Labour and the deficit

A constant refrain from those who help make Labour party policy goes like this. I know what you economists say makes sense, but we tried that policy at the last election, and failed horribly. We have to listen to what the people are telling us.

So, for example, we cannot oppose George Osborne’s deficit plans, because we tried that at the last election and lost. We cannot talk about the problem of rent seeking by the 1%, because we tried that and it was seen by voters as anti-aspiration. We cannot argue for a higher minimum wage because that will be seen as anti-market and anti-business - oh wait.

I would draw exactly the opposite conclusion from the election result. On the deficit Labour tried to avoid discussion, and let the Conservatives spin the idea that austerity was the last Labour government’s fault. By failing to challenge both this nonsense [1], and the austerity policy enacted in 2010 and 2011, and the austerity policy proposed after 2015, in terms of perception it adopted the Conservative policy on the deficit. [2] That was why it lost heavily.

Some will say that come the next election the government will be running a budget surplus anyway, so why oppose the process of getting there? The answer to that is aptly illustrated by Labour’s decision not to oppose Budget plans to limit child tax credits to the first two children, or plans to reduce the benefit cap. Both are terrible policies, and it is incredulous that Labour is not opposing them. But once you concede the need for austerity, it becomes much more difficult to oppose the measures that come with it.  

Another argument is that Labour has to accept Osborne’s surplus target, because nothing else will stop Labour being accused of being fiscally spendthrift. (See Hopi Sen for example - HT Simon Cox ‏@s1moncox) This just sounds politically naive. George Osborne (as Chancellor or PM) will not suddenly drop the spendthrift argument just because Labour adopts his plans. Instead the argument will change to focus on credibility. He will say: Labour now admits that it was spendthrift in government, and in opposition it has changed its mind so often, you just cannot believe what they say – so any future Labour government will be as spendthrift as the last.

Others will respond to the above by saying how can you argue Labour lost because it was not left wing enough! But challenging austerity is not ‘left wing’, it is just good macroeconomics. The idea that opposing austerity, or advocating less inequality, is akin to what Labour did between 1979 and 1983 is absurd.

If there are examples to draw from, it is to see how your opponents succeeded where you failed. The Conservatives did not regain power in 2010 by moving their policies to the left. They did it by changing their image. Until a couple of years before 2010 they had promised to match Labour on spending. But when circumstances changed, they seized their chance to change policy and focus on the deficit. It was a smart move not because of the economics, but because of how it could be spun.

In 2015, the SNP saw that times had changed compared to 2010. The idea that we might become like Greece was no longer credible, and voter attitudes on the deficit were much more divided. So they campaigned against austerity, and partly as a result wiped Labour out. (Their actual policy proposals were not very different from Labour, but unfortunately few voters look at the numbers: it is perception that matters.)

The lesson is that when the external environment changes, you try to exploit this change in a way that enhances the principles you stand for and gains you votes. As the deficit falls, putting this at the centre of policy will seem less and less relevant. In contrast, the costs of austerity and rising poverty that are the result of ‘going for surplus’ will become more and more evident. Osborne, by going for an unnecessarily rapid reduction in debt by means of increasing poverty, has thrown a potential lifeline to Labour. Unfortunately, Labour appear to be swimming away from it.

   

[1] Chuka Umunna writes: “Some economists reject this [supporting going for surplus] approach as it would, in their view, necessarily entail simply capitulating at the feet of George Osborne. In their view all we need to do is – in ever more strident and louder terms – shout back at the electorate that it was not profligacy on the part of the last Labour government that caused the crash, but a banking crisis. And, in respect of borrowing, far from acknowledging that we understand the need to reduce national debt, we need to enthusiastically go about making complex arguments for different types of borrowing. Do this and the public will see the light.”

I guess I am one of those economists. I would respond that Labour in 2015 made no attempt to seriously debate this issue, let alone shout about it. The only people challenging the myth that Osborne and much of the media were telling were ‘some economists’. I do not think it is ‘complex’ to argue that you should borrow to investment when interest rates are low, and I think this argument can be effective - which is why Cameron called the people making it dangerous voices.

[2] The SNP saw that Labour were endorsing the importance of deficit reduction, and exploited this by arguing against austerity.