British Shadow Chancellor promising the impossible

The British Labour Party officials and politicians have all been cock-a-hoop over the last week in Liverpool as they participate in their Annual Conference with the latest modelling suggesting they may win a “landslide 190-seat majority” at the next national election leaving the miserable and incompetent Tories with only 149 seats (currently 352) (Source). The contrast between the two national conferences this year could not have been greater. The Tories looked and sounded divided and like losers. The Labour Party looked like winners and united (although that latter condition has only come from the Stalin-like purge that the leadership has conducted on the Left of the Party). The Labour Party is now schmoozing the corporate bosses and each day that it passes it sounds more like what the Tories used to be like, before the rabid Right took over. That assessment is based on the promises that the Labour Party made at its recent Annual Conference. While the details are still relatively general, my assessment of the fiscal promises the Shadow Chancellor made last Monday and elsewhere is that the conditions that would be required to satisfy them will prove impossible to achieve.

I had a lot to say about the so-called Fiscal Credibility Rule that the Labour Party took into the last election.

The first version of it was poorly conceived and was internally inconsistent.

There was no way under any known conditions that the Party would have been able to satisfy that.

At the time, the economists who advised the Labour Party on the construction of the rule were highly abusive towards me on social media for daring to question their judgement.

It turned out that shortly before the election, the Rule was changed, without any fanfare or acknowledgement, to try to shore up the weaknesses that I had identified.

The economists were silent on the changes.

So the point of these Rules is political – the Labour Party want to appear responsible managers of the economy and have been scarred by Tory claims that once they get into office the Labour Chancellor will go on a spending spree.

The problem with holding these rules out as a demonstration of competence is that you then have to satisfy the conditions.

The worst thing that can happen is for a political party to define competence in terms of some aggregate that they have limited control over its final evolution, and then miss the benchmark.

In my view that is worse than having no rule at all.

The general problem with fiscal rules, is as stated above, the government of the day does not have the capacity to directly control all variables that come together to determine the final fiscal outcome.

I discussed that issue in this blog post (among many) – The Weekend Quiz – December 17-18, 2022 – answers and discussion (December 17, 2022).

The point is that essentially non-government, spending and saving decisions, determine economic activity in tandem with government spending and tax decisions; and tax revenue and welfare spending are functions of that economic activity.

So, if the non-government sector reduces its overall spending, then other things being equal, economic activity falls and tax revenue declines, and as unemployment rises, welfare spending also increases.

The net effect is that the fiscal deficit increases or a fiscal surplus declines.

What this means is that government forecasts of projected fiscal outcomes are notoriously inaccurate, and should condition caution in promoting such fiscal rules.

The other situation that typically arises is when a government tells the people that the fiscal deficit is too high and embark on an austerity campaign, which reduces the net public spending and, in turn, slows economic activity.

They then wonder why the fiscal deficit is rising, as unemployment rises.

But the explanation is obvious.

At the British Labor Party conference over the last week, the Shadow Chancellor and the leader have been talking relentlessly about how they will offer cast-iron fiscal discipline,once they take office after the next National election.

On Monday, the Shadow Chancellor outlined the Party’s plans in relatively broad terms.

Jargon was seeping out everywhere and it appears we have a new term – ‘securonomics’ – aka a sop to business leaders who believe in fiscal rules and all the banter that surrounds them.

The corporate sector seems impressed though by this new descriptor of what is effectively just neoliberalism dressed up in softer terms.

While the detail is still to be published, it appears that the British Labour Party will offer to the people the following as part of this ‘securonomics’ platform:

1. Plenty of corporate welfare – either directly in handouts or indirectly via further deregulation.

When Labour was last in office we had the ‘light touch’ regulation which effectively became no regulation or oversight.

That led to the GFC and the collapse of some of their main financial institutions.

Expect more of the same.

The corporate sector cannot be trusted to deliver outcomes for the workers – and last time I looked the Party was still the Labour party.

2. A series of fiscal type promises that they will not be able to keep, but, in their efforts to meet the targets will undermine future prosperity.

The Shadow Chancellor claimed in her – Conference Speech (October 9, 2023) – that:

… a Labour government will not waiver from iron-clad fiscal rules.

We will see about that!

3. The depoliticisation of macroeconomic policy will continue:

… we will protect the independence of the Bank, the Office for Budget Responsibility … I will put forward a new Charter for Budget Responsibility, a new fiscal lock.

Guaranteeing in law that any government making significant and permanent tax and spending changes will be subject to an independent forecast from the OBR.

4. More economic fictions:

Taxpayers’ money should be spent with the same care with which we spend our own money.

Our own money is the taxpayers’ money.

We pay taxes for sure.

But the government doesn’t use our money, we use their money!

5. Fallacious household budget analogy perpetuated:

I remember my mum would sit at the kitchen table, with her bank statements and her receipts.

We weren’t badly off, but we didn’t have money to spare.

To my mum, every penny mattered.

6. Incoherent goals:

… we will slash government consultancy spending …

Inconsistent because she did not say the Party would expand the public service employment.

The reason consultants have proliferated is because many of them used to be public servants who were shed as successive governments cut spending and outsourced, privatised and more.

In the second-quarter 1992, public servants accounted for 23.1 per cent of total employment in Britain (Source).

By the June-quarter 2023, that percentage had fallen to 17.9 per cent.

In the December-quarter 2008, the total public sector employment was 5,249 thousand.

By the June-quater 2023, that number has fallen to 4,989 thousand.

Those cuts came with cuts to services, research skills, information skills etc even though those skills remain essential for economic and social policy making.

Neoliberal solution: enter the consultants.

So, I will await the Shadow Chancellor’s promise to significantly increase public servant employment.

I will be waiting a long time!

7. As if she was back in Blackpool in 1976, the Shadow Chancellor claimed in her – Conference Speech (October 9, 2023) – that:

You cannot tax and spend your way to growth.

Juxtapose that against what James Callaghan told the Conference in 1976 (Source):

The cosy world we were told would go on for ever, where full employment would be guaran­teed by a stroke of the Chancellor’s pen, cutting taxes, deficit spending, that cosy world is gone.

That Speech really epitomised the first political turning point to neoliberalism and Monetarism in Britain and the world by the social democratic political movements and parties.

Callaghan went on to establish the NAIRU as the centrepiece of Labour Party policy:

We used to think that you could spend your way out of a recession, and increase employ­ment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of infla­tion into the economy, followed by a higher level of unemployment as the next step.

Reflecting on the Speech by Rachel Reeves on Monday, one concludes there has been very little progress in the 47 years since Callaghan abandoned the Labour Party charter to priortise working people.

They still talk as if they care about the workers but their policies and stances are quite different.

8. Some have interpreted her Speech as indicating a large public investment in climate change etc – a state-led campaign to revitalise infrastructure etc.

Nothing could be further from the truth – the Shadow Chancellor said:

As our competitors understand, there is a role for government in encouraging and de-risking investment in new and growing industries.

The Labour Party is really just following Biden’s approach hoping that the largesse and breaks they give corporations will translate into a higher investment ratio.

It really hasn’t worked in the past.

And the degraded public infrastructure, and I include all the privatised utilities in that that have been milked dry by their corporate raiding owners, will require a massive investment injection.

And that is before we get to the climate issue.

Stay tuned for a poorly constructed infrastructure plan that will fall short by far of what is required yet deliver massive profits to corporations.

9. On that, the Shadow Chancellor said that they would:

– ensure recurrent expenditure was matched with tax revenue (she used the erroneous term ‘paid for’) – in other words, balance the primary fiscal position (which is expenditure net of interest payments on outstanding debt minus revenue).

– reduce the debt to GDP ratio over the five-year term.

– They will invest an additional £28 billion per year on green investments by the end of the five-year term, beginning in the second half of the five-year period in office.

How do we assess all that?

First, I did some regression analysis as preparatory work to assess the tax elasticity – which means I just tried to work out how responsive over a long period of time is the growth in tax revenue relative to overall real GDP growth.

That gave me some starting parameters to see what might happen to tax revenue under different GDP growth assumptions over a five-year horizon, assuming that the Labour Party was now in office (so I could use June-quarter 2023 known data as my starting point for simulations).

It is approximate and if the Labour Party want to hire me to do something more detailed then they have my number (-:.

Recurrent expenditure has been growing on average at about 4.25 pre cent per annum over a long period if we exclude the pandemic.

If we exclude the pandemic, then the British economy has grown on a compound annual basis by 1.7 per cent per annum since the end of 1998.

My rough calculations suggest that the British economy would have to grow at around 2.5 per cent each year from now for the 5 years of the term in office for the tax revenue to catch up if the growth in recurrent expenditure growth was unchanged.

If we add in capital investment, then things get even more tricky.

My conclusion is that under reasonable circumstances, there is no way that the British government will be able to cut the debt-ratio over the five year period without significant cuts in recurrent spending.

That also makes it much harder to achieve a GDP growth rate anywhere near what would be required to meet the tax equals recurrent spending part of the rule.

The only way it could be achieved would be for the British private sector to invest at rates never seen in the modern era.

Pigs might fly!

Second, the required growth rates to get any where near the fiscal parameters necessary to meet the conditions of these sort of rules, will likely be beyond the nation given the state of the labour market.

There would have to be a massive mobilisation of those that can work but are currently out of the labour force and/or a massive migration plan.

They might be able to get more labour into their stated areas of expansion – battery factories, etc – if they drive the carbon-intensive industries out with tax and regulative rules.

But I see none of that in their narratives to date.

Third, Rachel Reeves told the Conference that:

Labour will commit itself to rebuilding that security.

To restoring that hope.

Labour is ready to serve.

Ready to lead.

Ready to rebuild Britain.

If the Labour Party really wants to do those things it has to start the massive repair job that has been left by the Blair years, the Brown years, and then the last 13 years of disastrous Tory rule.

That massive repair job will have to include fixing the health and education system, the restoration of local government capacity, more public sector workers (teachers, nurses, doctors, etc), not to mention addressing the shocking state of transport, water supply, electricity generation, and the rest of the privatised essential services.

How much spending will that require?

Off hand, lots.

They will not be able to do all that within the rules they are claiming will be iron clad.

Either the debt-ratio will have to rise, or taxes will have to go up, or they can do the right thing and abandon all that sound finance machinery and start using their fiscal capacity properly.

Conclusion

I will write more about this when the situation firms up and we get an actual policy document from the Shadow Chancellor rather than hot air.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.