Let’s not bet the house on what might be the wrong future

by Jonathan Todd

Labour has to be the party of optimism. Which should include being optimistic about the ingenuity of business, especially when combined with extraordinarily lax monetary conditions and a low pound. George Osborne anticipates Labour pessimism on this and we should deny him.

We know that the cuts are too deep and fast. We know that the best government response to economic challenges isn’t brutally to minimise government, but strategically to target the state’s resources to maximum effect. Having emphasised these points, we can be confident that the public know that we know this.

But in stressing these points we should avoid creating a blind spot: that our only economic expectation for coming years appears to be unremitting disaster. This would have us seem to be talking the country down, which is never a good thing, and undermine our claims to optimism. Also, if this expectation turns out to be false, it would leave us – to apply Peter Mandelson’s one club golfer analogy – on the 18th green of this parliament with only the driver of big government in our club bag.

Of course I’m not endorsing Osborne’s masochistic cuts.  I’m not convinced that they will lead to a sustained, job-creating recovery. I am, however, stressing the first point of futurists: in an uncertain world, it isn’t a case of the future but the futures. And a future exists, while not the most likely future, in which low interest and exchange rates, as well as possible further quantitative easing, more than compensate for the loss of output and employment wrought by the cuts.

The existence of this future was hailed by Fraser Nelson after the CSR as Osborne’s secret master plan:

“Here’s something you won’t read in the papers: in the fiscal consolidation of the Major years some 700,000 jobs were lost in the public sector (way more, note, than we’re discussing now). But two million more jobs were created in the private sector. The 3-1 ratio worked in Britain last time, and there’s every chance it will do again. But Osborne, I suspect, doesn’t want us to know about this strong likelihood. It would spoil his wee trick. Ruin the surprise.”

The government was hardly hiding its faith – and it is a faith – in this future. The first page of its White Paper on local growth stated:

“We have good reason to be confident that the private sector can lead the recovery. When general government employment fell by more than 0.5 million after the 1990s recession, following a period of transition, private sector employment added almost 1.5 million jobs in four years.”

The Tory-Lib Dem government is playing political-economic poker. Osborne has all his chips on this version of the future. It’s a huge gamble. In this future he’ll be able to argue that his gamble was calculated not based only on his weak hand – the deficit-burdened British economy – but his faith in the cuts and the vigour of business.

While I doubt his vision of the future, there is rarely only one possible future. Given this, it would be as unwise for us to have all our chips on the reverse position.

We avoid this by nuancing our position and giving proper weight to various economic risks. Yes, if we cut too deep and fast we risk withdrawing vital stimuli from a tentative recovery. Osborne’s chips are positioned to place no weight on this whatsoever. However, there is also a risk that if fiscal consolidation were to procede too slowly it would push up interest on government debt. This would raise interest rates across the economy, making it harder for businesses to access credit and households to service mortgages. All Osborne’s chips seek to counter this risk in anticipation of being credited with leading a robust private sector recovery.

We, too, should keep faith in the private sector, acknowledging the importance of monetary conditions to business and the interdependence between fiscal (controlled by the treasury) and monetary policy (determined by the bank of England). This means, in addition to warning about the pace and depth of the cuts, having a strong account of how we would reduce the deficit – recognising that fiscal discipline helps interest rates remain low and that businesses and households benefit from this.

Without this, we risk the perception that we see fiscal stimuli as the only motor of growth and monetary and exchange rate conditions as irrelevant. In opposition, we can only impact how we are perceived, not policy outcomes. So, as well as raging against iniquity, we should kill this perception now.

Jonathan Todd is Labour Uncut’s economic columnist.

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6 Responses to “Let’s not bet the house on what might be the wrong future”

  1. paul barker says:

    A balanced & intelligent piece, youre in the wrong Party.

  2. william says:

    in terms of having any hope of establishing economic credibility, in the eyes of the electorate, it would help if Labour were not just the party of optimism, but also a party that disowned Brown’s idiotic economics.

  3. William Gaywood says:

    A low interest rate stimulus will only nurture economic growth when the banking sector releases the available funds into the business environment in amounts large enough to kick start the upturn. Bank rates to business should also reflect the existing base rate and LIBOR, banks need to make safe returns on their lending capital but the private sector requires investment funds. The Labour Party should campaign to ensure this this flow is continuous and not hindered by overcautious finance providers.

  4. BenM says:

    The Party should certainly map out a broad sketch – not detailed – of what it believes the future should look like.

    We in the rearguard will carry on highlighting just how mad, how reckless and how irredeemably stupid George Osborne and his acolytes are being with the UK economy.

    Then at some point in the future, probably after the double-dip that may happen next year, we can combine the narratives and bring down hare-brained rightwing economics once and for all.

    If the US is pulling itself out of the doldrums too around that time then so much the better. We’ll hitch a ride on Obama’s bandwagon too.

  5. william says:

    BenM,but what if there is no double dip? We are the party of optimism to win the next election,or your party banking on the difficulties of others, hoping that the electorate will turn to the party that was in place when the bust came.Have a rethink.

  6. Edward Carlsson Browne says:

    To an extent.

    But if Osborne’s gamble works, we’ve lost anyway. To have any chance of victory, we have to be able to say that we’re better on the economy than the Tories. If Osborne can river-rat it, we can’t make that boast.

    We don’t want to predict economic oblivion, because frankly the middle economic path – growth, but little and sluggish – is more likely. But we do need to warn of dark skies ahead, because if we’re wrong everybody will be too busy praising the Tories to notice.

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