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Labour right-wing still in the austerity dead end

Rachel ReevesRachel Reeves, a former Labour shadow secretary for work and pensions, has produced a short note for Progress which has been hailed in the right wing media, and by the Labour right, as ‘an alternative Budget’. The New Statesman was perhaps the most excitable, describing Reeves as the shadow chancellor in waiting. All of this is entirely incorrect as the article offers no alternative to the Osborne’s resumed austerity, which he is certain to recommence in the next Budget.

Reeves has declined to join the current shadow cabinet under Jeremy Corbyn and her intervention is clearly posed primarily as an alternative to the economic policy framework outlined by Jeremy Corbyn and John McDonnell, not to George Osborne. It confirms once more that the Labour right is disloyally more interested in attacking the Labour Party leadership than in attacking the Tories.

In reality the note offers no recognition that there is now a weakening economic situation in Britain following an historically weak recovery. Consequently it offers no policy framework to improve matters. The very few policies outlined do not amount to a Budget, alternative or otherwise. There is no alternative to austerity, no clear role for government intervention, and certainly no suggestion that there is any mechanism to fund that intervention.

This amounts to a rehash of the economics of the Labour right, which wants nothing more than a cigarette paper between it and the Tories. It is the same as Ed Balls disastrous policy framework which played a key role in losing the last election. This approach also led most of the Parliamentary Labour Party under Harriet Harman to announce they would vote for the Tory cuts to working tax credits and only retreat to abstention under extreme pressure from unions and the Labour membership.

The real alternative
Osborne will argue that the UK economy is slowing, that this is because of deteriorating international conditions and that this therefore requires renewed austerity measures. Only the first of those statements is true.

The year-on-year growth rate has slowed in the UK from 3.0% in the 2nd quarter of 2014 to just 1.9% in the 4th quarter of 2015. Surveys, monthly data for early 2016 and other evidence all point to further slowing. Yet this is not induced by international conditions. Over the 18-month period real GDP has risen by a cumulative 3.3% but real exports have risen by 6.3% – indicating international demand is stronger than domestic demand. The slowdown in the British economy is not the result of international conditions (although these too are deteriorating). The slowdown is homemade.

Fig.1 Export growth much stronger than GDP growth

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But Osborne’s argument that more austerity is required because there is a slowdown is as false as his other claims. It should be noted that Osborne’s austerity approach goes completely unchallenged in the so-called alternative budget. The effects of Osborne’s first bout of austerity should be well-known to readers of SEB:

 · Growth slowed dramatically and stagnated in 2012

· Average living standards (per capita GDP) stagnated
· Real wages fell
· Public services are in crisis as jobs were cut
· The public sector deficit was not eliminated, and actually rose in 2012 as the economy slowed to a crawl
· Productivity actually fell, which had only previously occurred in the early years of World War I and in the Great Depression

In economic terms, renewed austerity is equivalent to applying leeches to the patient when the previous quack remedy has failed. As the effects of austerity fall mainly on ordinary workers and the poor, the social effects are enormously damaging.

It is clear that what is actually required is a strategy for investment-led growth. This will address the economic crisis directly and so will correct the deficit in government finances in the process. Fortunately, this is possible with the new economic framework outlined by Jeremy Corbyn and John McDonnell .

In contrast to the note from Rachel Reeves the new leadership of the Labour Party has identified the deficit of investment as central to the economic malaise facing Britain. In the US they talk of ‘secular stagnation’ or tepid growth because investment has only expanded by 10% in the years 2007 to 2014, according to World Bank data. In Britain investment has increased by just 7.8% in those 8 years. This little more than half the world rate of investment growth (14.2%) which is itself weak by historical standards.

The policy of asking and bribing the private sector to invest, a policy shared by Osborne and the Labour right, has failed spectacularly at Hinkley and elsewhere. Fewer homes are being built despite soaring prices, flood defences have been allowed to deteriorate and the rail network is truncated and overloaded, there is a looming energy capacity crisis while investment in renewable energy has been cut, and so on.

Labour’s new leadership argues that the public sector should increase its level of investment, in order to address this deficit and to spur growth. Relying on the private sector to lead has been tried and failed. In addition, unlike the hopes or pious wishes of both Osborne and Reeves, they have identified the means to achieve this increase in public sector investment, principally through the establishment of a National Investment Bank. This can borrow cheaply in the financial markets with the implicit guarantee of the UK Treasury. It can also ensure that the returns on the investment accrue to the public sector and that the investment stream is maintained even if private sector profitability is insufficient, or deteriorates.

It should be noted that this authentic version of a National investment bank has almost nothing in common with Osborne’s sop of a Green Investment Bank or Nick Trott’s versionproduced under Ed Miliband, which was aimed at providing loans to small firms where the commercial banks have refused. As small firms are not engaged in large scale housing programmes, or construction of rail networks, or the huge investment needed in renewables, this would be rather pointless to address an investment crisis.

Ending austerity

The word ‘austerity’ does not appear in the alternative Budget from Rachel Reeves. This is for the very good reason that the Labour right believes it is inevitable, and has only ever argued for slower or shallower cuts at most.

By contrast Corbyn and McDonnell have outlined the economic policy framework which can end austerity by investing for growth. The clear distinction in borrowing only for investment and balancing current spending over the business cycle is the correct framework as it is the only one which is sustainable because it maximises the government impact on growth and living standards, and the returns to government from that investment.

It is also a strong base from which to attack Osborne, who rules out even borrowing for investment (although in reality he has doubled the level of government debt by borrowing to cover current spending, which is clearly unsustainable). Osborne’s policy, to save first and only invest when there are sufficient accumulated funds, belongs to a pre-banking, pre-financial era. It is as stupid as it is primitive.

The Corbyn/McDonnell framework also stands in sharp contrast to the accumulated confusions of ‘keynesians’ (who have little to do with the views of Keynes) who believe governments can perpetually borrow for consumption, rather than as a temporary measure to avert crisis. As this entails debt and interest on it without raising the level of output, so it becomes a drain on the economy and slows growth.

Osborne and Reeves share the view that the private sector should be left to determine the level of investment in the economy and consequently to maintain or extend its near-monopoly on the ownership of the means of production. They maintain this even when the private sector is manifestly failing to deliver adequate investment. Of course, the ‘keynesians’ are opposed to austerity and its effects (unlike Osborne and Reeves) but they lack a credible framework to achieve an alternative because they refuse to clearly distinguish between the economic consequences of borrowing for consumption and borrowing for investment.

Corbyn and McDonnell do have the framework to achieve that and a mechanism to do so. Not only are they committed to ending austerity but their plan to increase public sector investment via the National Investment Bank means the public sector can borrow sufficient funds for the scale of investment and direct it towards the sectors required.

The consequent increase in growth will allow them to halt all austerity policies and to roll them back. Government revenues will rise with increased economic activity and government outlays will fall as decent well-paid jobs are created. This is a deficit-reduction programme based not on cuts but on growth, and a commitment to both social welfare and rebuilding public services in the transition to a stronger growth economy and beyond. Because it is theoretically grounded, this is a genuine, practical anti-austerity policy.

This article first appeared at Socialist Economic Bulletin

10 Comments

  1. David Ellis says:

    The Labour Right are quite conscious of the fact that should they replace Corbyn they ain’t going to be winning any elections. In fact the disintegration of the party would recommence and culminated in the party no longer an electoral force of any kind. They will bide their time and ride back to power on Corbyn’s anti-austerity ticket but will refuse to form a governmetn with him and bloc with the Cameroons to form a government of national emergency or unity that will impose austerity. At least that was the scenario until Corbyn caved on the EU issue and put the Blairites back in charge as the public face of the party once again with Blair, Johnson and Campbell taking the lead and so the pasokification of the party will now recommence even with Corbyn `in charge’ and the new opposition to the Westminster Establishment will be provided by the Tory Right, UKIP and the far right as it is in France where there is an absentee left and also now in Germany.

  2. Verity says:

    This a further restatement of the easier part of the economic arguments. I do not disagree with them, nor with their repetition. The discussion does need to move on though from this restatement. There are two matters that the Left needs to address though if the productive investment grand theory is accepted. One has its root in economics the other in politics.

    In the economic sphere, another way of characterising the argument is to say we need austerity on government expenditure (i.e. Consumption) that is not investment. That includes very many socially desirable measures. It includes recognition that we may not have the tax base to reopen/maintain the libraries under threat. It may mean we cannot fund the presumed new demands for staff increases in the NHS. It may mean giving up the needed new tax inspectors to challenge the hoarder- gatherers of resources for their future gambling. Of course some tax can be obtained from the cooperative behaviour of the Googles, Apples, Amazons and Starbucks, but they are obliged to take care of investors interests. We can then reward ourselves with this necessary expenditure once the projected productivity growth has kicked in, but until then austerity on expenditure will rule. This will involve a lot of patience from a lot of people in difficult situations. Some people’s poorer education provision will have been completed. Some elderly people will have died from the neglect in care.

    My suggested amendment to this arrangement would be to say that where consumption expenditure can be reasonable argued to make further savings elsewhere then it should be made where interests rates are not prohibitive. We may disagree about where these occur though. My ‘SureStart Centre’ will save considerable because we can evidence the savings to Local Authority children’s services budget. The employment of tax inspectors can evidence the raising of more taxation than the spend incurred. The consumption expenditure on adult care will allow the transfer of elderly patients from expensive National Health Service Care. But when it comes to other Local Authority discretionary spending – sorry about the absence of democratic influence but the Centre has to say no. It includes anomalies in wages allocations; increased need through random EU migration; staffing need through increased Council House building.

    There also arises issues on the political front. At a time when the gross inequalities are still evident in society (and quite possibly still growing) we have to ask you to be patient until our projected growth shows through. I know that our franchised EU expenditure continues to grow on vanity projects and symbolism and includes measures you have not asked for and do not understand. I know that taxation still appears to favour the rich but in the future we can show some radicalism in this respect. Whilst we have only have real long term growth to gain from it will come good if only you can be patient. There has big political implications for those ‘community movements’ so central to the Corbyn phenomena. We may be arguing that my SureStart Centre is so much more important than your meals on wheels service. But since decisions will need to be constrained at the centre, my Local Authorities case can await the strength of politics support and you can be sure Corbyn will be on the picket line to help out as long as the case comes from ‘longer term’ growth.

    There is still much to do. Continuing repetition of the productive investment part is the easy bit. A little more backbone on the harder parts is required. if you want more of my tax may I ask to see what you are doing with society’s elites?

    1. jeffrey davies says:

      trouble is the peasants pay thier taxes the rich just want to escape it by having offshore accounts you say all you like but the blair babies are finished they need to cross the floor to their bigger brother and leave the left to get on with it but you got to take into account if the labour party takes back whot we lost gas electric water has such back into government control yanky companies out of nhs and the like perhaps one day the peasants will send the packing to their private islands in the sun jeff3

  3. David Pavett says:

    A useful piece but when I followed the link to “new economic framework outlined by Jeremy Corbyn and John McDonnell”. I was reminded that what we have so far in policy terms is fairly thin gruel.

    Is there not a tendency to think that the our economic problems do not have their source in the private ownership of the dominant financial, commercial and productive capacity of society and that the solutions are all of a technocratic order (borrowing more to invest, closing tax loopholes ….).

    That there are big differences on the Corbyn-supporting side is brought out by the following:

    The Corbyn/McDonnell framework also stands in sharp contrast to the accumulated confusions of ‘keynesians’ (who have little to do with the views of Keynes) who believe governments can perpetually borrow for consumption, rather than as a temporary measure to avert crisis. As this entails debt and interest on it without raising the level of output, so it becomes a drain on the economy and slows growth.

    This draws attention to a problem I indicated in an earlier Left Futures piece on John McDonnell’s current New Economics road show. Most of the celebrity economists involved are committed Keynesians.

    Michael Burke indicates that the way forward is to increase public investment in the productive sector. This could represent an increasing socialisation of the economy or it could represent more public money being thrown at private institutions. We need lots more on what this means.

  4. David Ellis says:

    I don’t know if anybody noticed but post-war `left’ Keynesianism collapsed by the late 70s as the West stagnated and inflated. Turns out printing money and hiding unemployment in state-owned dinasours was not a worker. It was replaced by a combination of neo-liberalism and right-wing Keynesianism by which responsibility for money supply was handed over to the private sector on the grounds that `englightened self-interest’ would prevent them from allowing the supply of money to outstrip the demand unlike populist politicians who simply spent money like water building popular things like hospitals, schools, etc when people simply asked for them. But of course enlightened self interest was immediately ditched and the bankers immediately set about building the greatest Ponzi Scam the world has ever or will ever see. When they went bankrupt in 2008 after 30 years of building their pyramid they owed their bond-owning creditors four times the national debt which had fueled not the building of hospitals and schools but a massive consumer frenzy fronted by an army of salesmen celebrities. Now capitalism is not just stagnant and moribund but irretrievably bankrupt. Austerity is the embalming of the corpse. Stimulus would be the equivalent of apply a defibrillator to the chest of a mummy. Either approach has the identical effect of exacerbating capitalism’s fundamental problem of over-production. The choice is now a stark one: socialism or barbarism. Socialism or a New Dark Ages from which humankind is unlikely to emerge.

  5. Bazza says:

    Yes Michael is absolutely correct.
    The Right in Labour is focussing more on attacking Labour Leaders and in promoting their ‘great men and women of history’ when working class people are under massive attack from the Tories and particularly now with the Housing Bill which will affect the 6m social housing tenants.
    The two yuppies Ed Miliband and Reeves for example I don’t think were aware of the vile Bedroom Tax until they were forced by Labour Council Leaders to oppose it; and then they suddenly became champions against the Bedroom Tax.
    And it is often the Left and working class Left who are leading the fight back.
    I attended a heart breaking local Housing Summit on Saturday were we discussed ideas for opposing the Housing Bill (and the Benefits Cap).
    In ‘pay to stay’ the 7% of social housing tenants with incomes over £30k (£40k in London) will be forced to pay market rents from April 2017 and social housing tenants families will lose the right to succession to the family home (after paying hundreds of thousands in rent over a lifetime) in social housing properties; there will also be the extension of the Right to Buy to housing association properties (and research shows for every 8 social homes sold off only one is replaced) which will add to the housing crisis.
    Another nasty sting in the Bill is the end of security of tenure for all news social housing tenants (who will only be allowed to stay for 2-5 years) before having to move to the more expensive (and often poorer quality) and less secure private rented sector which will have a massive impact upon social cohesion and stability in communities.
    Housing benefit cuts for larger unemployed families could mean thousands of families in cities being evicted; the benefit curbs aim to save money but Councils have a duty of care to children so it will probably costs Councils (who are already cash-strapped) three times as much to house families in b&b as well as costs effecting other services.
    Housing benefit cuts to some in hostels such as those escaping domestic violence etc. could also put these at threat too.
    But in my city we have a BRAND – Hands Off Our Homes – but it is often led by a few of the ultra left (SWP members and the likes of the Socialist Party) who whilst being very decent human beings tend to decide what social housing tenants need to do for them when some of us working class social housing tenants at the Summit argued for getting information out to tenants simply and to also ask for tenants ideas.
    We have a strategy – stop the housing bill and benefits cap.
    And we have OBJECTIVES: to leaflet tenants, lobby councillors and MPs; to send a delegation to address the full Council meeting; to have petitions; to set up local groups; and to ask tenants for their ideas (and we need to support private tenants too).
    But in WHAT WE WANT we discussed things like: build more social homes to rent and genuinely affordable homes to buy; better security of tenure for social housing tenants plus private rented tenants; rent controls and the savings from housing benefit could be used to refurbish the thousands of empty homes to rent or buy; campaign to scrap the RTB; campaign to scrap the Bedroom Tax and support those effected; and I would also add have more flexible mortgages where you buy 50% and rent 50% (so you can revert to renting if you hit hard times) or even buy 50% get the rest on a 120 year lease (like some homes in housing conservation areas).
    I would also add a statutory right to tenants consultation in all tenures and radically redesigning run down estates in consultation with residents to green them up with trees and park areas plus to add community amenities.
    But sadly some of the ultra Left may also seem to see some Labour Councillors and Housing Association Managers as part of the enemy when many are equally opposed to the plans.
    I did say (as a working class social housing tenant) at the meeting that we should go on the attack; there are 2 welfare states – our working class welfare state which is often associated with a bare minimum, and stigma, and is under attack but there is also the upper class welfare estate – tax cuts for millionaires, inheritance tax cuts for millionaires, tax cuts for hedge funds, private landlords with multiple properties, and even tax relief for grouse moor owners went up to 84% and of course the rich and powerful are subsidised to the hilt on practically everything with tax relief.
    If anything demonstrates this more clearly it is Osborne giving those in poverty pay £50 per month if they can scrape £50 to save a month when in recent years he gave 13,800 millionaires tax cuts of £2,000 per month.
    So it’s £600 a year for those on poverty pay and £108,000 a year for millionaires.
    Just a final food for thought, I checked my tenancy agreement and nowhere does this legal document (signed over 8 years ago) say I must provide information on my income to the social housing landlord; perhaps if all tenants could refuse to comply on the grounds of an invasion of privacy? Perhaps there is potential for a joint Council/Housing Assn. legal challenge here as I don’t think you can impose retrospective legislation.
    Decent Homes for All!
    Yours in solidarity!

    1. John P Reid says:

      the SWP are do t human beings, apart from those In the Fascistic UAF, and the rape apologists,
      As for the Tories screwing the working class, shame so many working class vote Tory

  6. Tony says:

    I saw her on the BBC’s “Daily Politics” a few weeks ago. She does not believe in austerity when it comes to Trident replacement though.

  7. John Penney says:

    A good article. The way the entire capitalist mass media always grabs whatever half-digested, economically illiterate, clichés the Labour Right cough up, and declares it “the very best thing ever devised by man or woman (in the Labour Party that is) – such as to earn the latest cynical speechifier that much over-used mantle of ” is being spoken of as a future Labour Leader” – has gone waaaaay beyond parody.

    However , it has to be said – that John McDonnell seems to be spending way too much time playing essentially tactical semantic games with the capitalist press about Labour’s economic strategy , and pussy-footing about with non-socialist celebrity economists, and announcing the end of “Labour Tax and Spend” (which actually just confirms the bogus Tory narrative about “Labour’s previous over-spending”).

    John really needs to be developing ASAP a solid, well researched, radical Left Keynsian comprehensive Labour Economic Strategy – in consultation nationwide with the trades unions and Left economists and wider public participation . Seminars with Nobel prize winning liberal Keynsians just isn’t going to create the radical Left National Economic Plan
    needed to mobilize mass voter enthusiasm for a clear Labour economic strategy to refute the Austerity ” narrative – in favour of a radical route to economic growth..

  8. Mervyn Hyde (@mjh0421) says:

    “Second, improving access to finance for small and growing businesses – with a more competitive banking sector, reforms to open up equity markets, and a regional network of business banks.
    Third, a smart industrial strategy, working with businesses to boost investment, productivity, exports and job creation in key sectors where Britain has comparative advantage or significant growth potential – from renewable energy to new digital.
    Fourth, a renewed focus on adult skills and vocational education – so that no one is left behind, and so that Britain’s businesses can recruit the workers they need.

    And fifth, real devolution of power and resources to cities, counties and regions so that businesses and workforces, citizens and elected leaders can work together to take control of their own futures”.

    Classic Neo-Liberal drivel, As John Penny says Jeremy and John need to be more forthright, WE already have the money, we don’t need to borrow a penny, and if we continue using the Neo-Liberal narrative of balancing the books, we re-enforce the Tories position not weakening it.

    We have to first educate our members then they can get the word out, it’s people on the ground explaining what people themselves suspect, but constantly hear the same doctrine being repeated over and over again.

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