When Jeremy Corbyn first came into prominence to take over the leadership of the British Labour Party, his offsider, now Shadow Chancellor John McDonnell started talking about “deficit deniers” and he and the Labour Party were avowedly not so inclined, as if questioning the fiscal surplus obsession was a demonstration of stupidity. In fact, for a political group claiming to be the ‘end of austerity’, who aimed to seize control of the Party from the neo-liberal Blairites – those austerity-lite mavens – I thought he was sounded distinctly neo-liberal himself. His defenders who also understood perhaps a bit of Modern Monetary Theory (MMT) wrote to me and said we should be patient – that this was just a political ploy designed to snare the Conservatives in their own hubris. After all, George Osborne has categorically failed to achieve his goals of fiscal cutbacks. I noted that it was actually good that he had ‘failed’ because the U-turn Osborne made in 2012, albeit rather subtle, saved the British economy from a triple-dip recession and has allowed it to continue to grow. Britain is not an example of a successful austerity implementation. It looks rather Keynesian to me. John McDonnell decided he had better make a U-turn of his own in the last few days. This one won’t save the nation and will probably sink British Labour further into the mire. Why McDonnell supported Osborne’s crazy ‘Charter of Budget Responsibility’ two weeks ago is one question. It showed a monumental lack of understanding of what it would mean for the nation to lock the government in, legally, to achieving overall fiscal surpluses. The U-turn now betrays a capricious approach to policy and one that will fail to cut through and offer a truly progressive path. Very sad really.
Neo-liberalism is in the Labour Party’s DNA now after the years of Blair and his cronies. It will take a serious effort to reorient the narrative.
The day or so after Labour lost the election they should have won, given the appalling performance of the Tories, one of the Blairite hopefuls, Chuka Umunna came out and said that Labour lost because it was not “Pro Business” enough.
Which really says it all – he wanted the party of workers to actually become the party for the top-end-of-town, but, of course, in the context of their ‘austerity lite’ positioning, he would have lead a fairer party.
It you believe that you will believe anything.
His day in the sun was short-lived and he dropped out of the candidacy quick smart and was one of ‘Tony’s men (and women)’ who spat the dummy and refused to serve on Jeremy Corbyn’s Shadow Front Bench once he was elected.
Whether he is plotting with the others in the background to restore the New Labour glory days is another question. You can make up your own mind on that. Blind ambition doesn’t die easily as John Dean can attest.
Umunna recently wrote an Op Ed in the Independent (October 13, 2015) – George Osborne has given the nation a lesson in how not to balance the books.
The aim of the article is to discredit the Tories, and Chancellor George Osborne, in particular, for failing to deliver “budget surpluses” and reduce the public debt ratio (to GDP) in the time period that was originally laid out when they took office in 2010.
But in railing against this slow track to surplus, Umunna has to rehearse the standard New Labour line – that the Tories are about to fast-track their move to surplus “by punishing the poorest and most vulnerable in society”. And … Labour (under him ??) would achieve the same fiscal result more fairly.
He says that:
… reducing the debt and our deficit is a progressive endeavour.
He does acknowledge that the government can achieve a smaller fiscal deficit if it oversees a growing economy with higher wages.
Surely. But then he talks about the rising household debt as a sign of the sort of problems that Britain faces at present without connecting the dots.
We know he is not connecting the dots because he closes by saying that:
Aiming to reduce the national debt in the long term and running small surpluses when the economy is operating close to full capacity is sensible.
Why is running a small surplus at full employment sensible? Why is it progressive to deliberately aim to create fiscal drag in the economy when the economy is “close” to full employment and rising household debt is a problem?
Presumably, he wants household debt to fall (as a per cent of disposable income). That would require a shift in the saving to disposable income relationship.
Further, does he really believe the Britain will be running current account surpluses any time in the foreseeable future? I doubt you will find anyone who thinks that will be a possibility.
So piece this together.
1. External deficits will persist and worsen if Britain picks up its growth rate given the rise in imports that would follow. But rising investment incomes from abroad could offset that increase. The Office for Budget Responsibility certainly thinks that.
The external deficit is currently around 5.5 per cent of GDP. The OBR is forecasting the external deficit to be around 3.2 per cent in 2016.
2. What would a small fiscal surplus (say of 1 per cent of GDP) by 2016 imply for the private domestic sector, where households are already over-indebted? We are presuming for argument sake that the OBR forecast will be realised (I doubt it will but still).
The sectoral balances tell us that (S – I) = (G – T) + (X – M).
Substituting the values where appropriate we get (S – I) = -1 + (-3.2) = -4.2 per cent of GDP. That means the private domestic sector would be running a deficit of 4.2 per cent of GDP and accumulating further debt.
We do not know what the drivers of that private domestic deficit would be (Household saving plunging and/or a rapid investment growth rate).
The current private investment to GDP ratio is very poor (11.6 per cent of GDP) having falling dramatically during Blair’s period from 14.8 per cent in 1998.
A reasonable surmise is that the private domestic deficit will be driven by a drop in savings and a rise in household indebtedness beyond the already excessively risky levels.
Is this the Britain Mr Umunna aspires to? He is worried about the buildup of household debt but is advocating fiscal outcomes that would make that debt worse. I guess he doesn’t really understand the inconsistency in his story. That is the problem – political statements are continually made to elicit support from an ignorant public that cannot possibly be realised.
But in trying to realise the impossible, fiscal policy becomes skewed towards austerity and full employment shifts further away from the reality.
While Umunna was penning his latest piece of stupidity, the big U-turn was in progress. John McDonnell, the Shadow Chancellor, has demonstrated that his rejection of “deficit denial” is not some canny political strategy but a ‘me-too’ stance that the inferiority complexes that go deep within the Labour Party seem to hang on to.
The interchanges go something like this –
Osborne: I will achieve a surplus by 2018.
McDonnell: I will achieve a bigger one by 2017.
That sort of ‘me-too-ism’ – mindless and like Umunna’s demonstration of stupidity stupid!
On September 26, 2015, John McDonnell wrote that the Labour Party would go along with George Osborne’s fiscal surplus plans as outlined in the ridiculously titled Charter of Budget Responsibility (Source).
This was just ‘me-too-ism’. I was told to be patient. That is was just a cunning political ploy to trap Osborne.
I provided a critique of that position in this blog – British Labour Party is mad to sign up to the ‘Charter of Budget Responsibility’.
Two weeks or so later, the ploy gets more complex – its a U-turn. I guess to confound the Tories. Bob up here one moment, then bob up there next – a sort of Rope-a-dope strategy to get Osborne off-guard.
Well from where I type the U-turn looks like one of those confused monumental stuff-ups rather than a savvy political manouevre.
Remember the ill-fated Gerald Ford?
He looks a little like John McDonnell – n’est-ce pas!
John McDonnell wrote a letter to Labour MPs on Monday entitled – Charter for Budget Responsibility and the Fiscal Mandate
Among other things it said:
There is a significant difference between the charter and the mandate which the Labour Party agreed to support in January in that the Government’s proposal to require a continuing surplus on public sector net borrowing constrains the ability to borrow for future capital investment, a key plank of Labour’s growth strategy and one supported by the great majority of mainstream economists …
I suggested we vote for it nevertheless in support of the principle of tackling the deficit but to demonstrate that our approach would not involve austerity measures and we would seek to exclude capital investment from its severe and arbitrary constraints …
In the last fortnight there have been a series of reports highlighting the economic challenges facing the global economy as a result of the slowdown in emerging markets. These have included warnings from the International Monetary Fund’s latest financial stability report, the Bank of England chief economist, Andy Haldane, and the former Director of President Obama’s National Economic Council, Lawrence Summers …
Although we need to continue to bear down on the deficit, they believe that this is not a time in any way to undermine investment for growth strategies …
So I believe that we need to underline our position as an anti-austerity party by voting against the Charter on Wednesday. We will make clear our commitment to reducing the deficit in a fair and balanced way by publishing for the debate our own statement on budget responsibility. We will set out our plan for tackling the deficit not through punishing the most vulnerable and damaging our public services but by ending the unfair tax cuts to the wealthy, tackling tax evasion and investing for growth.
In subsequent press interviews, McDonnell was keen to stress that “Labour will tackle the deficit – we are not deficit deniers” (Source).
Did he really misunderstand that the Charter required an absolute rather than a current fiscal surplus to be the goal?
The general point remains. There is nothing canny about this U-turn. It was wrong to endorse the Charter in the first place even if he believed it only constrained the current fiscal balance to be in surplus.
Deficit deniers, if that is the term he wishes to use, are the ones who actually understand the relationship between the fiscal balance, the external balance and the private domestic balance and the implications of movements of one for the others.
I am a deficit denier using their terminology. To say that the Labour Party will still be “tackling the deficit” indicates that he thinks it is a policy target.
The fiscal balance should never be a policy target. It should just respond to the pursuit of the more legitimate policy targets such as full employment.
Further, there is no salvation to be had in saying that the Labour Party will bear down on the deficit but do it in a fairer way.
The equity implications of the government mix of spending and taxation are not at all important from a macroeconomic perspective although it is clearly very important from a progressive perspective.
By that I mean, that the fiscal deficit has to be large enough to satisfy the non-government sector’s desire to net save overall at levels of income and output which would generate full employment.
Not a penny more or less than that.
For Norway, that means a fiscal surplus is appropriate because the spending impulse it receives from its external (resource) sector is so strong.
For Britain, which an external deficit, unless domestic investment by firms is very strong (which it hasn’t been for a long time), a fiscal surplus is the anathema of responsible macroeconomic policy.
So a fairly sizeable deficit is required if the government wants to provide the space for the private domestic sector to run down debt, given the external deficit.
Once that is accepted then equity issues might be entertained. But that sort of reasoning is light-years away from austerity-lite.
McDonnell should be educating the public to understand that fiscal deficits will be the inevitable outcome of the nation achieving important goals such as social inclusion and full employment. A nation that can sustain those things should celebrate and realise that the fiscal deficit is the reason they can enjoy such success.
Why not start with that sort of narrative rather than getting trapped into all this Tory anti-‘deficit denial’ nomeclature and construction and then being forced to make embarassing U-turns because it becomes clear that the Scottish will never support you again among other things.
My inside sources tell me that the U-turn demonstrates that policy-on-the-run decisions by British Labour are now being made without much consultation with other colleagues – those outside the inner circle. How large is the inner circle? Not very large is what I have been told.
When that sort of centralisation occurs within political parties and the policy announcements begin to appear more U-turnish (which is my new euphemism for astoundingly ridiculous) then the tenure of the inner circle starts to become increasingly precarious – grass roots groundswell support notwithstanding.
And then, British Labour would be back to a dog fight between the even more ridiculous policies advocated by Liz Kendall or, spare the thought, Chuka Umunna.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.