Let’s capitalise on Tory twitching on the economy

by Jonathan Todd

Public debt, said to be the consequence of Labour largesse, is the problem for the governing parties, and aggressive cutting the medicine. Labour contends that this remedy is too tough to close the deficit. As we recover from a global shock of 1929 proportions, slower cuts are required for strong enough growth to generate the tax revenues needed to achieve deficit closure. Lack of growth, as well as the deficit, is the problem targeted by Labour.

Are these well-established positions shifting?

Not as far as Labour is concerned. Some twitching can, however, be detected on the government side.

First, John Redwood wants an improved growth strategy. This is echoed by Liberal Democrat Mark Littlewood. This doesn’t mean the Tories and Liberal Democrats are about to concede, as Labour has protested, that they have no growth strategy. Since the formation of the government they have argued that the deficit needs to be addressed to retain the favour of bond markets and so control upward pressure on interest rates. They prefer this monetary stimulus to greater fiscal support. Yet the comments of Redwood and Littlewood are not insignificant. They acknowledge that the resources of the shrunken state could better target growth.

Second, Norman Lamont has stressed that the government is battling the headwinds of a global crisis. Osborne has long sought to frame our economic problems as being wholly the consequence of Labour profligacy. Lamont may have carelessly forgotten this script or his comments might indicate that the Tories want to start to get some excuses in.

Third, George Osborne has flagged the “flexibility” in his plans. This isn’t a policy shift, but a change of emphasis. The automatic stabilisers of tax and benefits were never removed by him. The treasury might also define “trend growth” to create wriggle room on the extent of cuts needed to eliminate the structural deficit.

Osborne’s commitment that Ireland would be the only eurozone member he would bail out was shattered, as was always probable, in Portugal. His officials must have briefed him that Greek default now seems inescapable. Fireworks will follow, probably knocking our economy still further off course. So much so that Osborne may resort to the Lamont defence.

With this, the chancellor’s pretence that the deficit is entirely caused by excessive Labour spending and nothing to do with global conditions would be nakedly exposed. While this would be a significant concession to Labour, half of voters now blame Labour for the cuts, as compared with a quarter attributing them to the government implementing them. Osborne’s acknowledgement that the UK is not an island would help. But probably wouldn’t be enough in itself to reverse these numbers – especially if Osborne gets traction behind a subtler Lamont defence.

The simple version of this defence is a global crisis. The more subtle and accurate one is a European malaise. The euro’s principles “have proved unworkable at the first contact with a financial and fiscal crisis” (Martin Wolf) and the currency zone “is looking very much like a system that amplifies shocks rather than absorbs them” (Ken Rogoff). Swathes of southern Europe are unable to generate the growth they require to manage their debts within the eurozone. This isn’t sustainable. Either consolidation into a currency and fiscal union occurs or bits of the struggling south must break away.

Eurozone leaders have not confronted this choice squarely. The economic interests of the UK are best served by having them do so before this dilemma overcomes them. However, Osborne potentially has a tenable political position even if our economic interests are not so protected. While the shocks triggered by Greek default may destroy his economic projections, he will shift his account of the economic problem to the European variant of the Lamont defence. It won’t have worked. It will have hurt. But it will be Europe’s fault as well as Labour’s.

The bond markets and the polls will then give their verdicts on this argument. The markets will want Osborne to hold fast to plan A. As the pain accompanying this plan deepens, the polls instead might indicate an increased sympathy for Labour’s slower cuts. Labour should not, however, seem to be willing this grim scenario.

Labour should be building on the criticisms of Redwood and Littlewood and spelling out how smart policy can secure faster growth. We should also be getting ahead of the debate on the euro. Ed Balls ought to demonstrate that he is capable of leading in Europe in a way that Osborne has not. Then any deployment of a European-flavoured Lamont defence would be followed by Labour contrasting the paucity of Osborne’s response to that of Balls.

Jonathan Todd is Labour Uncut’s economic columnist.

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3 Responses to “Let’s capitalise on Tory twitching on the economy”

  1. Alan L says:

    Labour has two different economic problems – one of substance, and one of perception.

    On substance, you are right – although the argument is at the margins. The Darling plan and the Osborne plan are actually quite close (every £8 of cuts in the Osborne plan would result in £7 cut in the Darling plan). Certainly when compared with, say, the Obama plan (large expansionary phase in QE2, followed by a sharper contraction than even Osborne is planning), or the Greece plan (suicidal levels of contraction).

    Both the Osborne & Darling plans would probably result in slow, steady growth out of a terrible crisis. Neither is either imprudent in borrowing, nor would increase unemployment or stagnate growth (at least in the OBRs central projections).

    However, on perception there is a very different problem. The average Joe believes that Labour is against all cuts – no Labour message has gone out other than an “anti-cuts” message. This is not credible to the average voter, makes the party line look like it is denial, and feeds the message that Labour are not credible on the economy.

    Hence the economic trust figures we see in the polls.

  2. AmberStar says:

    People aren’t angry with Labour about the cuts; that isn’t really what they blame Labour for. They blame us for the imbalance in the economy which meant we couldn’t tell the bankers to f*ck off when they started taking the p*ss. Where else would jobs & a quick rebound from the crisis come, if not from our financial services industry? We’d tied our own hands. An entire country made to feel impotent & foolish by a handful of bankers whose ‘industry’ they’d saved from ruin. And there seemed to be absolutely nothing that Labour could do about it.

    The voters blame Labour for lack of financial services regulation & for adopting Tory business policies instead of pursuing policies to diversify the Uk economy. Labour didn’t do nearly enough to promote industry & innovation; & the voters blame us for allowing strong businesses & brands – built on British innovation, infrastructure & labour – to be sold off or off-shored or asset stripped until there was nothing left but the bl**dy banks.

  3. Henrik says:

    @AmberStar: I’m intrigued, are you suggesting that it was the bankers who consistently overspent on revenue and nearly bankrupted the nation? I had thought that was down to the Worst Chancellor and Most Incompetent Prime Minister, Ever. You live and learn….

    I’m also puzzled as to what the alternative was to bailing out the banks. Let them fail? That would have made life rather difficult for the deposit holders, surely? You know, deposit holders, voters?

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