Any reccession is terrible news for the economy, and more importantly for the families and businesses struggling in tough times. God, that sounds like a piece to camera, doesn't it? Sorry. Hard habit to break. Still true, mind.
This recession is worse, because it was avoidable.
Unfortunately, the more the government fails today, the tougher the fiscal challenge gets tomorrow.
The deficit will be stickier now, harder to reduce in the short term. That means the next Labour government will face even more fiscal pressure as it attempts to deliver our social justice agenda.
Now before I talk about the future, what about the past? How did we get here? Short answer. We got here because the government have screwed up.
Some commentators, notably Owen Jones, (there expressing the friendly comradeship the left is famous for), apparently believe that "In the Black Labour" advocacy of fiscal conservatism represented an endorsement of Tory economic policy. So I thought a few reminders that we've been saying since we started that the governent strategy would fail might be worthwhile.
As Anthony Painter and I said when we wrote in the Guardian on launching "In the Black Labour":
"The chancellor's autumn statement showed conclusively that George Osborne has messed up. His model of recovery – that export-led growth and private investment would step in as the state withdrew – was wrong. And he failed to allow enough flexibility should things not go as planned. The result is a faint but worrying reflection of the European periphery, where new austerity is piled on existing austerity in a desperate scrabble to hold on to fiscal targets."
and I underlined the point here in point three back in November:
"The government messed up because they got the short term economy wrong. We saw on Tuesday how we're all paying the price for that. In a demand crisis, you need to take action, and do so dramatically and boldly. To do otherwise isn't being fiscally conservative, it's just being stupid."
So, no question about that. The government got it wrong.
Yet that's not the end of the story for Labour.
If the government fails, this creates an increased pressure for the next government. The lower growth is projected in this parliament, the less likely it is we see deficits reduced, the higher the costs of failure and the bigger the challenge for a centre left government coming to power with a stagnant economy, high deficits and high social costs.
It's worth pointing out that we're pretty clearly now on the downside of the OBR projection for the economy. Here's what that OBR say will likely result from this state of affairs continuing. (they regard it as an Euro area issue, but the same point appplies for a domestic slump.)
"weak nominal GDP growth leads to significantly lower tax receipts, due to lower consumption, labour income and company profits. Taxes on assets are significantly weaker, due to lower equity prices and housing transactions;
unemployment-related spending rises, but lower inflation dampens benefits upratings and debt interest payments on index-linked gilts.
Spending, which is fixed in nominal terms over the current Spending Review period, increases as a share of national income. Growth in spending beyond the Spending Review period rises more slowly, as it is linked to
general economy inflation;and
much of the additional borrowing compared to our central forecast is cyclical, but nevertheless, because of our assumption of slower potential growth, the CACB is no longer in surplus in 2016-17;
and
higher borrowing (both structural and cyclical) leads to public sector net debt rising significantly over the forecast period." (OBR March forecast Para 5.41, pp174-5)
Some in the Labour party may feel it's politically sufficient for the Labour party to simply point out that the government has failed and ignore the question of what such a failure will mean for a Labour government.
I profoundly disagree.
Ultimately, the next election will be about the future, and if Labour isn't clear about it's approach, we will be exposed, even by a failed Chancellor. Even now, with the government's credibility ratings tumbling, we are seeing "a plague on all your houses" attitude among the electorate.
The last ComRes poll said that while just 25% of voters trusted Cameron and Osborne on the Economy, only 19% trusted Miliband and Balls.
I don't want to be pessimistic. This poll represents a significant improvement for Labour compared to the Tories, and one that is reflected in all polls, but the fact that both parties score so badly should concern us. It suggests that the many in the electorate think that both major parties have done little to earn trust. My belief is that it is here the Labour party needs to focus, and it is not at all to soon to do so.
I feel so strongly about this because the truth is that the next Labour government will not have easy answers, and we need to prepare the ground for that now, if we want to achieve anything worthwhile in government.
I also feel, (and I have no evidence for this, only gut instinct) that people will actually appreciate a party levelling with them now. This is no longer the Nice decade, and so we no longer need nice politics.
Actually, when it comes to the challenge feel I was sort of vaguely prophetic here, in the Independent back in September:
"Plan B may be essential, but a return to growth will only ease eventual fiscal consolidation, not remove the need for it. Worse, if George Osborne sticks to his plans but fails either to grow the economy or cut the structural deficit significantly, that just means an even harder task falls to the next government.
Either way, our plans for the future will involve a programme of more taxes and less spending when the economy is growing. This is hardly an attractive left-of-centre position, but when stable deficit reduction becomes necessary, surely it's our duty to get the finances into the black in a way that matches left-wing aims.
It would be stupid to pretend a fiscal path back to black won't hurt. To cut the deficit and invest in industrial growth, we'd need a public restraint that would be painful for many. That pain might still be worthwhile if we could use fiscal stability to generate a better spread of jobs and wealth"
This debate is wrongheaded because it is so parochial. Equivalent (not the exhorbitantly privileged US) economies are facing equivalent or worse growth recessions. The UK used up its fiscal stimulus – which was always exaggerated in its size versus those in the US and Germany by the way – under the Brown government. Any government, whether ConDem or LabDem, would have had to do the same thing: provide an absolutely credible deficit-reduction programme in return for highly accommodative monetary policy and low term rates. Stop beating yourself up. This is temporary and it is Europe-wide and – by taking the measures we have taken (and which Chancellor Balls would have taken) – we and the Irish will be out of this long before the Spanish are.
I agree with much of this – we're not ireland, we're not greece and there was room for an appropriate stimulus after the '10 GE but we are going to be in a much stickier situation in may '15 and we need policies to fit that election – not just say "I told you so"
even then any stimulus (should we be able to magic one up) would surely still have had to see significant public service cuts and a redesign of state provision. Propping up public services just wouldn't stimulate the economy – public spending has been used to mask/fill-the-gaps in areas where the private sector is weak but the only way we could really stimulate these local economies (esp in the north and west) would not be for more social services but really developing a skilled workforce and investing on infrastructure which would make businesses more competitive – an actual industrial policy rather than redistributing wealth generated in the SE. We're not going to have more money so any industrial policy will have to be paid for from within existing spending.
my worry is on the left we seem to have a prevailing view that protecting public services is the alternative to austerity. I think that's a mistake – not just in missing the opportunity to start to address the GVA gap between london and the regions but politically it may fail to address the priorities of enough of the voters we need to win back.
For what reason do you think it necessary to reduce the deficit?
I think for an answer to that, you're better off reading the original pamphlet!
H
At the basic level you can't keep piling on debt commitments forever, at some point you're not going to be able to pay them back. You could admittedly ask the Bank of England to intervene and print money to cover that debt, but that has dengerous consequences in terms of inflation and issuing debt in future. Ultimately, if you believe that the economy needs stability to flourish you need to have a balanced(ish) budget.
Personally, I don't think the more radical monetary options are being discussed enough at this point, but ultimately balancing the books is important.
( Big voice ) Mork your task is to come up with a story that allows the Labour Party to criticise cuts now suck up the the unions and yet , simultaneously , promise that Labour will not bankrupt the country again the second they are back in power
( Mork flinches) Nrarfff your vastness even puny eathlings will see through this subter .. subter…. errm, trick
SILENCE MORK- The earthlings have not yet worked out they are ruled by the mice , any old rubbish will do
( Mork) -Well oh fat one I could do the old tailor thing " This one fits you sir ….why yaaaaaz I mean the much larger one sir prefers, 'that' one fits you hmmm mmm"
(Big Voice) Thats it Mork say this and then that , but try to say them at the right time
Mork – Ok your hugeness armed and ready for lying
Wooooooosh
"……to deliver our social justice agenda." This basically means increasing the Welfare budget. I do so very hope Labour try to push this at the next election. I'm sure the tax payers of this country are just itching to release more of their funds to Labour's work shy and feckless.
Regarding the recession – Hopi is right to say it is bad news for everyone (unless you are bankrolled by the tax payer, like he is). What Hopi doesn't say, of course, is that under Labour, the situation we are in now would be far, far worse.
The only reason we are not doing much worse is because the markets have at least some confidence – as do all of the credible international institutuions. So, same old Labour here – spend more, borrow more, indebt more, waste more – and pretend trillion pound economies can be jump started by inventing public sector jobs in Labour constituencies – and Labour's favourite recourse when things get tough – soak the rich and undermine the successful.
We've all been here before – the 1970s – only now we lend to the IMF, rather than begging from it.
Balls & Miliband would destroy in a heartbeat any chance we ever had of a recovery – and they would do it with smiles on their faces,
There is very little proof that things would be far worse under Labour, UK treasuries have moved almost in harmony with their US counterparts, those nations having problems have been the Eurozone nations who have been without monetary policy options.#
It's also worth noting the consequences of a slower deficit reduction plan on the national debt, for example if we end up with 20% more debt, the additional interest cost is still less than 1% of GDP there is no resason why this should be considered unaffordable.
As for the international institutions it's worth noting that below the headlines, that tend to shy away from political constoversy they are hedging their bets and warning of potential dangers to excessive fiscal tightening.
Finally, this situation is completely unlike the 70s, in the 70's the big problem was runaway inflation, the problems we have now are completely different. I'll take your warnings with a pinch of salt.