Economic policy is central to the survival and eventual victory of the new Labour leadership, even though it is clearly not the only issue. Contrary to the usual Tory media reports, Jeremy Corbyn and his Shadow Chancellor John McDonnell registered an advance with the debate and vote on Osborne’s risible Fiscal Responsibility Charter. That advance came because the correct position of voting against was adopted. As this question will not go away, further advances will require even greater clarity.
The measure of the advance can be summed up in its political aspect with an analysis of the vote. Just 20 Labour MPs rebelled against Labour’s line by abstaining on the Charter. It may be recalled that of the 35 nominations Jeremy Corbyn received from MPs in the leadership contest, only about half of them actually supported him. During that campaign the vast majority of MPs followed the line of abstaining on the Tories massive cuts in the Welfare Bill. Now the overwhelming bulk of the Parliamentary Labour Party has voted against the key Tory legislation of permanently enshrining austerity and ruling out borrowing for investment. This is despite the fact that as recently as May the party’s economic line was ‘fiscal rectitude’, ‘zero-based spending reviews’ and sticking to outlandish Tory spending cuts in the first two years of the Parliament (something the Tories could not do in their own June 2015 Budget).
Politically, the 20 abstainers have isolated themselves within the party (although they will no doubt find regular berths in the BBC studios and lots of column inches in the Murdoch press). Jeremy Corbyn and John McDonnell have led the PLP to a much better economic position by opposing Tory economic policies. As the Tories are committed to austerity and this will be central to the economic debate over the next five years, that leadership will need to keep moving forward.
Exposing Osborne’s fallacies
Labour lost the last election because its economic policies were not credible. There is a concerted effort to distort this factual finding to suggest that Labour was too anti-austerity. Therefore the debate on economic policy is central both to the future direction of Labour policy and its election prospects.
Osborne’s great fallacies, like most distortions of the truth, have some connection to popular understanding otherwise it would be impossible to explain their political power. A central fallacy is to treat all debt as essentially the same, with equally negative consequences. Instead, as Socialist Economic Bulletin (SEB) has repeatedly shown John McDonnell and Jeremy Corbyn have made the correct distinction between borrowing for consumption and borrowing for investment.
In the homely analogies beloved by this Chancellor and by Margaret Thatcher, ordinary households understand very well the difference between different types of borrowing. Borrowing to buy a home, or borrowing to pay for night classes, or a new work-related computer all provide an asset or additional income and so are an investment. But borrowing to pay the electricity or grocery bills is not sustainable. It may ‘circulate more money in the economy’ but can only be done in extremis and not in the long-term.
Likewise, businesses understand cashflow. Business makes an appraisal of investment opportunity on the basis of cost-benefit analysis. If a reasonable expected rate of return exceeds the cost of borrowing then the investment will be made. But if the business is borrowing to meet day to day expenses it will soon face insolvency and possibly bankruptcy.
Government relies on these economic agents for its income. But in truth it is not unique as all three agents, government, business and households rely on each other for their income both directly and indirectly. In that sense government is no different. Government borrowing for investment delivers an economic return, either direct or indirect, will expand the economy and, just like business a key criteria will be whether the rate of return on the investment exceeds the borrowing cost. Contrary to views Keynes did not hold, but which are misleadingly entitled ‘Keynesianism’, borrowing for day to day consumption will not necessarily expand the economy – this depends on whether extra production increases profit, and in a number of situations expansions of demand may not increase profit and may actually reduce it. Consumption should usually be met by current revenues from taxation. If there is a shortfall between desired government current spending and revenue, wasteful spending can be cut (e.g. Trident) and/or taxes can be increased.
SEB has repeatedly demonstrated that investment is the decisive input for growth and consumption cannot lead growth, and from this it follows that government borrowing should be used for investment over the business cycle (running deficits/borrowing for consumption as well as investment may of course be valuable in economic downturns)
Alliances
The clear opposition to the Fiscal Responsibility Charter from the ‘Corbyn/McDonnell’ team on the Labour front bench was supported by strong economic arguments from a number of quarters, not all of them long-standing allies.
In the Commons debate Caroline Lucas said, “The Chancellor is incredibly irresponsible to imply that borrowing is always bad. If we borrow to invest, we increase jobs, stabilise the economy and increase tax revenues. That is good for the economy, not bad for it…… If we are investing in jobs, that gets taxes going back into the Revenue, which is good for the economy.” And, “The Chancellor is deliberately misleading the public by continuing to claim that all borrowing is irresponsible. It is not. What is irresponsible is failing to borrow to invest, providing we are able to sustainably meet the cost of borrowing.”
Jonathan Reynolds, describing the Charter as intellectually moronic said, “It essentially commits this House to never borrowing to invest, even when the cost-benefit analysis of that investment is such that the country would benefit greatly. That is why it has not one serious economist backing it.”
Helen Goodman said, “One of the most pernicious things about the rule that the Chancellor has chosen is that it treats capital and current spending the same. He is ignoring the fact that investing in housing, science, broadband, transport and the university system is a way of strengthening economic productivity and increasing growth in the British economy. Nobody thinks that it is right to max out the credit card to pay the weekly grocery bill—of course not—but families up and down this country take out mortgages to buy their homes. There is a precise parallel here.”
Regarding what John McDonnell himself said, as much of the press will not report it accurately, here are some of his key points “The worst false economy is the failure to invest. This will be a direct result of Government policy embedded in this charter, with its limits on all public sector borrowing. This Chancellor’s strategy has given us investment as a share of GDP lower than all the other G7 countries, falling even further behind the G7 average in recent years. It is incomprehensible for the Chancellor to rule out the Government playing a role in building our future. For him to constrain himself from doing so in the future, no matter what the business case for a project, has no basis in economic theory or experience.”
And, “We will not tackle the deficit on the backs of middle and low earners, and especially not on the backs of the poorest in our society. We will tackle the deficit, but we will do it fairly and to a timescale that does not jeopardise sustainable growth in our economy. We will balance day-to-day spending and invest for future growth, so that the debt to GDP ratio falls, paying down our debts”.
“That is why we will establish a National Investment Bank to invest in innovation across the entire supply chain, from the infrastructure we need to the applied research and early stage financing of companies. To tackle the growing skills shortages we will prioritise education in schools and universities along with a clear strategy for construction, manufacturing, and engineering skills to build and maintain sustainable economic growth. The proceeds of that growth will reach all sections of our society.”
Outside the Chamber, Chi Onwurah had previously written a strong piece deriding Osbornomics’ refusal to invest, “The Osbornomic farmer wouldn’t borrow to buy a tractor unless crop prices were falling. The Osbornomic househunter would not take out a mortgage unless her salary was being cut. The Osbornomic CEO would only invest in a new product line when revenues were falling.”
Long-standing Corbyn/McDonnell ally Diane Abbott made a series of similar points on Twitter, “Osborne’s Fiscal Responsibility Charter effectively outlaws the equivalent of taking out a mortgage…..Osborne’s Fiscal Responsibility Charter is a con-trick from a charlatan. Outlawing borrowing for investment means long-term stagnation….Every household and firm knows that borrowing for investment boosts incomes. Only Osborne and the austerity fanatics are unaware of this.”
These analogies are extremely useful for popularising the alternative to austerity, which is investment. The new leadership team has shown it can command an overwhelming majority in PLP with clear opposition to Tory austerity. Developing a broader understanding of the distinction between borrowing for investment and borrowing for consumption, and why Labour should support the former will be key in pushing back the Tories in the period ahead.
This blog first appeared at Socialist Economic Bulletin
An excellent and intelligent piece – thanks. I agree that policy clarity is crucial but I think it would be a mistake to rush into clarity. We need clarity with coherence. Coherence in terms of links back to the core principles e.g. of reducing wealth inequality towards socially healthy levels, social mobility, equal access to education opportunities etc. Economic policies must coherently link into these principles even when it throws up awkward results. Then, as you rightly explain, we can win the arguments rather than using media training to avoid them.
Another helpful and informative piece by Michael Burke. It not only helps to set the record straight on the ‘fiscal rectitude’ vote but makes clear that Corbyn and McDonnell did well in reducing the refusniks to a group of 20 (21 actually). I also appreciated that MB shows very clearly that the argument borrowing i.e. deficit spending can be put over in ‘homely’ terms. It is not difficult to explain the case when it is clearly understood. Labour’s failure to do so under Miliband and Balls reflected a lack of understanding, a lack of will to challenge the Tories on fundamentals and a confusion between objective analysis of the problem and assumptions about what the electorate can be convinced about in advance of actually trying to do any convincing (the traditional Labour problem).
Reducing the internal opposition to just 21 was indeed a notable achievement, especially as McDonnell gained support from figures like Chuka Umunna. We do need to remember though that 16 were absent (given permission) and this included the recently, over – vocal Ben Bradshaw. Let’s hope that this opposition was just frustration and petulance. But was it so difficult to support McDonnell on this topic?
On the substantive economics though, the contribution here shows why it was easy to give support. Though it does give weight to those who challenge Labour economic credibility in the historical past (although not necessarily the immediate past). I think this article, combined with accompanying article on Butskellism reminds us that Labour has in the past regualary borrowed for consumption. I must admit I do not know what a ‘downturn’ is so I cannot be sure, but it looks like Labour has previously chosen to avoid increasing taxation as the means of paying for consumption spending. Now if it was easy to raise taxes to do so, then surely they would have done it. The assumption I make is that it was a difficult political argument to win – remember Corporation taxes were high by current standards as was tax on high incomes. A political choice was made to argue that we can have (consumption) service levels without taxes paying for it. Do we know that the raising of taxation to the previous relative high levels (presumably directed only at the rich and big Corporation) will suffice for the job intended? Or maybe is this where the loss of prestige projects like Trident helps out for a few years. Some of this will be needed for alternative investment of course.