by Nick Small
For the 4.5 percenters, who, like me, backed Liz Kendall, John McDonnell’s first major speech as shadow chancellor at Labour Party conference was, in many ways, a pleasant surprise.
The acknowledgment of a golden rule of British politics, that the voting public demand reassurance from the centre-left about our economic credibility in a way that they don’t from the Tories, is welcome. It’s also welcome that McDonnell has explicitly reinforced the message that economic prosperity and social justice are two sides of the same coin; as our aims and values put it that means ‘a dynamic economy serving the public interest’. In other words, you can’t redistribute wealth unless you first create it.
Recognising that the country has to live within its means, that Labour should tackle the deficit fairly and that a Labour government inheriting a current account deficit in 2020 should pay it down without jeopardising sustainable economic growth is, again, good to hear. It’s not austerity-lite and it’s not deficit denial. This will chime well with the voters who’ll decide the next election. They may well be more economically radical than many from my wing of the party thought, but they’re certainly more fiscally cautious than many Corbynistas gave them credit for.
But it’s on monetary policy that McDonnell was perhaps most interesting, especially around Bank of England independence. In 1997 the second major economic announcement the Labour government made was that an independent Bank of England would set interest rates to meet an inflation target determined by ministers. The first announcement was one no-one gives Gordon Brown much credit for – a return to high and stable levels of employment as the key goal of macroeconomic policy. But the two are linked. Bank of England independence led to a depoliticisation of interest rates, which reduced short-termism and locked-in economic growth. It’s also the reason why the UK hasn’t had interest rates hitting 15% like in the last Tory recessions.
Abandoning Bank of England independence, which McDonnell has suggested in the past, wouldn’t in the long run bring about dynamic and sustainable growth or improve things for those suffering at the hands of Tory austerity. The public still don’t trust the politicians on the supply of money. It was that distrust that led to setting up the West German Bundesbank in 1957 and the same distrust that led Brown to set up the Monetary Policy Committee 18 years ago. So guaranteeing Bank independence, as McDonnell did in his conference speech, is a positive. So too is widening that debate to ensure that the Bank’s Monetary Policy Committee looks at the impact of interest rate policy on growth, employment and earnings as well as inflation. Where this leaves people’s QE, though, is anyone’s guess.
National governments’ ability to impact directly on aggregate outputs are significantly restrained in a globalised 21st century economy. What we need are monetary and fiscal policies that crowd-in public and business confidence. We need to change the things we can change. Government intervention is best targeted to those areas where government can best have a positive influence – like skills and welfare to work – and to eliminate market failure through taxation, removing corporate welfare and competition policy. We need to accept the things we can’t change – whether we like it or not, in the long run supply always equals demand. But most importantly, we need the wisdom to know the difference.
Nick Small is a Liverpool councillor and assistant Mayor