Sunday review: The autumn financial statement and “In the black Labour” by Graeme Cooke, Adam Lent, Anthony Painter and Hopi Sen

by Anthony Painter

There’s no hiding place. The autumn financial statement outlined in full the dire economic situation that this country will face for much of this decade. Squeezed living standards, high borrowing, cuts in public services and the shrinking of the welfare state, ongoing uncertainty, and high unemployment will define the 2010s: the austerity decade. What’s worse is that all of the risks are on the downside.

George Osborne has made the situation worse – unnecessarily so. Cutting short term programmes and investments such as the future jobs fund and building schools for the future which don’t add to the structural deficit was myopic. Once his model of economic recovery – driven by exports and private sector investment – was faltering early this year he should have intervened. He didn’t and that has made things worse. We are all paying a price as a consequence.

The choreographed dance so far this parliament has been for the Tory-Lib Dem government to blame the last Labour government for all our economic ills. And for Labour to blame the government austerity. The reality is far more complex. The government bears some, but by no means all, of the blame: a strong stance on fiscal consolidation has reduced the risk of government debt in the eyes of investors; world oil prices and food prices that have increased by 30% in a year have also been a drag on growth; eurozone crisis is starting to be a drag on confidence and demand; but an early and inflexible fiscal consolidation, especially the VAT increase, has made matters worse.

By revising growth and borrowing forecasts down the office for budget responsibility has reset the political debate: a blame game between the government and Labour is going to impress few. Instead, now we know that there is no easy way out, no magical cure, and no way to get through this other than endurance. The choice is between austerity minor and austerity major. And it’s not clear which of the parties’ strategies results in which type of austerity.

Labour’s short term stimulus focused on investment and jobs feels like a reasonable gamble to take, but not if it becomes a permanent stimulus and only if it also involved cuts in current spending alongside the stimulus. It can only be a short bridge to recovery and little more. Persistent borrowing at this level is just not feasible, particularly when so much has been borrowed already. Even under current projections, we will be spending around the same on interest as education in 2014-15; interest is likely to overtake education a year or two later. The Conservative approach is more fiscally sustainable (despite downward revisions) but with a price to be paid on incomes and employment. In all of this, we tend to over-estimate the power of the chancellor to secure predicted outcomes.

It is into this context that “In the black Labour” (a slightly tongue-in-cheek title, it should be noted) was launched. As one of the authors I’ll leave it to others to review the discussion paper itself. It is worth reviewing the response though.

Ed Balls and his team reacted to the paper – which argues for a blend of fiscal conservatism and economic activism – with political maturity and good grace. This is hardly surprising: it was Ed Balls’s conference speech which reminded Labour of its duty to manage the public finances responsibly. In fact, that speech set the context for the paper to flesh out what such responsibility might mean.

There is little doubt that there is an understanding in the shadow chancellor’s office that the autumn financial statement moves the politics of this parliament into a new phase and that Labour has to present a fiscally credible plan at the next election. Some forget that it was Ed Balls who was Mr Prudence in the run-up to Labour’s 1997 election victory which was built on a foundation of restored economic and fiscal credibility. The question is one of strategy and balance.

Labour’s fiscal credibility deficit should be reduced early and robustly is the implicit strategic argument of “In the black Labour”, others, while accepting the fundamental challenge, may argue that is ‘too far, too fast.’ An early adjustment will require Labour to address its own weaknesses as it tries to seize the opportunity presented by the Tory-Lib Dem government’s weaknesses. The question is whether their weaknesses can be properly exploited without addressing Labour’s own.

So much of the coverage of “In the black Labour” has overstated the divide between it and the current chancellor; there is a gap but it is not as wide as some suggest and could quickly be closed. The big short-term concern is that any ambiguity in Labour’s position of structural deficit reduction will be exploited by the Conservatives. Already, Matt Hancock is collating Labour’s implied “spending commitments” and has costed it at almost £326 billion extra borrowing. The figure is nonsense, but any Labour supporter who lived through the 1992 general election – and Labour’s tax bombshell/double whammy – will shudder.

The most trenchant critique of the paper came from Cormac Hollingsworth on Left Foot Forward. Cormac is one of the few Labourites who understands financial markets as a former insider. He argues that Labour has to re-adjust itself to the rhythm of opposition: assert the strength of the Darling plan, question the judgement of the OBR, and lay all the blame at the door of George Osborne. Normally I agree with Hollingsworth’s analysis but on this one I feel he has just got it wrong.

By adjusting to the mindset of opposition that is exactly where the Labour party will remain. It is tactics rather than strategy. However, the economics behind his argument are problematic too. Analysing the Darling plan in the light of the OBR’s adjusted assumptions and the economic changes that have actually been experienced in the last 18 months, HM treasury calculates that the plan would mean an extra £100billion borrowing over the course of this parliament and an extra £21billion in 2014-15. Paul Johnson of the IFS agrees that Labour would have borrowed more under the plan.

In fairness, the Darling plan allowed for flexibility but how can Labour say what decisions would have taken had it been in office and what the reaction of the bond markets or credit rating agencies would have been? There’s no way of saying with any certainty. It’s time for Labour to leave the Darling plan behind and stop playing virtual economics. It’s about the future now.

If Labour is to accept the parallel Darling universe then it has to accept its risks as well as its forecasts from March 2010. Essentially, what the Hollingsworth piece asks us to do is substitute the wisdom of Labour number-crunchers for that of HM Treasury, the OBR and the IFS. It just doesn’t work. The OBR may be far from perfect – what is in this environment? – but you need to have some independent way of making predictions and it may be the least worst option.

And that is going to be nature of the next few years economically and politically: unpredictability, uncertainty and austerity. The autumn financial statement may not be the last economic and political reset before the next election. For now, we are clearly now in a new environment. Labour has a chance to make an economically credible and politically astute case. Its success in doing so may well determine who is making the tough decisions from 2015 onwards and who pays the price of this lost decade.

Anthony Painter is an author and a critic.


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7 Responses to “Sunday review: The autumn financial statement and “In the black Labour” by Graeme Cooke, Adam Lent, Anthony Painter and Hopi Sen”

  1. AmberStar says:

    It is too soon for Labour to be presenting a shadow budget. You ‘back to blackers’ are a luxury which Labour can only afford this far from an election, which is probably one of the reasons why our shadow Chancellor took it with good grace.

    But to assume that you know better than Ed Balls is rather arrogant, don’t you think? Respect for his Bloomberg position is increasing; if Osborne’s policies tip the Uk into recession in 2012, Britain will be downgraded – & that’s the ball game for Osborne because he has continually asserted that everything he does is to ensure we keep that precious rating… Ed is definitely right to wait & see what 2012 brings before outlining his own plan.

    Also, conflating the Darling plan with the current OBR forecast is mixing apples & elephants. Actual growth was higher & borrowing lower than Darling’s own forecasts until Osborne started hacking away & talking down the economy, reducing both business & consumer confidence to zero. Even if Darling himself helped you with your ‘back to black’, it is a pointless & rather embarrassing exercise to feed the current OBR forecast into his plan.

    And it was pretty much the chaps of Labour’s center-right who handcuffed Ed Balls to the Darling plan… perhaps another reason why he is gracious about your paper. Some of the Darling Plan’s erstwhile supporters will now change position to support ‘back to black’ thereby splitting his ‘internal opposition’.
    😎

  2. In the last ten years public sector employment increased by 850,000 to 6.2 million; today some 52% of total UK employment. In the same period our national debt as a percentage of GDP rose from 32% to 62%. It now stands at 909 billion pounds.

    If the UK were a business this would have spelled trouble long before we got this stage; trouble that was being exacerbated by directors who were acting in what can only be described as a reckless fashion. In fact if the UK were a business the administrators would have been called in long before the last election.

    The problem today is that the chief players in the Labour government who oversaw this appalling state of affairs we find ourselves in are now being seen as preaching yet more of the same. Every time Ed Balls calls for impetus to be funded by yet more borrowing Labour he loses a little more credibility.

    This is because people in this country are not by and large stupid. They recognise both the problems and those in the Labour party who either played a part in bringing them about or who simply defended the policies that were leading up to them at the time. Talk of tactics to try to gain an edge over the coalition is pointless because it simply won’t wash. If Labour want a future any time soon it will take a serious mea culpa followed by a clear out of not only the leadership but pretty much the whole of its present front bench.

  3. Mike Homfray says:

    With the forthcoming collapse of the globalised trade and financial system, Labour will have to do a lot more very basic thinking – like how much should we look towards promoting European protectionism and localised sustainable production, not trying to run globalised capitalism better. It won’t work in any case – China and India clearly wish to become large scale consumers and the whole system requires them to be the providers of cheap goods instead.

    At least we’ll be able to dispose of the City and its worthless parasites

  4. Declan Gaffney says:

    ‘In the last ten years public sector employment increased by 850,000 to 6.2 million; today some 52% of total UK employment.’

    Is this a typo or does the commenter really believe that there are only 12m peope in employment in the UK?

  5. Richard says:

    “It is into this context that “In the black Labour“ (a slightly tongue-in-cheek title, it should be noted)”

    Never! Sign-post the reader through your thinking, why don’t you?

  6. Felix says:

    “Paul Johnson of the IFS agrees that Labour would have borrowed more under the plan.”

    He devotes four lines in his paper to this. No detailed analysis, no data to justify his claim and most of all no consideration given to what growth may have looked like at this stage under a Darling plan. To claim this endorses your argument is skating on very thin indeed.

  7. Felix says:

    *ice* being the missing word, as if you hadn’t already guessed.

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