The Charter is only a political
gimmick with no basis in economic sense or necessity and the Tax credit cuts
will come back to haunt the Tories.
It goes without saying that
the manner of John McDonnell’s U-Turn was most unfortunate for him; both Corbyn and he need
to get a real grip pretty quickly on how to run, organise and lead the Labour
Party. I say that or otherwise the right wing media will always report trivialities rather than substantive matters. So it was that the U-turn became the most important headline story that hid so many
critical realities for the British people.
If I was to enumerate the
list of U-turns made by political leaders of all parties during my adult life
there would be no space for anything else on the blog. In recent times I need
only mention a two – student fees and child tax credit – as classic examples.
But of course the current
enjoyment is for Corbyn at every opportunity to be ‘fed to the lions’ that
comprise the right wing press, the Tory party and Labour Party grandees. It is
all because they deeply resent that such a devastating intrusion into their
cosy ‘establishment’ way of doing politics has taken place.
The reality is however that
something that was never ever thought to be on the political landscape even six
months ago did happen in early September. Anyone that would have suggested over
the last thirty years that Jeremy Corbyn and John McDonnell would one day
become Leader and Shadow Chancellor of the Labour party would have been very
quickly sent for assessment as to their sanity. But in the words of the SDP logo
of 1981 they have ‘broken the mould’ of Labour and Westminster politics and it
won’t be the same again for some time. So everyone had better get used to it.
Unlike any other party political leader he has for now the massed ranks of some
300,000 plus party members and supporters behind him.
It is clear that the two are
struggling to change their long practised ways of working and having to
transform and adapt from being quite ordinary, rebellious, very left of centre backbenchers
to operating, behaving and performing as the two most senior people in the
Labour Party. The transformation required must be coming as one almighty shock
to the two of them and there are not many opportunities for rehearsal sessions.
So it is inevitable therefore that in the early stages there are going to be slip-ups
along the way. However it’s not my intention to deal with those here since I
want to pursue a more serious matter.
So it came to pass that on
September 25 the Shadow Chancellor, struggling to make the transformation I
have outlined first said that Labour will support Osborne’s Fiscal Charter - ‘we are going to balance the books, we do want
to live within our means and we will tackle the deficit’. Seventeen days later in a letter to Labour
MPs a few days prior to the Commons vote on the Fiscal Charter McDonnell said ‘we
will under line our position as an anti-austerity party by voting against the
charter’.
Of course the various people
I have mentioned earlier seized on what happened as a sign of incompetence and
the rest of it - which it was. I can only presume that the pressure of only
having been in post couple of weeks caused this mayhem in their political lives and
the ensuing loss of perspective. It was quite interesting to note that McDonnell had taken further advice from senior economist as being one of the reasons for his change of stance.
So everyone who seemed to be
in the know and apparently quoting from the ever mystical ‘unnamed sources’ were
predicting that up to 60 Labour MPs would rebel come the vote. In the end it
was 21 MPs and frankly there was no heavyweight in that group of members Miliband,
Yvette Cooper, Chuka Umunna, Hilary Benn, Andy Burnham, and the others were for
the new line. Labour was now joined by the Liberal Democrats, SNP and
the Green MP – an effective anti-austerity force.
Anyhow to return to the
substantive issue as to whether this Fiscal Charter necessary and what are its
implications? Firstly it is difficult to find any senior economist, former and
current members of the Bank of England standing up for the charter that is
flawed. It is time for investment to ensure better growth.
But what exactly is the issue
about? The UK National Debt as a percentage of Gross Domestic Product (GDP) is
less than the United States and is on a par with France and Belgium. Then the UK budget deficit ( -4.80%) expressed as a percentage of GDP, ranks the country just
above half of some 215 countries. It is however true there are some 30 counties
with no budget deficit and they include many smaller countries similar to Latvia and Tonga!
The Charter was always a
political ploy and Corbyn and McDonnell should have been alert to that from the
very outset aimed at presenting the Tories as being fiscally responsible and
therefore by implication anyone that voted against it are not.
It is a commonly held myth regularly
promoted by the right wing media that Labour governments have all been
profligate and financially irresponsible. I grew up in politics when the Tories
and right wing press were peddling that very same line in the time of Wilson
and Callaghan. But what is the reality?
It
is only on two occasions that Labour Governments have presided over increases
in the national debt as a percentage of GDP. Those two periods were during the huge
global financial crises that the Ramsay MacDonald government of 1929-31 had to
contend with in fall-out from the Wall Street Crash (that resulted in a 12%
increase in the debt to GDP ratio), and of course the last few years of the
Blair-Brown government of 1997-2010. We all can recall too well the 2008 financial sector insolvency crisis which saw an 11% increase in the debt to
GDP ratio.
All
the other Labour governments that have been in power have reduced the scale of
the national debt. Attlee's government 1945-51 reduced
the national debt by 40% of GDP despite having to rebuild the UK economy from
the ruins of the Second World War; Harold
Wilson's 1964-70 government reduced the national debt by 27% of GDP; and even
the Wilson-Callaghan government of 1974-79 managed to reduce the debt by 4% of
GDP.
Over six years, the Conservatives have successfully managed,
through clever campaigning supported by a complicit right wing media and poor
strategic tactics by Miliband and Balls, to focus the economic debate on the
deficit and convince so many people that the economic crisis and the large
deficit were caused by Labour Government spending.
It was a major blunder on the part of Miliband and Balls,
to have failed to take on Cameron and Osborne in the years leading to the
general election about all this instead of being presented as leaders of a
historically irresponsible party. I do accept however that they were faced with
a hostile media and a somewhat disbelieving electorate that had swallowed the
conventional ‘spin’ of the time and consequently were in no mood to listen to or
believe the facts.
What is more Miliband and Balls failed miserably to get over the
message that the average level of spending in the Brown years and at the time
of the 2008 financial crash was less than it was under Mrs Thatcher. They made
a poor attempt at pointing out to the voters that it was not the increased
spending on extra teachers, nurses, doctors and the police officers that caused
the economic crisis but rather the recklessness of the bankers speculating in
the City, and the failure of successive Governments to ensure effective banking
and financial regulations.
Ironically, and the public are
still not up to speed on this, it is Osborne himself that has failed to deliver
and so he now hides behind this Fiscal Charter. Serious commentators in all
sort of economic journals and articles in the serious press point all this out
but the tabloids and the media in general overlook all this.
In 2010, Osborne promised to reduce
borrowing over the next five years by £37 billion but it stood at £87 billion
in 2014-15. That is 135% more than his forecast. Then on public sector net debt
the promise was that over the same five year period it would fall to 69% of GDP
yet currently it is higher than 80%. So Osborne has missed all his targets.
Now to correct matters as he sees
it the Government is embarking on cutting £40 billion more than is necessary to
run a balanced budget, by cutting £30-odd billion from welfare and £5 billion
from essential capital expenditure. It is a plan to reduce the debt at a
ridiculous and unnecessary rate. Of course his plans are dressed up in the
argument that there is no choice.
In politics and economics there
are always choices and Osborne is choosing to continue with austerity and
casting investment to achieve increased growth aside - investing in the infrastructure, transport and housing. Mind I have seen economics tactics of this kind deployed before so it would not be at all surprising that come 2018/19 he will
ease off somewhat on his plans. After all there’s the little matter of becoming
Tory leader and Prime Minister in 2020 in his sights.
Meanwhile it will be the people
who are already suffering, the lowest 30% of income earners, the poor and those on low to middle incomes, that will suffer even more as he pursues his personal ambition. According
to research carried out by the House of Commons Library it is expected that as
a result of the Welfare cuts some 3 million households will lose out by around £1,300
a year. In addition the research indicates that the increase in the minimum
wage for people aged 25 and over—wrongly branded a living wage—will be nowhere
near enough to offset the cuts in tax credits.
All this is backed up by the
Institute of Fiscal Studies (IFS) in its updated analysis on the scale and
distribution of the public sector spending cuts expected in the November
spending review when it points out that the Tory policies put a
disproportionate burden on the most disadvantaged families. In addition the IFS
goes on to point out that the pending national living wage is not a substitute
for targeted benefits and tax credits when it comes to helping poorer households and tackling poverty. In fact
the data suggests that those that will benefit the most from the new minimum
wage will not be the poorest households but rather those households with higher
than average earnings.
So in reality all those on the
side of fairness, compassion, calling for more investment to achieve growth and
an end to austerity politics should be glad that John McDonnell did change his
mind. He has certainly opened up a significant new chapter in the economic debate and what is more the whole debate will become a poisoned chalice for Cameron and Osborne.