Economics
I first studied economics at Barrow Sixth-Form College. I choose economics A-Level because of all of the economic problems that I could see around me in Cumbria, which the Tory government were so indifferent to. We now have another Tory Prime Minister, equally determined to pursue small-state policies.
In the mean time, I’ve become an MSc level economist and worked as an economic consultant for four and a half years. In terms of the bigger picture, the Blair/Brown government delivered many years of rising prosperity and showed that the country can be made fairer and more prosperous at the same time. Proving that we are the party of prosperity will always be crucial to securing Labour government.
But the global financial crisis means that we are in a new economic era. The British economy shrank by six per cent. This massively reduced tax collection, paricularly in the finance and housing sectors. The recession also increased unemployment, which, in turn, increased spending on unemployment benefits. The effect of this increased spending and reduced tax collection has been a large deficit, which has been financed by selling government bonds.
The politics of this parliament, as I have written on Labour Uncut, will be defined by this deficit. The deficit does need to be corrected. If it isn’t, then, interest rates on government bonds will go up, which will eat into resources available for public services and threaten growth through passing increased interest rates into the wider economy.
However, there are choices to be made in how the deficit is corrected: what mix of tax increases and spending cuts is used; what spending is cut and when; which taxes increase and when. It simply isn’t true, as George Osborne repeatedly asserted in his 2010 Budget address, that all the choices which he made were unavoidable. Instead, as I have shown on Labour Uncut, many of the choices which he made were driven by ideological choice, not pragmatic necessity.
Labour has to face up to tough choices. We have to argue for spending cuts and tax increases. But we have plenty of scope to do so in ways that reflect a very different ideology from that which drives Osborne. The choices that we make should reflect both the country that we wish to create and our judgments on how this country will best be created.
We should seek to minimise spending cuts by arguing for tax to play a greater role in deficit reduction than the coalition. These taxes should be progressive in that they should fall to a greater extent on the better off. But we must seek to be percieved as a party of fair taxation, not high taxation. These taxes should also incentivise the behaviour that we want to see: a carbon tax to drive our green economy; a land tax to curb property speculation and wealth inequality; alcohol taxation that favours community pubs over supermarkets; taxation of the financial sector that encourages long-term investment, not short-term speculation.
We should make the case for all of these tax changes and be clear about their implications. Obviously, the more revenues these taxes raise the less spending would have to be cut. Nonetheless, Labour must accept that some cuts must happen. We should spread the pain of these cuts more fairly than the coalition by arguing against any ring-fencing of departmental spending. Efficiencies made in the NHS should not be recycled in the NHS, but used, like efficiencies in all other areas of spending, to pay down the deficit. Shielding the NHS only increases the total damage caused by spending restraint by making it more likely that spending in other areas – the number of police officers, new school building, social care services, etc – will be cut to dangerous levels.
As well as tax and spending decisions, Labour needs an economic growth strategy. Post credit crunch, most politicians agree that our economy needs rebalancing away from finance and in favour of manufacturing. But, as I’ve argued on Comment is Free, finance and manufacturing can be complementary. Labour should develop and advocate the policies that will make our financial sector a real motor to the wider economy.
This is an economy which is seeking to grow in the context of a low pound and a world economy in which the role of the BRIC (Brazil, Russia, India, China) economies is ever more significant. As I have previously blogged, the capacity of the British economy to export to the BRIC economies has never been more important. The coalition’s answer to this challenge, like all others, is to roll back the state. They think that the economy will be rebalanced by rolling back the state. In contrast, in government we made the case for new industries and new jobs, which involved a positive role for government and we must continue to develop this thinking. We need the policies to convincingly argue that we are the party best able to develop new sources of growth like the digital economy.
Labour faces a lot of economic challenges. But so does the economic profession. “The Great Credit Crisis has cast into doubt much of what we thought we knew about economics”, as Barry Eichengreen, an economics Professor at Berkeley, has put it. The debates which this doubt opens up have far reaching implications. This changing intellectual weather frames the policy context in which Labour shall operate.
It wasn’t until seven years after the Wall Street crash of 1929 that Lord Keynes published his General Theory. Perhaps, if Labour economists engage with these debates, we won’t have to wait seven years from the collapse of Lehman Brothers in September 2008 to develop a new economic framework. Hopefully, in our We Think age – another trend that any new economic framework should capture – this websites shares and inspires some ideas that help towards this.
