Why Labour's current disarray is ultimately the consequence of Osborne’s austerity

 

I want to expand on a footnote to last week’s post. As I said there, we now have clear evidence that austerity from 2010 onwards helped fuel right wing populism, Brexit and Farage. However, that post argued that right wing populism would have emerged anyway, because its fundamental cause was a trend towards ending elite taboos on the right against appealing to xenophobic and racist voters which we see across the world. So austerity just helped populism arrive more quickly and, with Brexit, more dramatically.

In contrast I do think a lot of the problems we see in the UK Labour party today stem from Osborne's successful devastation of public services, and it is less clear they would have happened anyway. A Conservative cutting public services to numbers way below what the public were comfortable with should have been a gift to Labour of course. So I think the story of how it turned out otherwise is worth spelling out.

It is easy to forget how almost universal the belief was in the UK media during the austerity years that reducing the budget deficit had to be the major macroeconomic priority. Basic macroeconomics, understood since Keynes, said that when interest rates were stuck at their lower bound cutting the deficit would damage a recovery. This was ignored, despite it being in the worst recession since WWII. We now know, from empirical work at the IMF, that trying to cut the deficit in this situation not only prolonged the recession but in all likelihood made the public finances worse in the medium term as well!     

As few now defend Osborne’s policy today, it is easy to forget how much it seemed to be common sense to the media and large parts of the electorate at the time. I invented the term ‘mediamacro’ to describe this. In contrast a majority of academic economists opposed austerity as it began, unsurprisingly given it violated what we all taught, and this majority grew steadily over the next few years as the damage became clear and the intellectual arguments for austerity collapsed, but none of that made much impression on the media.

The result was that Labour in opposition found their arguments against Osborne’s policy were getting nowhere, and so they were gradually discarded. [1] Despite UK workers facing a cost of living crisis at least as bad if not worse than over the last few years, the Conservatives won the 2015 election, and the media’s promotion of austerity played a key part in that. The reaction to this among many prominent Labour figures was to almost completely accept the case for Osborne’s austerity. Ironically, just when public opinion was finally beginning to turn against what Osborne had been doing, it looked as if Labour’s senior politicians were heading in the wrong direction.

I thought at the time and still think this is the essential background to understanding the election of Jeremy Corbyn as leader in 2015. A majority of Labour members hated austerity for good reason, and were dismayed at seeing their party leaders be equivocal at best. Corbyn was the only one of the four candidates who clearly opposed austerity, and as a result he won overwhelmingly. It is silly to blame this result on ‘entryism’, although that is less true of his re-election in 2016.

So I think it is fair to say that it was austerity, and the failure of Labour to dent the media consensus that austerity was necessary, that led to the four years in which the left led the Labour party. Of course that doesn’t excuse the Labour leadership that came before him for their appeasement of austerity, but I hope it makes it a little more understandable. Equally it is unconvincing to suggest that most of this pre-Corbyn leadership actually wanted a smaller state, after they spent years in government doing the opposite.

In opposition Labour under Corbyn and Shadow Chancellor John McDonnell did make good on the promise of ruling out a repeat of 2010 austerity. Although McDonnell accepted (rightly in my view) the need for a fiscal rule, these would not apply when interest rates were stuck at their lower bound, which they had been since 2009. The media at the time called this a ‘loophole', of course, but something like it is now standard in most UK fiscal rules adopted in recent years. In the recession that came with the pandemic Sunak made no attempt to pretend that the budget deficit was the priority, and instead enacted a (probably overgenerous) fiscal stimulus package, which was the opposite of the policy advocated by Osborne in 2009.

It also became clear, pretty quickly after Corbyn’s election, that there were those on the right of the Labour party that would never accept a party led from the left, and who were prepared to see a Conservative government as a price worth paying for taking control of the Labour party away from the left. They had expected this to happen in 2017, and were rather shocked when it didn’t, but they organised with the help of the media to ensure it happened in 2019.

That is not to suggest that this right wing faction was responsible for Corbyn’s 2019 defeat. Actual and potential Labour voters were overwhelmingly against Brexit, and as it became clear from 2016 to 2019 what Brexit under the Conservatives would entail, this opposition grew more impassioned. Corbyn was slow to respond to this, which neither pleased Remainers or (when he finally did) Leavers. But the reality probably was that there was very little Corbyn could have done that would have prevented Johnson winning in 2019.

Defeat, together with the anti-Brexit views of most Labour party members, meant that the left were unlikely to win the contest for his successor in 2020. Morgan McSweeney from Labour’s right found their ideal candidate in Keir Starmer. He was a relatively new MP without a public record of clear policy positions, and he promised to unify the party with a platform that was pretty left wing.

Whether Starmer always intended to renege on this platform, or whether it was McSweeney’s influence that persuaded him to do so, we will probably never know, although plenty of people will tell you they do. In an important sense it doesn’t matter. Either Starmer was always part of the right wing faction that intended to bring Corbyn down, or he was politically naive and therefore easily persuaded by the man who got him elected to allow a purge of the left [2] once he had won, but the result was the same. Neither alternative reflects well on Starmer.

Purging the left didn’t have an immediate electoral cost while the Conservatives were in power, as it was the Conservatives who badly lost the election in 2024 rather than Labour winning a great victory. Labour won with just 34% of the vote, having been over 40% in the polls a month before. However, once in government the influence of McSweeney, and the political weakness of Starmer, began to have serious costs. Just as the far right faction had had contempt for the left during the Corbyn years, when in power they seemed to have a similar indifference to voters with socially liberal views. In McSweeney’s case this reflected a Blue Labour ideology, which combined modestly left wing economic policies with pretty socially conservative policies on asylum and immigration.

This position was the worst of all worlds for the Labour government to take. Copying Reform on immigration and asylum just legitimised and reinforced Reform’s appeal, while at the same time alienating much of Labour’s core vote. Labour in government has lost voters on both sides, although more to the left than the right. Disastrous Council election results inevitably followed, as many of us said they would. (I initially made this point a year ago.) It is true that Starmer has made plenty of other mistakes, but it is far from clear that these mistakes are similar in magnitude to those made by Johnson and Truss. It is best to ignore the preoccupations of the media here. What gives the media licence to pretend otherwise is Labour’s terrible poll position, which reflects losing votes to their left as well as to the right.

In this respect Labour and Starmer’s current precarious position is a direct result of being led by the right wing faction that wanted Corbyn out at all costs, a faction that gained control because of Corbyn’s victory in 2015, a victory which in turn owed a great deal to Osborne’s austerity policy and the Labour leadership’s powerlessness to strongly oppose it. What we are seeing today, therefore, is a direct consequence of that austerity policy and the support it received in the media. Furthermore, it is not obvious how all this would have happened without Osborne’s austerity and the media’s promotion of it.

Of course setting this out does not imply that any of it was unavoidable. Labour could have fought austerity in a more knowledgeable way (see footnote 1.) The media should have been more interested in what academics said and paid less attention to central bankers who had axes to grind and market analysts who had a vested interest in austerity [3]. Lexit was always a dumb idea. Those on Labour’s right who wanted Johnson rather than Corbyn in 2019 gave us a version of Brexit that has produced the economic stagnation that limits what Starmer can do today. While some Labour voters are socially conservative, it was always obvious the majority are not and would not remain passive as Labour trotted out Reform cliches and lies. Yet historical analysis involves recognising actors as they are rather than how you would like them to be. In this respect it is ironic that Osborne’s austerity not only screwed up the economy and public services until this day, but it has also inflicted severe political damage on the Labour party.

[1] If I wanted to be critical, I would say that the weakness of Labour opposition to austerity owes something to a mistake made in government, by a new Chancellor preoccupied by rescuing the banks and strongly influenced by the Treasury’s fear of rising budget deficits. The policy message then should have involved clear priorities: first deal with getting the economy completely out of the deepest recession since WWII, and only once the recovery was almost complete and interest rates were rising to start dealing with whatever excessive budget deficit remained.

But Labour’s plans to reduce the deficit when in government meant its message in opposition, faced with a Conservative government determined to cut spending even when the economic recovery never came, was weak. As growth stagnated from 2010 to 2012, instead of saying this was because the government was focused on the wrong problem they instead just said it was going too fast. Instead of confronting with basic Keynesian economic a media convinced that deficit reduction was necessary, Labour’s message seemed tame and failed to convince many.

However, so total was the media’s conviction that Osborne was right that I doubt that even this superior messaging in government and then opposition would have made that much of a difference to Labour’s fortunes at the time.

[2] Of course there have always been battles between left and right within Labour. However figures like Corbyn were tolerated by Blair, but not by Starmer. In reality there is a significant proportion of voters who are socially liberal and economically left wing, and if they don’t feel represented by the Labour party then they are easily lost to a dynamic party that does embody their views.

[3] Austerity killed the recovery meaning that short term interest rates would be stuck at their lower bound for a long time, meaning longer term interest rates fell and bond prises rose. As Toby Nangle points out the bond markets cheered, because rising gilt prices produce good returns. Taking macroeconomic advice from bond market traders is like taking advice on how to deal with pandemics from undertakers.