Jonathan Todd

I wrote for Labour Uncut today on the challenge for the new shadow chancellor.

The Labour leadership election will, finally, end on 25 September. But the identity of the shadow chancellor will be unknown until 7 October, when the results of the shadow cabinet election are announced. 13 days after this the new leader and shadow chancellor will lead our response to the comprehensive spending review. “It is”, as a leadership contender has said, “an incredibly tight timetable for the new leader and their shadow chancellor to map out a policy that might yet determine how we are viewed for the rest of the parliament.”

The general election too quickly gave way to the leadership election. (Which should have started later and been shorter). With the end of the leadership election, the formal involvement in the shadow cabinet election of four of our would-be leaders begins. This is a grueling pace. But the new leader and shadow chancellor will need immediately to demonstrate economic literacy, which means robustly critiquing George Osborne and articulating a credible and appealing alternative economic approach. While this is challenging, there are some relatively simple points that are worth underlining.

First, like the Liberal Democrats, we consistently warned prior to the general election that it was too much of a risk to the economy’s recovery to cut public spending this year. There is no evidence that these risks have significantly diminished.  Business credit remains weak. Lending to businesses fell for the eleventh consecutive month in July. Consumer demand remains sluggish, as tens of thousands of homeowners are expected to face at least four more years of negative equity and redundancies in the public sector are thought unlikely to be absorbed by additional private sector employment.

Second, no matter how the Liberal Democrats defend the shift in their position on public spending cuts this year, the UK is not Greece and was never in danger of becoming Greece. As Rachel Reeves has noted, national debt in the UK in 2009, as a percentage of GDP, was 72 percent, while in Greece it was 119 percent. Additionally, and crucially, having our own currency and a central bank that can set interest rates in the interests of the domestic economy provides us with far more flexibility than is available to the Greeks within the eurozone.

Third, our opposition to cuts this year derives from a deeper view: sustaining economic growth is an indispensible precondition of deficit reduction. In the absence of growth, the deficit will widen as tax receipts fall and unemployment benefit payments rise. Public debt levels are generally more sensitive to growth than changes in tax and spending. George Osborne can cut as aggressively as his Thatcherite heart desires, but if we slip back into recession this cutting will do little to contain the deficit. Indeed, it also risks a deflationary spiral if Osborne responds to recession by persisting with his cuts.

The risk to public finances posed by a double dip recession must be balanced against the risk of higher interest rates cascading through the economy – further credit crunching businesses and raising household mortgage payments – if the deficit reduction plan fails to convince markets. Reduce public spending too early and the double dip risk increases; cut too late and upward pressure on interest rates becomes more likely. George Osborne, in cutting earlier and by £40bn more deeply over this parliament, is putting more emphasis on the later risk than Alistair Darling’s plans do.

Yet, as no lesser economic authority than the FT’s Martin Wolf has observed, “the market is screaming its lack of concern about UK fiscal credibility”. In these circumstances, forcefully illustrated in Ed Balls’ Bloomberg speech, it is perverse for the chancellor to underplay the double dip risk of cutting too early and too deep for the sake of masochistic cuts ostensibly justified by market concern about the deficit.

In truth, Osborne’s plans are driven by an ideological imperative to reduce the size of the state. This goes against the premium which Anatole Kaletsky places upon pragmatism in Capitalism 4.0; his weighty tome on the financial crisis and capitalism’s future. “In an indeterminate world”, he writes, “both economic and institutional decisions will have to proceed by a zigzag process of trial and error.” Rather than this flexibility and adaptability, Osborne, as Pat McFadden has noted, has given us “faith-based economics”.

Labour must be careful, however, that we too do not become inflexible and dogmatic. While Osborne is underplaying the double dip risk, which even those red-blooded socialists at the British chamber of commerce worry about, and is willing a private sector led recovery through little more than his faith in it, the interest rate risk attached to the deficit should be squarely confronted by Labour. Being squeamish about this not only betrays our credentials as the party of pragmatic economics but leaves us seeming trapped in what Phil Collins has called “the comforting illusion that state spending is a straight line to progress”.

This illusion can attach to social as much as to economic policy. And the public sees through it. The mood music emanating from Labour risks seeming too statist if we seem unwilling straightforwardly and even-handedly to address the deficit. Alistair Darling has left plans which should take us a long way towards avoiding this outcome. But our new shadow chancellor will still have crucial decisions to take during a testing first fortnight in office.

I had the piece below published on Labour Uncut on 16 June 2010:

The Daily Telegraph isn’t normally essential reading for Labourites. But yesterday it should have been, especially for Harriet Harman. Fraser Nelson set the backdrop to the politics of the deficit and the “emergency” Budget, to which she, as acting leader, will respond. This week’s report from the new Office of Budget Responsibility (OBR) dramatically changes this political context. Nelson has been quick to realise this and, while our instincts differ markedly from his, we need to be equally fleet-footed.

The limited discussion on the deficit in the leadership election has denied our candidates the opportunity to demonstrate this quality. Though, of course, they could engineer such an opportunity for themselves. I’d be impressed if any of them do flesh out a more substantial economic platform, not least as The Economist is right to note that, “nothing will make or break the next leader of the opposition like his response to the government’s austerity programme”.

The coalition, preparing the ground for the scorched earth to come, has grasped any and every opportunity to exclaim their horror that “it is even worse than we thought”. Labour, apparently, have not just cooked the national books, but eaten and spat them out again. It’s what we always do. We can’t help ourselves. It is the coalition’s duty to pick up the pieces; in the national interest, of course.

The coalition has pushed this story since its creation. It matters whether it is believed. It wasn’t until after black Wednesday that the spectre of the winter of discontent stopped being a drag on Labour’s support. If the deficit is perceived as Labour’s deficit, then the pain of reducing it will be a similar drag. However, a major spanner has been thrown in the coalition’s attempts to embed this perception. As Nelson observes, “something is going badly right” for the British economy.

The OBR reported earlier in the week, as Nelson noted, that unemployment “will be almost 200,000 lower than had been feared. Economic growth will not be quite as strong but the tax revenues – which are far more important – will come in much more strongly than Mr Darling gloomily forecast.” So, the reality is that public finances are in better shape than the Treasury forecasts bequeathed to the coalition gave them to expect.

How troubled George Osborne must be that this reality, so out of kilter with his desired spin, has been presented by the OBR. After all, he established this body, as Nelson puts it, with the intention to “demolish the economic Potemkin Village that Gordon Brown built during his time in Downing Street and reveal the full extent of his fiscal vandalism”. Yet, rather than exposing Labour irresponsibility, the OBR has shown “Mr Osborne’s election goal – to abolish “the bulk” of the structural deficit by 2014 – would have been easily achieved had Mr Darling remained in place. No more taxes need to be raised, or budgets cut, to honour this Tory manifesto pledge.”

This is a tremendous vindication for Darling and inconvenience for Osborne. If Osborne now persists with plans to cut further and faster than intended by Darling, he will be doing so for reasons of political belief, not economic pragmatism. Nelson understands this and urges him to press on “because he wishes to restore the power balance between state and society. A true liberal believes that people spend their own money more wisely and effectively than government can do on their behalf.”

While Rachel Reeves has expertly explained why comparisons – encouraged by the scaremongering spin of the coalition – between the UK and Greece are spurious, our deficit does require careful management. However, there is a world of difference between the careful prudence of Darling’s plan and the ideological, small-state zeal that would carry Osborne beyond it. Nelson encourages Osborne in this direction because “with Labour embroiled in a five-way leadership contest, he will never face weaker opposition”. Precisely why we must be vigilant against him.

What the formation of the coalition told Philip Stephens about David Cameron was that “he is a Conservative in the centrist tradition of Harold Macmillan rather than a radical such as Margaret Thatcher”. However, we need to be ready for his Chancellor leading the coalition on a distinctly Thatcherite course in his first Budget. Having scrapped the Child Trust Fund and the Future Jobs Fund this might be no surprise, particularly after the coalition agreement made, as James Purnell noted, “no mention of abolishing child poverty. Of reducing inequality. Of protecting education funding. Of guaranteeing jobs for the long-term unemployed.”

In responding to Osborne’s Budget, the key distinction is between actions that can be justified as decisions of economic necessity and those that are driven by political belief. We strip ourselves of credibility if we do not acknowledge the necessity of some pain. We can absorb more of this pain in the form of taxes than Osborne will propose, but we can’t hide from the need for some spending cuts. To remain credible we need openly to concede this, but we also need clearly to identify the areas in which Osborne is acting as the ideological vanguardist that Fraser Nelson wants him to be, losing sight of the sober economic reality presented by the OBR.

That this reality is much brighter than the coalition’s spin is a credit to the decisions we made in office. We need to be equally strategic and forensic in our economic decision making in opposition.

Good analysis of the economy and public finances from Larry Elliott. He’s right to identify the struggles which some companies are still having in accessing finance as a key challenge as the pre-budget report draws nearer.  It must be a major worry that lending to businesses fell by £4.6bn in September – the eighth successive decline. What can Alistair Darling do about this?

Almost certainly less than the Bank of England may potentially be able to. “Inexplicably”, Willem Buiter convincingly argues, ”the Bank of England has not made full use yet of the instruments it has at its disposal.” Interest rates may go lower still (to zero or even beyond) and quantitative easing, which has taken a markedly different form in the UK from the US, might be revised in the UK. The UK’s programme has produced, in round terms, £2bn of outright purchases of private securities and £169bn of Treasury securities. There is a strong argument that shifting the balance between these purchases would do more to get credit flowing to businesses.

This isn’t a shift which it is within Darling’s gift to make, however, and Buiter does not anticipate “much joy … from fiscal policy as a means for boosting aggregate demand in the UK in the short run”. So, Darling’s ability to get credit flowing is constrained. Nonetheless, he’ll come under some pressure to provide greater fiscal stimulus in the pre-budget report. This might be a last gasp of Keynesianism. For this gasp to achieve anything, though, it needs to be the kind of smart Keynesianism that I have previously praised. This is a Keynesianism that recognises that what the government spends its money on matters as much as how much it spends.

The next round of monetary and fiscal stimulus must both put an emphasis on quality, not quantity. Well targeted government spending can make a difference, even on a limited scale, and the form which quantitative easing takes is as important as its scale. If these revisions can be made on both the fiscal and the monetary fronts, businesses may be able to access credit on more favourable terms than they can at present and, if this were to be the case, the green shoots really would be coming into view.

I know that the other day I again proclaimed the futility of negative politics, at least as far as the Labour Party at the moment are concerned. However, I was asked to comment on this letter from the Tory PPC for Copeland and couldn’t resist picking apart his arguments. I’d be amused at how weak they are, if the prospect of him being the MP for the seat where I grew up and where most of my family still live were not so appalling. This is what I had to say:

If David Cameron is so pro-nuclear, how is his close relationship with the avowed anti-nuclear campaigner and Tory PPC for Richmond Park Zac Goldsmith to be explained? Could it be that the Tories want to say one thing in Richmond Park and another in Copeland?

Irrespective of what they say in different parts of the UK, a Conservative government would not be heard in Brussels, as David Cameron has already made decisions which have, according to France’s European Minister, castrated British influence in Brussels. This materially impacts upon economic wellbeing in Copeland. Chris Whiteside speaks of removing barriers to new nuclear investment, but securing a higher and more stable carbon price would remove a key barrier to this investment. Lowering the cap in the EU-ETS is the best available policy lever for achieving such a carbon price, but this lever will only be pulled by a British government capable of commanding influence in Brussels and across the EU. The castration of British Conservatives in Brussels threatens the nuclear future of west Cumbria should we ever have a Conservative government.

It is odd that Chris Whiteside bemoans, rightly, attempts to misrepresent the policies of other parties and then proceeds not only to misrepresent Labour policy but also his own party’s history.  

As far as his own party’s history is concerned, it is one thing to attempt, as Cameron and Andrew Lansley, the Conservative health spokesman, are doing, to re-brand the Conservatives as champions of the NHS. Great is the joy for the sinner who repenteth. But it is quite another to ask us to forget the sin, as Chris Whiteside’s perplexing praise of the record of past Conservative governments on the NHS asks us to do. The NHS was on its knees when Labour came to government in 1997. We turned it around because we have always believed in the NHS and not seen it “as a 60 year mistake”, as a Conservative MEP recently described it; comments which cause one to doubt the sincerity of the repenting we are being asked to embrace.

As for misrepresenting Labour policy, since when has Budget 2009 been a leaked document? This very public document set out plans for a cumulative 6.7 percent reduction in public spending over the three years from April 2011. I can only presume that the 10 percent figure that Chris Whiteside refers to is the reduction which is implied across most of the public sector by the Conservative commitment to both match Labour’s spending restraint and ring fence increases in health spending. This ring fencing is intended to convince us of the sincerity of Tory repenting on the NHS, but one’s confidence in this sincerity is further shaken by Chris Whiteside’s capacity not only to confuse a leaked document with Budget 2009 but Labour Party policy (which is for a 6.7 percent reduction) with Conservative policy (which is for the 10 percent reduction he refers to).

Nonetheless, Whiteside is correct to be concerned about public debt and we look forward to the Chancellor, Alistair Darling, setting out full plans for the management of public debt in the Pre-Budget Report later this month. He will do so on a basis that both preserves confidence in the public finances and maintains the public services that Labour has turned around since 1997. To re-coin a phrase, this will be prudence with a purpose. Chris Whiteside’s obvious lack of either prudence or sincere purpose is a danger to Copeland.

Recently Hector Sants, head of the Financial Services Authority (FSA), said:

“The question of the size of individual payments is not one for financial regulators. That is one for politicians and society as a whole. If politicians wish to take a view on that, then they should say so, but they should not be asking the regulator to carry out a pay policy”.

Politicians should step up to this plate. So, it is welcome to read reports that Alistair Darling, the Chancellor, is considering means of doing so.

Any nervousness that might be felt in relation to this should be quelled by reflection that Martin Wolf, Raghuram Rajan and Paul Krugman were arguing for this long ago. Of course, we should, as ever and as the Times argues, be wary about unintended consequences. But the Times – hardly a bastion of red blooded socialism! – proposes a sensible way ahead:

“Only a small fraction of a bonus should be paid at once. The rest of the payment would follow only if subsequent years of good performance confirmed that the profitability was sustainable. In this way, the incentive to make short-term profits with very risky transactions might be avoided. It would be reasonable to penalise banks that did not comply by requiring they offset the risk by holding more capital”.

Deferred compensation schemes seem the way forward.