Latest post on Left Futures

How Labour should deal with the Fiscal Responsibility Act

Corbyn at PMQsJeremy Corbyn and John McDonnell are frequently in advance of many of their supporters on economic matters, including their supporters in academia and economic commentators. They are correct to argue against permanent budget deficits and in favour of the central role of public investment as the path out of the crisis, identify People’s Quantitative Easing as a useful policy tool, and to question the ‘independence’ of the Bank of England. They have faced unwarranted and confused criticism on all of these from some on ‘the left’.

The recent indicators point to a slower pace of economic activity and the Tory government is about to embark on Austerity Mark II, in nominal terms exactly the same level of cuts and tax increases as the £37 billion George Osborne announced in 2010. As the Tories have little popularity (the second lowest popular share of the vote for any government) it has been necessary for this project that there is a pretence that this is not a return to austerity, after the boost to consumption that helped the Tories get re-elected. So, there was the fiction that recently there was a ‘One Nation’ Tory Budget, that Osborne was ‘stealing Labour’s ideas’ and similar nonsense.

Politically it is crucial for the Tories that there is no opposition to the latest version of cuts, as this would show the blantant falsity of the claim that the Tories have a commanding parliamentary majority and that There Is No Alternative. This necessity explains why the other Labour leadership candidates were so wrong to give the Tories a free pass on welfare cuts.

However the election of Jeremy Corbyn and the appointment of John McDonnell as Shadow Chancellor changes the previous situation in which Labour did not in fact challenge the Tories’ central economic policies. Now the Tory tactic is to set a series of political traps for the new team in the hope of detaching them from either, or both, the majority of the population or their base of supporters. This is taking place primarily on the area of foreign affairs and the military. But on the economic front this will be the introduction of an amendment to the Fiscal Responsibility Act. This proposed Act precludes borrowing in normal circumstances/over the course of the cycle not only for current government expenditure but also for investment. It also commits future governments to run budget surpluses when the economy is growing, to be overseen by the Office for Budget Responsibility.

Labour’s response

Initially, George Osborne hoped that by announcing the new law and holding it over to the autumn that it would dominate the Labour leadership campaign. That has failed spectacularly. Instead it is possible to turn the tables on Osborne and use the debate and vote to set out clear differences with him.

To achieve this it is necessary to approach these questions soberly and intelligently. To paraphrase a remark by Trotsky, the appropriate economic policy is not at all automatically derived from the policies of George Osborne, simply bearing only the opposite sign to him – this would make every madcap pundit an economics guru. It is necessary for Labour to put forward a positive economic policy based on a correct economic theory.

Labour should formulate its own policy and pose that sharply in contrast to Osborne’s. It must be based on a clear understanding of the difference between consumption and investment. Investment is the chief motor of economic growth, with the latter in turn being the chief determinant of the population’s living standard. Therefore the way to ‘grow the economy out of the crisis’, as Jeremy Corbyn and John McDonnell have correctly put it, is to increase the economy’s level of investment. As the private sector has failed to do this the state should step in. This should be expressed in a policy to increase state investment, and to create a National Investment Bank – which should finance both state and private investment.

The key question is where the savings equivalent to such investment should come from, and this in turn relates to the current expenditure in the budget. Current expenditure can be financed in one of two fundamental ways. It can be financed by borrowing, but in that case this reduces the proportion of the economy devoted to savings/investment, which is undesirable as it will slow economic growth and therefore the increase in living standards. Or consumption can be financed by taxation, in which case it merely means privately financed consumption is being replaced by government financed consumption (either government final expenditure or transfer payments) in which case the level of investment is not being reduced and growth will not be reduced.

It therefore follows that for a coherent and sustainable policy current government expenditure should be financed out of taxation, in particular on higher incomes and luxury consumption, and not out of borrowing.

Expressed in terms of budget deficits and borrowing his means that the aim should be for a balanced current budget over the business cycle, but reserving the right to borrow for state investment. This is the correct position expressed by John McDonnell. This therefore means that an amendment to Osborne’s Bill expressing that position, of no deficit over the cycle for current expenditure but permitting borrowing for investment, should be moved by Labour. This will establish its position clearly.

But, in the likelihood an amendment of this type were to fall, although some other parties may vote for it, then Labour should vote against the entire bill – as it excludes borrowing for investment. (In fact the level of state borrowing for investment currently should be considerable, up approximately 3-5% of GDP). Labour should explain its position of voting against the bill as a whole because of the defeat of its amendment.

In this way, Labour’s approach would be very clear. It is not in favour of public borrowing to fund current expenditure and is in favour of borrowing to fund investment. As a balanced budget law does not allow that investment, Labour would be opposed to the Tory policy.

Labour should not support the Bill without this amendment as this would preclude borrowing to invest and leave the economy at the mercy of a private sector which has achieved only chronic under-investment. Neither should it simply oppose the Bill without offering an alternative, especially not on the spurious grounds that any public sector surplus should be ruled out because it ‘obliges the private sector to run a deficit’. Sometimes the private sector, or at least the business component should be obliged to run down its savings, if it is hoarding cash and refusing to invest. Many countries accumulate budget surpluses in their sovereign wealth funds, to be used for investment at a later date. This is what should have occurred with the windfall of North Sea oil, rather than wasting it on consumption in the ‘Lawson Boom.’

In taking a clearly different approach, Labour’s new leadership will be able to demonstrate it has an entirely different policy to the Tories based on increasing investment to increase prosperity.

13 Comments

  1. Robert says:

    Nobody hopes more then me for a left of center party or a left leaning party which ever..

    But I do have this feeling that labour are going to implode with the left and the right having open war fair on the issues about whether New labour which is not dead or sleeping is active hind the scenes.

    I’ve this feeling the Tories are going to offer the working class gifts and the pensioners also this will be critical to this, so I can see them being offered more.

    We can already see the Tories jumping onto some of Miliband idea and stealing them so why not Corbyn’s .

    But it’s still the same issues will Progress sit in the back ground doing nothing or will they come out fighting and while the left and the right fight the Tories will win.

    1. David Ellis says:

      In effect the left that have just taken control of the party are the new right because New Labour itself is a completely dead duck. It is a toxic brand whose adherants have literally nothing left to offer. Their only option is to remain as impotent members of the party, stay as ever more emibttered and ineffective wreckers or go over to the class enemy as Lord Adonis has just done. No, Corbyn and Co are the new right of the party and it is in political opposition to their rather feeble outlook that a new manifesto for socialism must be forged.

      1. Robert says:

        Adonis Frank Field Blair who offered help to Cameron. Seems you can do this even as an MP and we had others.

        Now then the right wing Moderates or the old New labour they are now dead they are still a major power within labour, and they will work to get rid of the left.

        I’d love to see a left wing Government but I did see them in the past , 1966 was when I started work and what I saw did not make me any better off.

        Labour will need to prove to me it has the policies those are the only thing which will make me vote for it not dreams or spouting what may or may not be.

        I’m a long way from being convinced about new labour being dead or labour being socialist I think a lot of what happens will end up being driven by the very powerful right wing within labour.

        But of course we have four and a bit years to see.

  2. David Pavett says:

    Michael Burke has made a well-argued contribution which I found both informative and convincing. It certainly merits discussion. In particular the clear distinction between government spending for consumption and investment and the way this should relate to taxation and borrowing is helpful. However, it would have been useful to also have some discussion of People’s QE aling with its pros and cons in relation to this dustinction. Perhaps Michael Burke could respond about that.

    Given the interesting nature if the article it is a pity that the first two posts fail to respond to any of its specifics. They are yet more wearisome examples of responses that use articles as an opportunity to sound off on some pre-determined theme.

    1. Robert says:

      Well we lived through one bloody dream of making a new world order under Blair, and what I see in the next few years will make me vote labour or not.

      I saw the new idea on mental health which stated getting people back to work, not helping people live.

      I’m miles away from believing the hype.

    2. J.P. Craig-Weston says:

      So tell me David, what is the difference between a gauge and a vector boson?

      The article’s bunk, the most tedious and self indulgent type fantasy politics and economics. It’s based on a completely unsubstituted premise that Labor may yet find themselves in position to implement any of it which, at this point seems unlikely if they don’t start concentrating on expanding and consolidating their electoral support which currently seems to be going in the opposite direction by all accounts. on

      Wrong kind of voters, wrong kind of comments, wrong kind of socialists, in fact every-thing’s wrong except us; which may yet be the epitaph of the British Labor party ?

      Personally I often find the comments here to be of far more interest and value than many of the articles; but then to reiterate my own previous observation about how narrow and frankly how completely unrepresentative, (and how out of touch,) most of the to contributors to Left Futures seem to be, but when you look at the kinds, of people (journalists and academics,) who are contributing that’s probably unsurprising.

      Michael Meacher actually has a real job.

      Meric Apak Councillor.

      Naomi Fearon Councillor.

      Ann Black A computer programmer.

      Richard Murphy Director Tax Research LLP.

      Michael Burke Economic consultant.

      Conrad Landin A journalist.

      Uri Avnery Another journalist.

      Mark Seddon A Journalist and Speechwriter.

      Owen Jones Another Journalist.

      David Osler Yet another journalist.

      Ben Mitchell Freelance political analyst, (I suspect that means journalist.)

      Keith Ewing Professor of Public Law at King’s College London.

      Bryan Gould Vice-Chancellor of the University of Waikato, (serving until his retirement in 2004.)

      Duncan Hall Another college lecturer.

      Mark Drakeford Professor of Social Policy at Cardiff.

      Lucy Reese FE college teacher and TV producer.

      David Pavett Retired maths/science/philosophy teacher.

      Phil Burton-Cartledge Lecturer at Derby University.

      Carl Packman Health researcher ?

      And so on…………………..

      1. Verity says:

        Does it really matter if the articles have a contributor bias? It is not as though there is a queue of people wishing to feed debate such that others are blocked out.

        I think your comment does offer support to that previously made by David Pavett, in that what the Left needs is more co-ordindination/organisation of sites to suit a range of different needs. There is for example, sometimes an overwhelming need to blast off a little thought out opinion with high emotion on almost any current topic at one extreme and a well thought through referenced/sourced contribution at another. There is then a range of differences lying somewhere between – perhaps organised by thematic contributions.

        Some of the anarchic contributions arise from lack of personal discipline, but there is another explanation. There is a complete absence of leadership in the initiation of important Left discussion in websites as well as being too few sites with well defined functions/themes. There is considerable superficial duplication without clarity about the distinctiveness of each. The building of a mass movement in support of the ‘new regime’ necessitates the addressing of this weakness. It is a reflection of the dire weakness of the Left that we are in this situation. If there was less hero worshipping by the now ‘former Corbyn’ organisers and more initiation of that much highlighted mass movement, then there will be less regrets in a few years time. What are those leading organisers and supporters doing whilst they await the latest pronouncements of their heros? At the moment they are either spending time arguing with the ‘lacklustre 3’ supporters in their own branches or stunned into a stupor awaiting the ‘little red book’ statements from the new heros.

      2. David Pavett says:

        Even in response to my complaint you fail to engage with the article to which these posts are supposed to be a response beyond saying that it is “rubbish”. From an eleven year-old who hasn’t understood the need to have reasons for opinions this would not be surprising. In terms of the debate that is now needed within Labour and more generally on the left it is an infantile indulgence that helps no one and which puts off others from contributing.

  3. Mervyn Hyde says:

    I have to take issue with the idea that there are two options, one is borrowing and the other is raising taxation.

    Both of these position are economically unnecessary and are actually part of Neo-Liberal orthodoxy.

    If we are to win people over to Labour, the left have got to understand that the Bank of England does not have to borrow it’s own currency and that money enters the economy by the private Banks printing it out of thin air.

    THAT IS FACT.

    So why are we talking about taxation and borrowing?

    We have a FIAT money system exactly the same as the USA, Australia, Canada, and Japan. Japan has for years now printed money into the economy and will do into infinity if that is what it takes. Shinzo Abe came to power promising to print unlimited money into the Japanese economy, the problem for japan though, is that they do it via the private banking system, when like Britain the central bank could print it according to need, i.e. infrastructure or public service.

    This is an extract from a document written by Alan Greenspan on how central Banks operate and global finance, Jan 14th 1997.

    “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

    That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”

    Simply put Central banks can print money without limit.

    That means that the Bank of England doesn’t have to borrow money from anyone or anywhere.

    The reason we do, is a policy decision.

    We could choose a different policy which means we put that money directly without interest payments into the economy, just like we did for the banks, only we don’t need QE to do it either.

    THIS A FACT.

    1. David Ellis says:

      Delusional

      1. Mervyn Hyde says:

        David; you are just a Troll, I have provided you with the CEO of the Federal Bank Alan Greenspan’s view in 1997, he explained exactly what I have been saying, do you think he is delusional as well?

        This is how the Banking system works FACT.

        I really do suspect that you are here to obfuscate and confuse, in all your posts you never provide information, just your opinion, which is pretty worthless when it’s not backed by facts.

        1. David Ellis says:

          Greenspan was the man most shocked by the collapse of the banks. He could not believe that they had killed the goose that layed the golden egg. Enlightened self interest was supposed to keep the supply of money in equilibrium with demand but the bankers having been handed responsibility for money supply by the monetarists immediately set about building the greatest Ponzi Scam the world has ever seen lasting thirty years and leaving debts in the trillions which the poor are now being robbed to pay for.

          1. Mervyn Hyde says:

            I have made the statement that this is how the Banking system works, what has changed since the crash?

            I have also said that we have the capability to print money into infinity and that is a fact.

            Clearly if you are not obfuscating you would also remember that I have said that that we create money out of thin air and tax it out of existence, we regulate the economy through taxation and interest rates, The Bank of England expresses this as they control Bank lending by setting the level of interest.

            The so called deficit is the difference between the tax raised and the money needed for public expenditure, In that case why have they reduced taxation for the rich from 83% in the 1960s down to 40% now?

            It’s called a political choice.

            So, what is currently happening in the economy?

            Oh yes that’s right the Banks don’t like savers they only like borrowers, it’s only when people borrow that new money is created in the economy, that is how it gets there.

            Borrowers go onto the asset side of the Bank balance sheet and savers go on to the liability side.

            So how is the economy doing? Well if someone is not borrowing that means they are also not spending, if everybody is saving then the economy goes into recession, when that happens banks charge a negative interest, in other words charge people for saving.

            Which is the current proposals from the Banking system, which means we are in a recession, or as I would say we are in the middle of a depression.

            We therefore need to spend in the economy in order to create work, if you have already noticed there have been a number of job losses announced, meaning the economy that is in the middle of a depression is getting deeper into trouble.

            My point is that we have the money, the private sector is not creating jobs but losing them, it therefore leaves it to the public sector to step in, that means government.

            We can create money out of thin air and destroy it through taxation, in a depression we can print as much money as is necessary, or you could do as the Tories are at present and make matters worse, which is it?

© 2018 Left Futures | Powered by WordPress | theme originated from PrimePress by Ravi Varma