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Labour mustn't sign up to stagnation Labour mustn't sign up to stagnation
(7 months later)
Some, sadly including anonymous Labour frontbenchers, suggest that the only way for Labour to win back the economic trust lost in the global banking crisis is to sign up to the Tory-Lib Dem post-2015 election spending plans due to be announced in the budget next week.Some, sadly including anonymous Labour frontbenchers, suggest that the only way for Labour to win back the economic trust lost in the global banking crisis is to sign up to the Tory-Lib Dem post-2015 election spending plans due to be announced in the budget next week.
In fact the reverse is true. More cuts and austerity will continue Britain's economic inertia and destroy Labour's claims to offer a serious alternative to the scorched-earth economics being pursued in Britain and across Europe.In fact the reverse is true. More cuts and austerity will continue Britain's economic inertia and destroy Labour's claims to offer a serious alternative to the scorched-earth economics being pursued in Britain and across Europe.
When Labour signed up, before 1997, to the then Tory spending plans, the economy was growing, not slowing. Our pledge was designed to reassure voters that we could be trusted to be prudent with the benefits of that growth. But today the economy is stagnating. Economic credibility will not come from talking tough about continually tightening the squeeze when what the economy desperately needs is a stimulus.When Labour signed up, before 1997, to the then Tory spending plans, the economy was growing, not slowing. Our pledge was designed to reassure voters that we could be trusted to be prudent with the benefits of that growth. But today the economy is stagnating. Economic credibility will not come from talking tough about continually tightening the squeeze when what the economy desperately needs is a stimulus.
The way to cut borrowing and bring down Britain's debt burden is to get the economy growing again. Most of the budget deficit will disappear once it returns to full working capacity. Any remaining shortfall can be tackled over the course of the next parliament, when a growing economy will make any unavoidable tax rises or spending cuts more bearable.The way to cut borrowing and bring down Britain's debt burden is to get the economy growing again. Most of the budget deficit will disappear once it returns to full working capacity. Any remaining shortfall can be tackled over the course of the next parliament, when a growing economy will make any unavoidable tax rises or spending cuts more bearable.
We are now living through the longest lasting slump since the 19th century. Output is some 14% below where its pre-2008 banking crisis trend would have placed it. Recession is costing us more than £200bn in lost annual income.We are now living through the longest lasting slump since the 19th century. Output is some 14% below where its pre-2008 banking crisis trend would have placed it. Recession is costing us more than £200bn in lost annual income.
Government budget plans assume that the gap between actual and potential output is small, about 3%. This is important because it means that most of today's budget deficit would persist even after the economy eventually returns to full capacity working.Government budget plans assume that the gap between actual and potential output is small, about 3%. This is important because it means that most of today's budget deficit would persist even after the economy eventually returns to full capacity working.
But this assumption is false, according to authoritative bodies like the National Institute for Economic and Social Research, the International Monetary Fund and the Institute for Fiscal Studies (IFS). They argue that the output gap is much bigger, meaning that the economy could grow quickly by taking up the slack, causing much of today's budget deficit to melt away. The deficit would shrink because economic growth would boost jobs and tax revenues and reduce welfare bills. The fiscal squeeze needed to end any ongoing budget deficit can be far less tight and less urgent than that being planned by the chancellor, and Labour should not touch it with a barge pole.But this assumption is false, according to authoritative bodies like the National Institute for Economic and Social Research, the International Monetary Fund and the Institute for Fiscal Studies (IFS). They argue that the output gap is much bigger, meaning that the economy could grow quickly by taking up the slack, causing much of today's budget deficit to melt away. The deficit would shrink because economic growth would boost jobs and tax revenues and reduce welfare bills. The fiscal squeeze needed to end any ongoing budget deficit can be far less tight and less urgent than that being planned by the chancellor, and Labour should not touch it with a barge pole.
As Jonathan Portes, former chief economist at the Cabinet Office, recently commented: "A few years of 3% growth ... and much of the problem will simply vanish." The way to bring the budget back into balance is to ease the squeeze by boosting public sector investment.As Jonathan Portes, former chief economist at the Cabinet Office, recently commented: "A few years of 3% growth ... and much of the problem will simply vanish." The way to bring the budget back into balance is to ease the squeeze by boosting public sector investment.
The CBI has called for an extra £10bn in infrastructure investment, the IFS for an extra £20bn of public investment. My own preference is the proposal from the former chief economist at the Cabinet Office, Jonathan Portes, for a £30bn programme of infrastructure investment, because the scale of the problem is so large that vigorous action is required.The CBI has called for an extra £10bn in infrastructure investment, the IFS for an extra £20bn of public investment. My own preference is the proposal from the former chief economist at the Cabinet Office, Jonathan Portes, for a £30bn programme of infrastructure investment, because the scale of the problem is so large that vigorous action is required.
We should follow the example set by Alistair Darling in the 2009 recession, when he brought forward £30bn of public investment plans originally scheduled for later years. A big programme of social housing would be a good start.We should follow the example set by Alistair Darling in the 2009 recession, when he brought forward £30bn of public investment plans originally scheduled for later years. A big programme of social housing would be a good start.
The folly of George Osborne's strategy is that in the year just ending, his target deficit is twice what he said it would be in June 2010, and next year the Office for Budget Responsibility (OBR) expects it to be three times what he planned in 2010. Is this really what the prime minister meant by going "further and faster on the deficit"?The folly of George Osborne's strategy is that in the year just ending, his target deficit is twice what he said it would be in June 2010, and next year the Office for Budget Responsibility (OBR) expects it to be three times what he planned in 2010. Is this really what the prime minister meant by going "further and faster on the deficit"?
Osborne is missing his public sector debt target, too. It was meant to be falling to 67% of GDP in 2015-16, but now the OBR has it "falling" to 79% in 2016-17. A strange definition of success – debt falling upwards. Borrowing, another of the chancellor's targets, is more than £200bn higher than he planned in 2010. And Britain has lost his cherished triple-A credit rating status. Why not learn from the US, instead of blaming the eurozone for Britain's return to recession? The American economy has been growing because President Obama gave it a boost in 2009 of the kind Britain urgently needs now.Osborne is missing his public sector debt target, too. It was meant to be falling to 67% of GDP in 2015-16, but now the OBR has it "falling" to 79% in 2016-17. A strange definition of success – debt falling upwards. Borrowing, another of the chancellor's targets, is more than £200bn higher than he planned in 2010. And Britain has lost his cherished triple-A credit rating status. Why not learn from the US, instead of blaming the eurozone for Britain's return to recession? The American economy has been growing because President Obama gave it a boost in 2009 of the kind Britain urgently needs now.
Labour set out on the same path after the banking crisis but the coalition has managed to turn Labour's road to recovery into the road to ruin – a dismal, reactionary consequence of failed policies that Labour must not think of emulating, even for a few post-2015 years. To do so would destroy trust, not earn it.Labour set out on the same path after the banking crisis but the coalition has managed to turn Labour's road to recovery into the road to ruin – a dismal, reactionary consequence of failed policies that Labour must not think of emulating, even for a few post-2015 years. To do so would destroy trust, not earn it.
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