All Pain, No Gain

The latest deficit figures show that Government borrowing is higher today than it was a year ago.

A year ago, Anthony Painter and I argued in favour of a fiscally conservative Labour party, saying that:1:

“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.

That still rings true pretty true today. As Rachel Reeves says:

“As a flatlining economy and rising long-term unemployment has sent the welfare bill soaring and tax revenues down the government is borrowing billions more simply to pay for the cost of their economic failure”

We’re not in recession2, but we’re growing weakly. That makes deficit reduction more difficult, puts state spending in the wrong places3, and increases the insecurity and vulnerability of those on lower and middle incomes at precisely the time the economy needs their demand.

All this helps explain why I believe that fiscal conservatism will be essential to the success of any progressive project in the coming decades and am so against the fiscal stupidity perpetrated by this government.

Osborne’s way is all pain, no gain. You cut at the wrong time, in the wrong way, and hurt the wrong people, and then stand back, amazed, when the result is sluggish growth, increased costs of failure and ever narrowing policy options to put things right.

Fiscally Conservative types like me should be passionate about the government’s failure.

Now, that doesn’t mean suggesting the government are wantonly cruel, or vicious, or take delight in increasing human misery. Rather, I think the desire to put the economy on a more productive footing, to avoid a fiscal event, to change the balance of the economy was a worthy and well-intentioned one. It’s kind of important to note that, because I have to watch my tendency to be negative and vituperative.

No, the passion should come because the Government took that reasonable aim and wedded it to a destructive set of short-term policies that were unable to work, and they now cannot change course because this would undermine the fundamental purpose of their administration.

Not only does their inability to really reduce borrowing make the reduction of the deficit longer, more painful and more costly than it needs to be, it reduces public faith that a better path to a sustainable fiscal future is even possible. Having been repeatedly mis-sold fiscal prudence, the chances that the public reject good policy  grows ever greater.

Yet such a path is possible.

What we should be doing is increasing capital spend, scheduling in future tax rises and spending cuts for when growth arrives, and, as far as politically possible, shifting resources from programme and benefits spending (in which I include various tax breaks for the moderately wealthy that boost their lifetime incomes) to investment, capability and structural spending that will support long-term growth.

It’s not that complicated to conceive. Adapting Steve Van Riel, in the Purple Papers, it’s a ‘Simple-hard’ strategy. Simple to set out, hard to execute properly, with as little pain and as much gain as possible.

When the next Labour government sets out its spending plans, there will be howls of dismay from several corners. We know this because it’s happening already, in France and Denmark.

Many, me included, would shy at the political consequences of some decisions. (Example – Pensioners: You need to say goodbye to the triple lock. It’s fiscally irresponsible, a low priority for growth, and poorly targeted to reduce poverty).

Nor is it pain-free within the Labour party.

Ed Balls got huge flack when he refused to offer trade unions meaningless honeyed words about Public sector pay, but he was dead right. He’s just as right today counseling his shadow cabinet colleagues against a partial acceptance of cuts which looks tough, but in fact creates an unfulfillable set of expectations. The bad news is all that is just the beginning, and the next Labour chancellor will have to do much, much more.

The good news is that this would be to deliver a plan with pain, but the prospect of some real gain at the end of it.

Labour is actually in a pretty good place to deliver a policy programme like this, but we’d need to commit to the tight fiscal consequences and the increased contributions and sacrifices this requires from many of us. If we don’t, it would be easy to stereotype the short-term economic boost we need to deliver as just another Labour spending splurge, and too likely that this might turn out to be true.

We need, as Jonathan Portes says, “much more (focus) on ensuring that we have a sensible framework that will ensure long-run fiscal sustainability.

That would mean, for example really grasping at a renewed Fiscal Rule, and because rules themselves have been cruelly abused in the past (and now), that requires that we set out exactly what sort of choices will flow from adopting that rule in the medium term.

In other words, Labour needs to prove that we will be bound to the fiscal mast when the siren voices of loose fiscal policy call at us during economic growth.

There’s another aspect to our approach to rules, of course. We did allow spending to get out of balance in the last few years before the boom. This didn’t cause the recession, or anything like it, but it did limit our room for reaction.

This means we get blamed for those problems that had nothing to do with our fiscal position pre-crash, because we don’t seem to accept the limited things we do have responsibility for. So showing that we’ve learned from that past mistake is politically important too.

How-ever we go about it, the Tories continued failure to cut the deficit opens the door to a fiscally credible, economically reforming Labour party.

Getting the deficit down, over time, and consistently, does matter. We need to steadily reduce the share of debt to GDP in the coming years. The Tories are failing on the very test they set themselves. If we are really serious about both our past mistakes and our future plans, Labour could be the fiscally responsible party of British politics again.

What we surely can’t do is let the Tories botched, incompetent, half-arsed version of fiscal conservatism be the only fiscally responsible game in town.

  1. The article was supporting our “In the Black” paper, written with Graeme Cooke and Adam Lent []
  2. That I’m now more hopeful we won’t triple-dip suggests how low the bar now is! []
  3. on welfare bills not capital, infrastructure and innovation, for example []

3 Responses to “All Pain, No Gain”

  1. Richard Nabavi

    What you are actually saying, Hopi, though you can’t bring yourself to admit it, is that Osborne is basically right, and that, to the extent he might be wrong, it’s because he has been too generous on welfare.

    Of course, Labour likes to focus on the slower-than-expected growth of the last couple of years, but this has been caused by the twin external factors of imported inflation, because of higher-than-expected commodity prices in 2011, and the Eurozone crisis, which has badly hit confidence and damaged the City.

    However, In terms of actual decisions, there is very little to criticise in what Osborne has done; really his only mistake is that, in retrospect, increasing benefits by the full inflation figure (and thus much faster than wages) was too much. That, though, is with the benefit of hindsight – few expected inflation to be so stubbornly high – and in any case, Labour can hardly claim to have been campaigning for less generous welfare settlements.

    Of course we could get slightly higher growth if we concentrated less on redistribution and more on infrastructure (and of course freeing up the labour market more), but, sadly you are a bit of a lone voice on the Left in proposing a responsible approach.

    Reply
    • hopisen

      Well, it depends what You mean by “basically right”. If you mean that he’s correct to say that dealing with the deficit is important, that private sector growth is key, and that the economy should rebalance, then I’m happy to say he’s right, though this strikes me as pretty de minimis!

      On the other hand, while I’d agree with the diagnosis, I am absolutely unconvinced by the proposed cure (though it’s better in the “march of the makers” rhetoric than the reality).

      BTW I was one of those who publicly said that raising benefits by 5% last year while freezing tax credits was a really bad idea- so at least on that I can claim to have been ahead of the “strivers” curve!

      Reply
  2. Matthew

    I find it all very complex. Isn’t there a reasonable argument that the government has no idea how to boost the economy through R&D or infrastructure or ‘investment’ but is very good at redistributing income?

    Is there strong evidence internationally that countries whose governments focus more on ‘investment’ and less on ‘redistribution’ have more successful economies?

    Or maybe that is too simplistic. Perhaps it’s the way in which you redistribute that’s important.

    Reply

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