Last Wednesday (November 22, 2023), the Tory government in Britain released their fiscal update known…
One cannot but be very happy that Jeremy Corbyn has assumed leadership of the British Labour Party if you sit on the progressive side of politics. His elevation to the top job has all but closed the door on the compromised years of New Labour. The so-called Blair-ites have been declared yesterday’s new and not before time. Their embrace of neo-liberalism and the ‘light touch’ approach to the financial sector allowed the destructive period set in place by Margaret Thatcher in the 1980s to become more intense (for example, the decline of manufacturing and the increasing dominance of the unproductive financial sector). But as I have indicated before, some of the language and promises coming out of the Corbyn camp appear to be within the neo-liberal paradigm and, in many ways, not an advance on the New Labour shemozzle. I know that the claim will be that they have to be cautious for political reasons not to open themselves to attacks from the conservatives given the public fear of fiscal deficits, after years of indoctrination. But then their claims to be heralding in a ‘new politics’ would seem to be rather lame if they are prepared to lie or obfuscate about the role and meaning of fiscal deficits just to get some political advantage. Further, at some point they will have to take this issue on if they want to forge a truly progressive new political agenda. Otherwise, they will wallow in the confused space where they cannot break out of the neo-liberal mould while banging on about how fair they will be. They have five years before the next election – and that is plenty of time to reeducate the public. That process of messaging and re-framing should start now. Accordingly, they should take the political flack now and trust in their messaging and re-framing.
Jeremy Corbyn’s leadership campaign was aided by direct mailout to Labour Party members with the envelopes emblazoned with the following:
The outstanding results in the Leadership election reflected the appeal that this type of language has for the members who have suffered years of mind-numbing, me-too-type narratives from smooth talkers like Blair and Brown and the rest of the New Labour politicians.
The hypocrisy of the New Labour approach was amazing to watch from afar. They took Thatcher’s initial largesse provide to the financial markets (deregulation etc) and turned it into a monster, which if not for state support, would have collapsed spectacularly in the GFC.
They preached equity yet watched income and wealth inequality rise under their stewardship.
They participated in an illegal invasion of Iraq which has completely destabilised the World. One upshot of their criminality in this regard is the worst humanitarian tragedy since World War 2 that is playing out before our eyes at present as tens of thousands of people are being displaced.
Corbyn has to some extent revitalised the British Labour Party with literally hundreds of thousands of new members and, significantly, a whole new brigage of youthful supporters suddenly engaged with the traditional political process, probably for the first time.
That is an exciting development. We were excited when Syriza was elected. But the anticipation that something good would come out of that outcome lasted for moments as it became obvious that they were not prepared to advocate taking Greece out of the Eurozone – to freedom.
Once Syriza tried to play ‘chicken’ with the Eurofin ministers while claiming they were staying in the Eurozone then it was only a matter of time before total humiliation at the hands of the Germans would occur. It took 6 months as the capitulation was slowly dragged out of them – painfully and destructively.
The press have moved on from Greece, but the damage inflicted on the people is accelerating – but then it is their problem, n’est-ce pas? That was yesterday’s news.
Now the progressives are seeing Corbyn as the saviour with his ‘new kind of politics’.
For me, a ‘new kind of politics’ must start with new grand visions clearly articulated with proper ‘causal’ understandings conveyed.
Some of the challenges facing the UK economy include unemployment and low-quality employment. So a grand vision might be “Zero waste of Brits” – which makes the people the central target or destination that aspirations are intending to reach.
But then how might Britain achieve that grand goal? Well that is where the causality comes in? The vision must be accopmanied by so-called ‘force’ statements. Force is energy exerted onto something to push it to a desirable destination.
So we want everyone who can work to have a job and have as many hours of work that they desire to work. We don’t want people in zero-hour contracts. We want people to have some income security. We don’t want people being paid below socially-acceptable minimum standards.
That is a grand vision. But then the right-wingers would claim the same thing – and of course mean something quite different.
But that grand destination has to be reached. How? Well the right-wingers including the New Labour lot think it can be reached via market forces largely unfettered by the interference from government policy.
Take away income support benefits and people will search and take any job and then the ‘cream rises to the top’. This is the type of market-based claims that are rehearsed relentlessly by the conservatives (including New Labourites).
But casting our eyes around tells us that the years since Thatcher have not delivered on that grand vision no matter how the conservatives would like us to believe it had.
The GFC was a particularly nasty manifestation of what has gone wrong with the current approach to politics and policy that the Tories and New Labour followed.
So the ‘new kind of politics’ has to explain in detail the different causal routes (or forces) that will deliver that grand vision.
Enter a new discussion of the capacities of the currency-issuing government and the role of fiscal policy (including deficits).
Explain how employment is a direct outcome of spending of one sort or another.
Explain how one person’s spending is another person’s or persons’ income.
Explain that if non-government spending is insufficient to generate enough sales to fully employ people in jobs that the ‘grand vision’ believes are acceptable then there is only one sector that can fill the gap.
Explain how government deficits fill the gap and increase incomes and wealth in the private sector.
Explain how running government surpluses or trying to run them destroys private sector incomes and wealth.
And so on.
Spending is the force, the incomes and jobs are the destination.
But then you read Op Eds that are coming out from Labour Party stalwarts that belie the idea that Britain is truly entering a period of new politics.
For example, the UK Guardian article (September 12, 2015) – Simply protesting against austerity will not enable Labour to win – by one, Peter Hain who was a Cabinet Minister in the New Labour governments and retired at this year’s election.
The main argument is that a successful political strategy cannot be just a protest against the orthodoxy of the day. It needs a vision.
The party now needs a serious alternative to the suffocating neoliberal orthodoxy of cuts, shrinking the state, privatisation and job insecurity. That has to start by defending the economic record of the last Labour government, because otherwise we will be trapped in that neoliberal orthodoxy just as, sadly, we were in the last parliament with an austerity-light policy.
Before the banking crisis, Labour delivered a record 10 years of continuous economic growth, low inflation, low interest rates, record employment, record infrastructure investment and rising living standards.
But this appeal to the wonderful New Labour record is slippery indeed.
Record employment is mostly a product of the scale – everything was larger. It also oversaw mich higher unemployment that it inherited.
Unemployment increased from 2.1 million to 2.6 million between mid-1997 and mid-2010 even though it fell during the first two terms of government.
And the lowest unemployment rate it achieved was still more than 1 per cent higher than Britain tolerated in the early 1970s.
And talking about those first two terms, one could argue that the ‘pro-market’ stance adopted by Blair and his cronies set in place the conditions that accelerated the vulnerability of the British economy to the financial meltdown if not helped cause the GFC.
Remember the classic 2005 – Speech – by the Gordon Brown to the Confederation of British Industry (CBI).
The better, and in my opinion the correct, modern model of regulation – the risk based approach – is based on trust in the responsible company, the engaged employee and the educated consumer, leading government to focus its attention where it should: no inspection without justification, no form filling without justification, and no information requirements without justification, not just a light touch but a limited touch.
The new model of regulation can be applied not just to regulation of environment, health and safety and social standards but is being applied to other areas vital to the success of British business: to the regulation of financial services and indeed to the administration of tax. And more than that, we should not only apply the concept of risk to the enforcement of regulation, but also to the design and indeed to the decision as to whether to regulate at all.
The blind belief that the financial markets were actually calculating risk in any meaningful way dominated this period of financial deregulation. New Labour propounded the myth that self-regulating markets will deliver optimal outcomes.
As we have seen, the risk-based approach badly failed and was always going to fail.
The fact that New Labour built on the destructive tendencies started by Thatcher with respect to financial markets and the resulting damage of the crash will be their legacy. It was neo-liberalism exemplified.
So it is a little odd that Hain (clearly trying to protect his own repute as part of Blair’s team) thinks Labour only turned neo-liberal (and austerity-lite) in its last term of office.
Further, note the reference to “record infrastructure investment” and see the analysis below. The reality is that New Labour maintained the historic low public investment ratios that began with the Thatcher assault on public sector net investment.
New Labour did spend more than anyone previously on public sector net investment but then that is hardly a record worth defending given that the economy was also growing (and by a faster rate) and everything was getting bigger in nominal terms.
But the share of public investment in total national income languished at the low levels that Thatcher had created. There was only minor improvement in this ratio during New Labour’s tenure.
Peter Hain then considered New Labour was a success because:
Britain’s budget deficit and national debt were low compared with most advanced economies – and significantly lower than that inherited from the Tories in 1997 … The truth is that Labour’s pre-crisis budget deficit of £39bn, or 2.7% of GDP, was dwarfed by the colossal cost of saving Britain’s failing banks-which by 2009 was equivalent to 90% of GDP.
Which tells you almost everything.
During New Labour’s tenure the external deficit average around 1.9 per cent of GDP rising from near balance in 1997 to around 2.6 per cent by 2010.
So you know the external deficit was increasingly draining spending from the British economy during this period. I don’t want that interpreted as being a bad thing. But the fact means that you cannot evaluate the fiscal stance and outcomes in any meaningful way without considering the behaviour of the other sectors – external and private domestic.
Further, New Labour oversaw a decline of the British household saving ratio from around 6 per cent of disposable income in 1997 to around minus 3.3 per cent in early 2008, before the crisis hit.
The ‘light regulation’ pushed unsustainable levels of debt onto British households which went into the property boom and resulting crash where prices fell by around 15 per cent.
As Aditya Chakrabortty wrote in his UK Guardian Op Ed (May 30, 2014) – Britain is still feasting on credit – and the next crunch will hit in 2016 – the collapse left many British mortgagees in negative equity, which has evolved into around “770,000 ‘mortgage prisoners’ – households who, perhaps because they’re self-employed or have low equity in their homes, will find it very hard to remortgage on to a cheaper deal.
We read that:
The story of British households is simply told: we went into the crash with historic levels of debt; we cut back a bit, but are still burdened with debts worth about 140% of our income – higher than the eurozone and even credit-happy America. In cash terms, household debt is way above that racked up by the government – even though the right only bangs on about the latter.
Meanwhile, the unemployment rate rose during their tenure.
So the “low” “budget deficit and national debt” was actually signalling policy failure not the hallmark of responsible fiscal management.
In 2007-08?, the fiscal deficit was 0.44 per cent of GDP and it accompanied an external deficit of 1.2 per cent of GDP.
In other words, the net contribution to demand from the government sector was not sufficient to offset the drain on demand from the external sector and as a consequence the private domestic sector continued to run a deficit (spending more than its income) of 0.8 per cent of GDP.
The private domestic deficit had fallen in the years leading up to 2007 but the household saving ratio (as a percent of disposable income) was still negative and had been negative since the December-quarter 2004. It only turned positive again (that is, households resumed saving) in the December-quarter 2008 as the reality of the crisis started to dawn on the excessively indebted British households.
The private investment ratio (capital formation as a percentage of GDP) had also fallen from 19.8 per cent in the second-quarter 2000 to 18.8 per cent in the December-quarter 2007.
So the dynamics of the private domestic deficit were being largely driven by household dissaving and increasing their indebtedness.
The economy was growing but in an unbalanced way – too much private debt and too small public deficits.
The fact that Peter Hain chooses to use isolated financial ratios (“budget deficit and natinoal debt”) to play the “low” is good card tells us that he doesn’t want the readers to understand the way in which the fiscal outcome is intrinsically linked to the other sectoral balances and they are linked together via national income movements.
He might not recognise the point that the “low” fiscal deficits that New Labour were boasting about in 2005 and 2006 had helped to create the destructive forces that would come to roost a year or two later.
This deception gets worse when he prescribes that Jeremy Corbyn has to bring “public finances back into balance” by speeding up growth.
Thinking back to the New Labour era, the continuous growth was aided by the fiscal deficits and would have come to a crunch much earlier, given the private debt escalation, had the government tried to run a fiscal surplus.
A nation can safely run a fiscal surplus if the external sector is adding so much to spending in the domestic economy that the government can provide an appropriate level of services and the desires of the private domestic sector to save can be met.
Continuous growth that was associated with relatively large external deficits and unsustainable private sector credit expansion, would not suggest a fiscal surplus or balance was appropriate then, especially when we know that the British economy was not suffering from over-full employment.
So in what sense is a fiscal balance of zero appropriate?
Britain will not generate large external surpluses in the foreseeable future, which means the only way that the private debt situation can be brought under control without driving the economy back into recession, is for the government to increase its fiscal deficit.
How do the Blairites propose that Britain will create external surpluses that are of sufficient magnitude to meet the desires of the private domestic sector to net save, while at the same time, ensuring overall spending is sufficient to achieve full employment and allow the government sufficient spending scope to provide first-class public services and robust public infrastructure development?
Given history and the current circumstances, I would think an on-going fiscal deficit – larger than it is now – is the correct strategy if the well-being of the British people is to be advanced.
And that narrative should be introduced into the public debate immediately to underpin a period of ‘new politics’ where the public are fully appraised of the options available and the implications of these options fully explained.
To reinforce our understanding of the failure of the Blair years here is some analysis of what happened to investment.
The Thatcher-Blair years resulted in a very stark reduction in public sector investment and no visible improvement in private business investment as a per cent of GDP.
The following graph shows Private business investment (as a per cent of GDP) and Public sector net investment (as a per cent of GDP) from 1948 to 2014 for Britain.
The data for Public sector net investment was provided in financial years after 1954 but I just squeezed it into calendar years to match the National Accounts data. For a blog this is fine and does not alter the outcome significantly.
The red horizontal line is to mark the Thatcher then Blair years for those who cannot recall.
Clearly, there is a cycle in the data and the deep recession in the early 1980s is evident. Thatcher made that recession worse than it had to be.
But the most striking aspect of the graph is what has happened to Public sector net investment (which is the spending on productive public infrastructure net of depreciation) in the Thatcher-Blair years.
There was a significant reduction in public sector infrastructure investment and a visit to Britain now sees the impacts of that realignment in public spending.
The other point is that the neo-liberals can hardly say that private business investment as a per cent of GDP took up the slack left by the sharp and sustained reduction in public investment.
The neo-liberals talked endlessly in the 1980s about how privatisation was just a process of shifting expenditure and employment from the inefficient public sector to the efficient private sector.
Critics of privatisation predicted that it was really about cutting spending and employment.
It is clear from the above graph that there was a net reduction in total investment in the British economy as a proportion of GDP when Thatcher took office, which was sustained through the Blair years.
That reduction hasn’t been a good thing for Britain.
Further, as the next graph shows the public sector retrenchment was not so much in terms of the proportion of recurrent spending (as a per cent of GDP) which has been around 35-40 per cent of GDP since the mid-1970s.
Rather, the damage was inflicted on Public sector net investment, which undermines both current growth and employment and future potential growth.
The article by Peter Hain is not an isolated contribution from Labour Party insiders. The person touted as being the new Shadow Chancellor, John McDonnell wrote on August 11, 2015 – Jeremy Corbyn would clear the deficit – but not by hitting the poor – was similarly adopting this ‘safe’ strategy to deflect obvious attacks from the Tories.
I analysed that article in this blog – Corbyn should stop saying he will eliminate the deficit.
Just to reiterate, John McDonnell claims that British Labour under Corbyn will be:
… eliminating the deficit and creating an economy in which we live within our means.
The reference to “living within our means” is an oft-used metaphor that is intended to promote the idea that the government is behaving excessively and that sacrifice is needed and therefore cuts are necessary if it is running a fiscal deficit.
The metaphor doesn’t ask us to think about the nature of the ‘means’ that a currency-issuing government might have or whether such a concept is even applicable to this institutional.
What are the means available to a national, currency-issuing government. Certainly they are not defined by the size of the deficit.
For a private household, our means are restricted by the financial resources that we can garner which then allows us to purchase real goods and services. Those financial resources include our incomes, our prior saving, our capacity to sell previously required assets (real and financial), and our capacity to borrow.
None of those constraints are applicable to a currency-issuing government. Political constraints aside, the actual constraint that such a government faces is the available real goods and services including all the idle labour that are for sale in return for British pounds.
The idle real resources define the ‘means’ available to the British government and the fiscal space that is possesses.
It can create more fiscal space if it chooses by reducing the purchasing power of the non-government sector (for example, by increasing taxes) and increasing the stock of idle resources available for purchase.
Balancing the fiscal position has no obvious relevance to this concept of fiscal space.
Finally, I also thought this article in the Sunday Observer (September 13, 2015) – Conservatives see a chance ‘to discredit socialist thinking once and for all’ – was ridiculous.
The proposition is that the Tories will avoid ‘playing the man’ and will instead “beat him with clear intellectual arguments”.
And what might those arguments be:
… It is a chance for us to discredit socialist thinking for good.
Framing! Corbyn does not advocate Socialism. He even publicly denied that “he would reinstate clause IV of the Labour party constitution, which committed the party to nationalising industry and was scrapped by Tony Blair 20 years ago” (Source)
A Socialist agenda is not defined by “higher spending, higher taxes and more borrowing” by the government sector. It just goes to show how language has evolved (deliberately) and is now so misused that terms lose meaning but still carry a potent message to an indoctrinated public.
As a slight digression even if there was a fully-Socialist economy with no coherent private domestic sector, it wouldn’t necessarily follow that the central government would be running a large fiscal deficit or even a deficit at all.
If a nation such as Norway suddenly became truly Socialist and the private Capitalist sector was eliminated, the national government would still have to run a surplus (probably) because of the strength of its North Sea resources exports. Otherwise there would be too much spending and inflation would result.
Playing ‘safe’ by lying about deficits and the role of government because it neutralises or reduces the veracity of the political attacks that the Tories will mount is not ‘new politics’.
That sort of ‘safe’ strategy is the old, failed politics and has no place in a truly progressive strategy. There is five years to the next election.
That is plenty of time to start the process of re-education which will force a change in the public debate because then the conservatives will have to explain why fiscal surpluses are desirable rather than just asserting their view and reinforcing the lack of credible explanation with a series of metaphors that play on our ignorance.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.