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Labour must fight, not adopt, austerity

George Osborne unleashed a new round of austerity in his Autumn Statement. Millions of people are now set to face even deeper and longer cuts.

The scale is breath-taking. When the Coalition came to power, it proposed the longest period of public sector cuts in history. Last year this was extended by two years as its failed policies undermined growth. The Autumn Statement added it by a further year meaning the “age of austerity” is set to last 8 years.

Moreover, the cuts are now to be made even closer to the bone. Following the Autumn Statement the Institute for Fiscal Studies said the level of cuts needed post the general election could be “close to inconceivable”.

Already austerity isn’t working.  There will be barely any growth this year, the economy lags around 4% below it pre-recession peak and growth forecasts for future years were revised down in the Autumn Statement. As a result the national debt continues to increase whilst the living standards of millions of people are being savaged by stagnation and the cuts. More austerity will make it all worse.

But the unrelenting logic of the Tory economic policy, mirrored across Europe, is that the solution is more austerity. This recalls the bleeding of patients in the Middle Ages. If the patient didn’t improve then more blood was deemed the solution.

So where should Labour stand on this?

Whilst Labour has so far opposed some of the cuts made, it has not yet offered a credible alternative. Its Five Point Plan, as welcome as its measures are, barely makes a dent in the loss of output caused by the recession.

UK GDP is currently £47bn below its 2008 levels and to get back to trend growth levels, where it would have been without recession, requires output to increase by around £200bn. Yet the main stimulus measure in Labour’s plan is for an economic stimulus of £2bn through a tax on bank bonuses to fund jobs and a temporary reversal of the Tory VAT increase.

Some have argued that there is no need to lay out an economic plan whilst in opposition and with two and a half years until a general election. Whatever views were held on this approach, the Tories have now forced the issue for Labour to now lay out a serious alternative.

Firstly there is the impending vote on the welfare cuts in the Spring that proposes real terms cuts for millions of people, including Labour voters, who receive benefits. Secondly a Comprehensive Spending Review in 2013 will begin allocating cuts for the first year of the next parliament and which will clearly impact on subsequent years. Labour urgently needs to lay out a genuine alternative – or prepare to carry out the largest cuts in history.

The scale of the cuts still to come is frightening. The table below from the 2012 Budget shows a “fiscal consolidation” (public sector cuts and tax rises) of £155bn per year by 2016-17. This will be even deeper with austerity extended to 2018 following the Autumn Statement. Aggregating these annual ‘fiscal consolidations’ planned to 2016-17 will see £577bn taken from the incomes of working people and from the public services they rely on.

So far the cuts carried out have been a fraction of this. We are now three quarters of the way through the 2012/13 financial year, meaning that tightening has been around £85bn (£41bn in 2011/12 and three-quarters of £59bn in 2012/13).  Yet in the two years post the election the government has announced that the total “fiscal consolidation” would be £289bn. The current unpopularity of the Coalition will be transferred to any Labour administration if it seeks to implement these cuts.


So what path should Labour take?

Labour’s solution to the economic crisis has to address the causes. The driving force behind the recession has been the decline in investment (Gross Fixed Capital Formation). The latest figures show that real GDP has declined by £47bn since the peak in 2008. Investment has contracted by £49bn, that is by more than the fall in the economy as a whole. Of the other components of GDP only the fall in household consumption comes close to matching the negative impact of declining investment falling by £37bn over the same period. This was offset by government current spending rising by £14.7bn over the period, while net exports rose by £29.3bn.


The private sector was the initial source of this decline in investment proceeding the fall in consumption. That’s because investment decisions in the UK are mainly in private hands. If capitalists believe there are insufficient profits to be made on their investments they will simply abstain from them. That is the private sector is on an investment strike– and everyone else is affected as GDP falls. Of course the state sector can step in to drive investment. The Labour Budget of 2009/2010 modestly increased public investment and this lay behind the expanding economy inherited by the Coalition on coming to power. But the Coalition immediately brought that public investment to a halt. As Socialist Economic Bulletin recently explained: “What is now striking is that the decline in investment is now led by the contraction in public investment. In fact the whole of the ‘double-dip recession’ of three consecutive quarters of falling GDP is accounted for by the sharp fall in public investment.”

Reversing this decline in investment and also in consumption is key to solving the economic stagnation.

Of course the Tories will hit back with the tired claim that state investment is unaffordable. But they are borrowing £200bn more than they planned to do just two years ago due to the low growth resulting from their failed austerity policies. It is surely better to borrow to invest in jobs and growth rather than to fund a failing economic policy.

Furthermore there is not a lack of money, it merely lies in the wrong hands. The lack of investment takes place at a time when businesses are sitting on huge amounts of cash. As an article by the Daily Telegraph’s Assistant Editor Jeremy Warner explained:

“At the last count, the cash holdings of UK non-financial companies stood at £731.4billion, the highest level on record and equal to approximately a half of annual UK GDP… What the economy needs is for the corporate sector to start spending and investing. Instead, companies are either hoarding cash or paying it out in dividends to investors, who in today’s risk averse environment, are more inclined to save it too than re-invest it.”

The Tory strategy is to reverse this hoarding by enticing the private sector to invest. The whole function of austerity is to drive down wages and engineer a transfer from labour to capital that is sufficient to make it worthwhole for businesses to end their investment strike.

That policy has already failed and even if it was to succeed it can only come at the expense of huge attacks on working class living standards. With household incomes being driven backwards and the private sector not adequately investing, it is clear that government has to step into the void to ensure there is investment which will create growth.

Such investment need not actually cost the state a penny. It could be initiated by using the bailed out banks for the public good. As economists Michael Burke, George Irvin and John Weeks argue in their pamphlet A Brighter Future for the British Economy, the government could “simply instruct RBS [and Lloyds] to invest in those sectors prioritised by the government for an increase in investment, eg. housing, transport, infrastructure and education. The jobs bonanza created by this investment would sharply increase taxation revenues and lower welfare payments”.

Others argue that government borrowing costs are so low – even negative in real terms – that investment can be paid for through state borrowing. As Paul Krugman, Nobel economics prize winner expalined: A slump is a good time to invest in infrastructure… funding is cheap, and many of the resources you would use would otherwise be unemployed. There’s really a compelling argument that we should be doing a lot of public investment right now.”

Of course there are also many ways that the government could raise money to spend on stimulating the economy – from seriously tackling the £25bn a year lost in tax avoidance by the wealthy and by corporations, as highlighted by the TUC, to imposing a special tax on huge company cash reserves and dividends not beign used for the good of society to the scrapping Trident nuclear weapons replacement.

The issue therefore isn’t one of economic resources. It’s a political one about whose hands the resources lie in and how they should be used. This impacts on the political choice Labour faces. Over the coming months, will it outline a plan that tinkers at the edges and by default leaves millions to suffer from ever deeper cuts over the coming years? The history of the 1920s shows what happens to the party when it abandons people in that way.

Or will it reject the Tory cuts and tackle the source of the low growth, the investment strike, to stimulate jobs and growth? Of course, in doing the latter it would have to take on powerful vested interests from the banks who don’t want a strong state owned bank, from the businesses that lose out to a stronger state sector, and from the hyper-wealthy in seeing their incomes reduced to fund state investment.

Yet in doing so, Labour would benefit from creating economic growth and being on the side of the overwhelming majority of people who would see living standards increase and be defended against further economic onslaught. Surely that’s the purpose of the Labour Party: to defend the many not the few?

Via Next Generation Labour, First published in Chartist Jan/Feb 2013 edition.


  1. Dave says:

    I’d certainly agree with the well-argued concluding sentence, but it seems to PLP have other priorities:

    Blunkett is currently delivering on his News International £49,500 rolling six-monthly contract* with a campaign against press regulation.

    David Miliband is doing even better – raking in £125,000 for 15 days work** for Sunderland FC. And that’s just the tip of the iceberg – he often earns more for a day’s ‘work’ than most people earn in a year.

    With glittering prizes such as these up for grabs one wonders how the PLP careerists will find time to do anything other than feather their nests.



  2. treborc says:

    Sadly I agree Politics now is about how much you can make, and how many people you can kick, perhaps he’s in training at Sunderland for his time as the ruler and the welfare reforms.

    As for Miliband I just cannot take to the bloke he really does look gormless and sounds as bad.

  3. treborc says:

    That should be! as for Ed Miliband

  4. Quintus says:


    Better Ed and the right policies (fingers crossed) than with David/Blair/New Labour/Orange Book/Tory policies.

  5. John says:

    Cuts versus public spending, which is right? The simplest way to answer this question would be to look at the relationship between public spending and GDP in the UK since the war. We have had plenty of booms and busts so increased spending should precede recoveries and decreased spending precede downturns. I have plotted the data at:

    Does public spending stimulate the economy?

    What I found surprised me. Increasing public sector spending seems to be bad whenever it exceeds private sector growth. Take a look at the
    graphs in the link above. It happens every time over the past 70 years. If you want to improve the economy, in the UK at least, your simplest action is to cut public spending, or so it appears. Any comments?

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