Jonathan Todd sorts the economics from the ideology

The Daily Telegraph isn’t normally essential reading for Labourites. But yesterday it should have been, especially for Harriet Harman. Fraser Nelson set the backdrop to the politics of the deficit and the “emergency” Budget, to which she, as acting leader, will respond. This week’s report from the new Office of Budget Responsibility (OBR) dramatically changes this political context. Nelson has been quick to realise this and, while our instincts differ markedly from his, we need to be equally fleet-footed.

The limited discussion on the deficit in the leadership election has denied our candidates the opportunity to demonstrate this quality. Though, of course, they could engineer such an opportunity for themselves. I’d be impressed if any of them do flesh out a more substantial economic platform, not least as The Economist is right to note that, “nothing will make or break the next leader of the opposition like his response to the government’s austerity programme”.

The coalition, preparing the ground for the scorched earth to come, has grasped any and every opportunity to exclaim their horror that “it is even worse than we thought”. Labour, apparently, have not just cooked the national books, but eaten and spat them out again. It’s what we always do. We can’t help ourselves. It is the coalition’s duty to pick up the pieces; in the national interest, of course.

The coalition has pushed this story since its creation. It matters whether it is believed. It wasn’t until after black Wednesday that the spectre of the winter of discontent stopped being a drag on Labour’s support. If the deficit is perceived as Labour’s deficit, then the pain of reducing it will be a similar drag. However, a major spanner has been thrown in the coalition’s attempts to embed this perception. As Nelson observes, “something is going badly right” for the British economy.

The OBR reported earlier in the week, as Nelson noted, that unemployment “will be almost 200,000 lower than had been feared. Economic growth will not be quite as strong but the tax revenues – which are far more important – will come in much more strongly than Mr Darling gloomily forecast.” So, the reality is that public finances are in better shape than the Treasury forecasts bequeathed to the coalition gave them to expect.

How troubled George Osborne must be that this reality, so out of kilter with his desired spin, has been presented by the OBR. After all, he established this body, as Nelson puts it, with the intention to “demolish the economic Potemkin Village that Gordon Brown built during his time in Downing Street and reveal the full extent of his fiscal vandalism”. Yet, rather than exposing Labour irresponsibility, the OBR has shown “Mr Osborne’s election goal – to abolish “the bulk” of the structural deficit by 2014 – would have been easily achieved had Mr Darling remained in place. No more taxes need to be raised, or budgets cut, to honour this Tory manifesto pledge.”

This is a tremendous vindication for Darling and inconvenience for Osborne. If Osborne now persists with plans to cut further and faster than intended by Darling, he will be doing so for reasons of political belief, not economic pragmatism. Nelson understands this and urges him to press on “because he wishes to restore the power balance between state and society. A true liberal believes that people spend their own money more wisely and effectively than government can do on their behalf.”

While Rachel Reeves has expertly explained why comparisons – encouraged by the scaremongering spin of the coalition – between the UK and Greece are spurious, our deficit does require careful management. However, there is a world of difference between the careful prudence of Darling’s plan and the ideological, small-state zeal that would carry Osborne beyond it. Nelson encourages Osborne in this direction because “with Labour embroiled in a five-way leadership contest, he will never face weaker opposition”. Precisely why we must be vigilant against him.

What the formation of the coalition told Philip Stephens about David Cameron was that “he is a Conservative in the centrist tradition of Harold Macmillan rather than a radical such as Margaret Thatcher”. However, we need to be ready for his Chancellor leading the coalition on a distinctly Thatcherite course in his first Budget. Having scrapped the Child Trust Fund and the Future Jobs Fund this might be no surprise, particularly after the coalition agreement made, as James Purnell noted, “no mention of abolishing child poverty. Of reducing inequality. Of protecting education funding. Of guaranteeing jobs for the long-term unemployed.”

In responding to Osborne’s Budget, the key distinction is between actions that can be justified as decisions of economic necessity and those that are driven by political belief. We strip ourselves of credibility if we do not acknowledge the necessity of some pain. We can absorb more of this pain in the form of taxes than Osborne will propose, but we can’t hide from the need for some spending cuts. To remain credible we need openly to concede this, but we also need clearly to identify the areas in which Osborne is acting as the ideological vanguardist that Fraser Nelson wants him to be, losing sight of the sober economic reality presented by the OBR.

That this reality is much brighter than the coalition’s spin is a credit to the decisions we made in office. We need to be equally strategic and forensic in our economic decision making in opposition.

Jonathan Todd is a consultant at Europe Economics and was a Parliamentary candidate at the 2010 election

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5 Responses to “Jonathan Todd sorts the economics from the ideology”

  1. james says:

    “We strip ourselves of credibility if we do not acknowledge the necessity of some pain.”

    But the question is – who feels the pain? Those at the top who caused the financial crisis and resulting recession – or the rest of us? Credible to whom?

  2. Jonathan Todd says:


    I want as much of the pain of deficit reduction as possible to fall on those with the broadest shoulders. I would be looking towards them to pay more tax. But squeezing the rich becomes economically and politically counterproductive before the pips squeak. We can go further on tax than the coalition presently propose but there are limits to how far the deficit can be reduced by tax alone.

    Spending will have to be cut. Any government that did not acknowledge as much at present would massively haemorrhage credibility with the bond markets. This would make it considerably harder to service the national debt, which would greatly eat into resources available for public services and make higher interest rates much more likely. At this stage, it is probable that this hypothetical government would cease to be considered credible custodians of the economy in the eyes of the broad mass of the electorate.

    However, this says nothing about what spending will be cut and at what rate. There is plenty of scope for decisions to be made in these regards that protects those most dependent upon public spending; to shield them from the pain of deficit reduction. Tax relief on ISAs could, for example, have gone before Child Trust Funds. Spending didn’t have to be cut this year; there just needs to be a robust plan for controlling the deficit over the medium term.

    The reason why the coalition didn’t make these choices, however, as I argue above, is because they are going beyond the pragmatic decisions needed to retain economic credibility and have an ideological commitment to a smaller state. This isn’t about shielding the vulnerable from pain; it’s about putting them through a cold shower.

    We need to strike a balance between exposing this and retaining our economic credibility.

    Cheers, Jonathan

  3. james says:

    It’s not merely about taxing the rich, Jonathan. Surely if over-all spending – which has taken up for the fall in private investment – is reduced before there is strong growth, then what we get by cutting is a downward spiral.

    Bond markets are not merely concerned about strucutral deficits – they are concerned about the effect of deflationary policies on structural deficits! So after the first round of cuts – a second, a third, a fourth. All to provide economic credibility to bond markets…

    Any government faces the choice between caving in to the irrational demands of bond markets and credit ratings agencies (the latter complicit in the financial crisis to start with!) or moving in to restructure the economy in the interests of the many, not the few. This would not merely mean stimulus spending of the kind proposed by the Green New Deal Group – it would mean ensuring that there is a growth in co-operative and employee-owned firms which are less likely to export capital or outsource employment to low-wage economies.

  4. Simon Collier says:


    Thanks for this intelligent and well-written piece. I think the line you suggest is quite right. We need to acknowledge that given the state of the public finances there need to be some cuts over the medium term. But the line we have to work to establish is that we had a perfectly sensible plan for getting the deficit under control, and the Tories have turned this into an ideological virility test.

    That should be the strategy, in my opinion. I think the best tactic is to mix mockery in with anger at some of the cuts. We should be standing at the despatch box saying Osborne’s plan for the economy is Full Monty 2 – fire more Sheffield steel workers and leave them with nothing to do but take their clothes off for money. We should sneer that he is proving his “toughness” by charging OAPs to swim. We need images to show the public that, as you say, these cuts go beyond necessity and are now a matter of dogma.

  5. james says:

    But ideology and dogma don’t exist independently of interests. This is something that Labour should be stressing – especially as a plurality of voters recognise the Tories as a party of an out of touch elite. Foreign press coverage of the election was more open about the wealth of the Tory and Liberal leaders – I think it’s interesting that Andy Burnham, styling himself as the continuity candidate initially, has been most vocal about the socioeconomic divide between the cabinet and the country.

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