This week, the economic announcements are likely to show that unemployment is beginning to rise sharply, inflation is edging up (even before the VAT hike kicks in), and consumer spending portends a further slowdown. That might be explained as temporary but necessary pain before things get better. But there is another scenario which is far more likely. The clue to what is really happening is supplied by the OBR’s marking down of the deficit total at the time of the June budget to £155bn compared with the Treasury’s estimate of £178bn six months earlier. This £23bn reduction before the Budget cuts took effect was never officially explained, but plainly follows the increased boost to spending provided by Labour in 2009. This obviously disproves Osbornomics that increased spending can only increase the deficit and that drastic cuts are required. That must be the starting point for Labour’s alternative strategy. So how much further can additional spending now be pushed?
It will be said of course that Labour left a ‘structural deficit’ problem which must be addressed and that any expansion now would only make it worse. But that isn’t true. Labour didn’t leave behind a large structural deficit – far from it. Prior to the recession in 2008, public sector current spending was 38% of GDP – that’s below the level of spend in 8 of Thatcher’s 11 years. Labour spending never rose above 40% of GDP, and that was only in the last financial year after two years of deep recession. But even that was below 6 of Thatcher’s 11 years.
So the problem isn’t Labour over-spend which justifies huge cuts now; it’s rather the drastic fall in tax revenues caused by the depth of the recession after the financial crash. The appropriate response therefore is to repair this tax black hole either by increasing taxes or by increasing spending in order to promote jobs and growth as in 2009. Both have a role to play, in a manner that exactly reverses current Tory policy.
Osborne is indeed raising taxes with the 2.5% VAT hike, but in precisely the wrong way. The extra £12bn tax revenue is almost cancelled out by Osborne’s cuts in corporation tax, tax on bankers’ bonuses, and tax on top earners. Moreover a VAT rise almost more than any other tax diminishes aggregate demand because those hardest hit by it, the poorest, spend the highest proportion of their income. What is needed instead is a higher tax on bankers’ bonuses, a Tobin tax on financial trades, a much more ruthless attack on tax avoidance and evasion, and abolishing the NIC upper earnings limit on top earners.
That would underpin the funding for a new and more effective jobs and growth strategy than the unduly modest effort in 2009. There is a public need and eagerness for Labour to begin to flesh out this alternative, and to do so soon.