There are probably some Tories pinning their hopes on economic recovery to save them from a crushing defeat in 2015. And I recently heard LibDem peer Susan Kramer talk about the coming economic boom.
Yet apart from the foolish and the terminally deluded, almost everyone knows that austerity in Britain has been a failure – even the IMF says so. Austerity killed a mild recovery and the economy has stagnated ever since. As a result, the deficit too has stagnated at £120bn a year. It will probably stay there over the next few years, despite the ever-optimistic forecasts from the Office of Budget Responsibility.
Most attention on Ed Balls’ recent Thomson/Reuters speech has focused on the issue of removing eligibility for the winter fuel allowance from better off pensioners. But there was too a pledge to use the Tories 2015/16 spending plans as the starting-point for Labour’s own budgets.
In the same speech, Ed Balls argued that the government needs to adopt a growth strategy and that otherwise the British economy would remain in the mire. He is right of course. But the same must also be true for Labour. It too needs a growth strategy. Yet the speech contained only a commitment to increase infrastructure spending by £10bn over the life of the next Parliament. In economic terms this is a ‘rounding error’, so small as to be completely irrelevant.
To get back to pre-recession growth and prosperity, the British economy would need to grow rapidly by between £250bn and £300bn. It would need to be led by investment, which now accounts for more than the entire decline in output since the recession began. So the idea that there can be an investment-led recovery ‘paid for’ by minor welfare cuts is simply ridiculous.
Instead, while being economically irrelevant the roll-back of the universal principle in welfare payments has major political consequences. Those consequences are an erosion of the principle underlying the welfare state. Ed Miliband used to defend the universal principle, saying that ‘benefits for the poor lead to poor benefits’. Universalism is needed to maintain the political support of the better paid. Without it, they withdraw support.
In addition, it is impossible for Labour to mount a serious criticism of any Tory cuts between now and the election. The retort will simply be that Labour will also implement them.
The undermining of Labour’s long-held position on welfare also has an electoral consequence. Europe is littered with political graves of social democrat former Prime Ministers who implemented austerity. It should hardly need saying given where the Tories are in the polls, but austerity is massively unpopular in Britain. Even against a shambolic Tory party at all-time lows in the polls, Labour is threatening to undermine its own electoral prospects by embracing failed austerity policies.
Across the world global stock and bond markets are in turmoil because investors are uncertain about recovery. Yet during these wild swings the British government was able to borrow at MINUS 0.76% real interest rates. In fact new borrowing isn’t needed at all as the government can command huge resources for investment. But it does demonstrate the fact that large private investors are willing to pay the government to hold their assets. There is no fiscal crisis. There is an economic crisis.
Instead, the alternative to adopting the economic and politics of failed austerity is very clear and rather simple. The decline in investment is the cause of the slump. The incoming Labour government can invest its way to economic recovery. That way, by growing the economy and increasing employment the public sector deficit will take care of itself.
Join Next Generation Labour for a discussion on Labour’s economic plans with Peter Hain MP, John Healey MP, Cllr Catherine West, Heather Wakefield and Michael Burke – 6.30pm on Monday 10th June, Grimond Room, Portcullis House.