But it is clear that it would not be one to override others but rather something desirable to be done as soon as circumstances permit. In other words, what is said to be an economic constraint binding government fiscal policy is, in reality, subordinate to political feasibility. Partly this reflects the division between Treasury and prime minister. The Treasury, as it has done throughout most of its history, always takes a narrow accountant’s view, habitually a deflationary stance, seeking to balance the budget by limiting spending. Boris Johnson as PM, on the other hand, will be guided by political necessity, even if that means sidelining fiscal rules.
The requirement to balance the budget is a political trope that the Tories use selectively to impress anyone who is prepared to believe it to justify austerity measures. They use it to tell recipients of Universal Credit that there is no magic money tree, to justify cutting their income by £20 per week. But they don’t actually believe it themselves, because they know it is politics and not an economic imperative; they will set it aside when it suits them, such as in order to finance a new royal yacht or military adventure.
Shadow chancellor Rachel Reeves promised Labour’s party conference that she would make taxation fairer, by shifting the burden onto the wealthier, to make it more efficient by collecting more revenue through closing various tax avoidance loopholes, such as ending private schools’ charitable status and insourcing government spending. She would also use tax incentives to support the high street through reforming business rates and levying digital taxes on internet companies. All progressive policies but lacking in detail.
It was disappointing that there was nothing in her long and sloganising speech on public ownership. For the state to run transport systems, housing, mail and water, as proposed in the Corbyn manifestos, is recognised by many other countries as an efficient way of running natural monopolies and should not be dismissed on ideological grounds. Labour should be arguing for this as the neoliberal model fails.
She announced an investment of £28 billion each year for the rest of the decade in greening the economy. If this is counted from today as eight years, it is remarkably similar to the last manifesto promise of £250 billion over ten years.
There was a disappointing lack of ambition on industrial policy – which ought to be a key priority because of the vast inequality in output between regions. The OECD has shown that the UK is by far the most unequal country in Europe. Instead of addressing the need for new jobs outside the South East and London, the only industries she mentioned were retail, hospitality and care. The UK economy is unbalanced, with a dominant financial sector that has crowded out manufacturing, and there is a need to address that – something the Blair government failed to do.
This policy of promising to stick to strict fiscal rules to limit or eliminate deficits and reduce the level of debt is not new: it was also used by former shadow chancellors John McDonnell, in the elections of 2017 and 2019, and Ed Balls in 2015, as well as by Gordon Brown previously. It is not obvious that merely stating a fiscal rule convinces voters that Labour can be trusted with the economy. There should be an economic strategy focusing on the real economy, creating green jobs – including in manufacturing – to replace industries that closed in Thatcher’s disastrous monetarism years: a Green New Deal and full employment.
Labour’s fixation with fiscal responsibility, defined in purely financial terms, is a mistake reflecting an economic fallacy. There is no economic justification for the UK government prioritising a balanced budget as the main aim of its economic policy. Doing so just results in deflation and might lead to recession, as we have seen in the decade since the global financial crisis. If it convinces the electorate to vote Labour in as a government of economic competence, its implementation in office, leading to recession and unemployment, will destroy that reputation.