by Jonathan Todd
We are a nation seeking to rebuild from the economic calamity of the past half decade. You might think this task merits a chancellor focused upon it. But George Osborne doesn’t look to Keynes, Friedman or other economists. He prefers his own ‘baseline theory’ of politics.
As we grasp for an economic rubber ring, we’re thrown the thin gruel of his politics. To the extent that his actions are informed by any economic strategy, it envisages a state so shrunken as to be beyond the ken of post 1945 Britain. Yet his political logic is robust enough that this troubling scenario may come to pass after May 2015.
Osborne’s theory is informed by an impeccable reading of recent general elections. It holds that oppositions never form governments unless they match the fiscal plan of incumbents. Governing parties hold the privilege of being able to set the fiscal baseline. Any departures from this baseline by oppositions will be subject to intense scrutiny. In 1992, this resulted in the Labour opposition seeming to threaten a ‘tax bombshell’, while in 2001 and 2005, it resulted in the Conservatives appearing a menace to public services.
Over the next 18 months or so, the TUC’s Duncan Weldon suspects, the implausibility of Osborne’s baseline will stretch this theory – perhaps to destruction. In this baseline, £25bn of additional spending cuts – much of them from the welfare budget – come after the next election. But, as Weldon notes, the necessity of running a surplus by 2018/19, which motivates these cuts, is not set in stone. It is a political choice. The UK will only come apart if Scotland votes for it, not if a surplus isn’t run by 2018/19.
In fact, there appears more likelihood of grim things happening if Osborne’s baseline is kept to than if it isn’t. It’s delivery – assuming no further tax rises, protection for pensioner benefits and continued ringfences for the NHS, schools and DfID – requires a much reduced role for government outside of ringfenced areas and/or further cuts for the disabled, children and the working poor.
This delivery isn’t impossible but it is likely to be brutal. Perhaps so much so as to effectively be impossible. The social strain and political pain might just be too much. Maybe Osborne knows this and has no genuine intention of seeing this through in the event of being in office after May 2015. But, in indicating that he will, he’s presented Labour with a set of unattractive options.
One such option is for Labour to accept Osborne’s baseline. In its toughest form, this would mean not only accepting £25bn of extra cuts but accepting that half of them will come from welfare payments to working age adults. This would put Labour in a position that Nick Clegg has already castigated as unfair.
It seems unlikely, therefore, that this will come to be Labour’s position. Instead, Labour might match the Liberal Democrat position: acceptance of the £25bn but rejection of the depth of cuts to working age welfare. This rejection, however, only deepens questions as to how the £25bn will be made up.
Wiggle room would be created by relaxing Osborne’s assumptions, which would mean some combination of additional tax rises, cuts to pensioner benefits and cutting within ringfenced departments. And it may require a sizeable chunk of all three of these unpalatable possibilities to match Osborne’s baseline.
Another approach for Labour would be to reject this baseline. According to Osborne, in doing so, Labour would be accepting general election defeat. To remain in a winnable position, his baseline theory demands that Labour accept a fiscal trajectory so precipitous and fraught that it’s questionable whether Osborne would actually even see it through himself.
If Labour rejects this baseline, Labour wouldn’t commit to deliver a surplus in 2018/19 or perhaps ever. Maybe Labour would come up with another measure of fiscal sustainability – focusing on, say, the structural component of the deficit or the ratio of debt to GDP. Which might apply over a longer time horizon than to 2018/19.
There is more than enough shared grey matter between the two Eds of Balls and Miliband to come up with such a measure. Perhaps sufficiently so to win over at least some of the intelligentsia. I can imagine Janan Ganesh, Osborne’s biographer, shaking his head at the column of Martin Wolf, his FT colleague. But Osborne wouldn’t be the first chancellor to electorally prosper in the face of the scorn of the cerebral economists like Wolf.
Having established his baseline, Osborne will swoop on any Labour departure from it as evidence of dangerous profligacy. Even if Labour commits to a surplus by 2018/19, differentiation from Osborne may create scope for him to associate Labour with tax bombshells, Benefits Street and threats to the wellbeing of the grey vote. To reject his baseline entirely, while it may make more policy sense, would be an even bolder political move.
Miliband is likely to use his first speech of 2014 on Friday to press ahead with his cost of living focus. But observers may be more interested in how he responds to the gauntlet thrown down by Osborne.
Jonathan Todd is Deputy Editor of Labour Uncut