The consensus – and a fair consensus at that – is that Ed Balls has had a good war. He has punishingly exposed the illogic and perverse masochism of the school building cuts. Michael Gove, who before entering the department for education was the government’s highest flyer, now seems sheepish and cautious. He’s still standing but his confidence has taken an enormous knock.
And then came the Bloomberg speech. Widely lauded by some of the leading economics columnists including Martin Wolf and Samuel Brittan of the FT, its core plea for the government and British economics establishment not to repeat the deficit denialist errors of the past has struck a nerve.
Samuel Brittan is gushing in his praise of the speech in his column this morning – both for its historical analysis and prognosis for the economic recovery. From a beacon of economic good sense, this is extremely high praise indeed. It is a long time since any Labour politician has had an argument and message which has chimed with such serious commentators. That is a massive achievement. Brittan takes Balls’ argument further and suggests splitting the UK Budget into three elements: an in-balance current account, a capital account which can be in deficit, and a stabilisation fund in case of economic slump. This formalises Gordon Brown’s “golden rules” into new economic institutions and takes them further.
Politicians need to handle economists with care. When placed side by side, economists’ conclusions can look as spread out as an office of budget responsibility fan chart:
And this is why the next Labour leader needs to keep their options open. A flexible approach to economic policy with a credible policy of fiscal consolidation is the order of the day. George Osborne has taken an enormous economic gamble but there is a risk that Labour could fall into an equal and opposite trap.
It is worth illustrating what this might mean for Labour politically. My intention is not to forecast what will happen to the UK economy but rather to consider what might happen and how this might impact the political discussion.
Let’s take the OECD forecasts for the UK published yesterday. For 2011, it forecasts a growth rate of 2.5%, exports increasing by 8% and private non-residential investment by 4.2%. At the same time, unemployment, inflation, and the fiscal deficit would be heading down. These forecasts are not a million miles out of line with those of the office of budget responsibility. Maybe they will be right, maybe not – we don’t know and that is why Labour needs to retain room for manoeuvre.
If the OECD forecasts were to prove accurate, but Labour had forecast economic calamity, then that would place its economic credibility on the line and would give the Tory-Lib Dem government an enormous political win. That is why it must resist even a tone that predicts that the economy will collapse under the strain of the government’s economic and fiscal policies – because it may not. It must simply point out the risks that they pose, but be pragmatic in proposing alternatives. Instead, it should focus on the types of institutional reforms that Samuel Brittan proposes, which have a bias in favour of greater growth and employment. It must outline how it intends to create an investment climate that can create the jobs of the future. And it must seriously revisit financial reform as we have been reminded so pertinently by the appointment of the American huckster, Bob Diamond, to head Barclays Bank.
And, actually, whatever the polls say in the short-term, getting on the right side of the economic and future growth argument is critical to Labour’s chances. Anger at cuts in public spending is unlikely to be enough to create a strong enough alternative to the Tory-Lib Dem government. Sure, it’s critical to make the arguments about the brutality of cuts – and the impact of the latest announcement of £4billion of cuts to the welfare bill in addition to the £11billion already announced on child poverty could be immense. Those are sound arguments. But Labour also can’t afford to take win-or-lose chances with economic policy.
Ed Balls may prove to be right. In which case, he would have a second euro-style ‘I told you so’ moment. If he is not – in the eyes of the public at least – then the political price will be high. Listen to his arguments with extreme seriousness because serious people listen. But Labour must stop short from allowing these arguments to become the party’s new orthodoxy. No retreat, no surrender is a dangerous political approach whatever its emotional pull.
Anthony Painter blogs at http://www.anthonypainter.co.uk
Tags: Anthony Painter, economics, Ed Balls, Martin Wolf, Samuel Brittan
If he’s wrong, then the Tories will be able to say, “I told you the cuts worked” and we’ll lose anyway. Whereas if we line up behind the Tories, we get none of the credit if it does work. And there really are only two choices – we’ll get called deficit deniers if we’re even marginally to the left of the coalition on this.
I’d say it’s a risk worth taking. The bigger strategic risk is that the economy suffers, but not enough to give the coalition a Black Wednesday moment. Then at around summer 2014 the growth that the cuts had been repressing finally breaks through, revenues increase and we face a government insisting that was their plan all along and promising tax breaks.
I don’t think the thrust of Ed Balls’ argument is “take my approach or face calamity”. He has laid out a viable and impressive alternative economic vision which has the weight of history behind it and allows for a more socially responsible approach to the deficit. What Labour does with Balls’ analysis is what’s important. It is not necessary to use the politics (or economics) of fear which has driven the coalition’s public approach to the deficit. With a reasoned and supported economic argument behind him, Balls has opened the door to new way of challenging the cuts agenda.
The media has bought wholesale the need for cuts to reduce the deficit and the question now is where the pain should fall. Balls is tackling the premise behind this. Labour can never win public support if they simply challenge where the cuts should happen – they will appear sniping and incoherent. An alternative (quasi-Keynesian) vision for economic recovery based on investment, fair tax rises and, yes, some spending cuts gives Labour a platform to challenge the underlying assumption which currently gives the coalition the opportunity to ideologically cut at will.
In the end, it doesn’t matter whether the worst downside of the austerity drive comes to pass, with Balls’ vision, there exists an alternative vision to hold up to people and say “Even though we avoided a violent double-dip, we could have tackled the deficit in a much fairer way.” There is nothing at all wrong in basing Labour’s approach on Balls’ view, because it has intellectual weight regardless of the outcome of the coalition’s actions. Put simply, the recovery is not black and white and even if the coalition don’t fail utterly, a viable alternative can retain credibility. I think the risk to Labour is in failing to have an economic vision which underpins Labour’s opposition, rather than worrying about being notionally “wrong”.
Anthony,
I suspect Ed Balls’ analysis will prove more accurate than the OBR’s in terms of growth. I’d put the odds of an actual double dip at around 50/50, but either way I reckon we’re heading for several years of very sluggish growth and high unemployment.
But I agree on the risks of Labour talking up the risk of collapse.
Where I think you’re right is in saying –
“And this is why the next Labour leader needs to keep their options open. A flexible approach to economic policy with a credible policy of fiscal consolidation is the order of the day. George Osborne has taken an enormous economic gamble but there is a risk that Labour could fall into an equal and opposite trap.”
And we already have that. The 4 year plan to halve the deficit is, in reality, more flexible than it is often portrayed as.
As Liam Bryne has noted:
“Labour had a much more flexible approach; we legislated to halve the deficit over 4 years, but it was possible to bring in orders for a change if the economy started heading south. George Osborne’s fiscal mandate appears to have no such escape hatch.”
However we didn’t really mention this in the election campaign – instead we shadow boxed over £6bn of in year cuts.
I think moving ahead it is very possibe that Labour could pledge to stick to the four year timetable whilst emphasing that we would be flexible if the economy slowed/headed south.
We could attack Osborne for not having a “plan B” in case his hoped for export and private investment doesn’t appear.
(Also worth remembering that sticking to the Darling plan would mean opposing £86bn of cuts over this parliament).
http://duncanseconomicblog.wordpress.com/2010/09/06/4-year-plans-the-numbers/
I agree with Duncan’s post though I’m not about to start out in the business of making economic predictions- I’ll leave that to the pros to mess up.
Just to say that Duncan (@duncanweldon), Greg (@greglovelluk), Sunny Hundal (@sunny_hundal) and myself (@anthonypainter) have been having a discussion about the politics and economics of this on Twitter so take a look at our Twitter feeds if you would like to see more…
Interesting debate. Osborne won’t say this but the only “plan B” that he seems to have is to look to the Bank of England for more monetary easing, which will have to come in the form of quantitative easing given how low interest rates are. We live in very uncertain times and it is hard to say where any of this is going. But further quantitative easing on the scale which may become necessary due to Osborne’s early and deep cuts would make it more likely that the “ketchup in a bottle” theory of inflation becomes a reality: all the money that has been printed suddenly catches up with us in the form of inflation. If we were to have double dipped, this would leave us with negative growth and inflation. That’s right, stagflation. Osborne might think his macroeconomics takes us back to Thatcher’s 1980s but stagflation is, of course, the curse of the 1970s.
The thing is, no one really knows, the idea that the UK Treasury controls the UK economy is laughable. Our fortunes are tied up with the global e.g. U.S. economy to a great extent.