Osborne rides to Labour’s rescue

He has forced Labour to acknowledge that if you cut less now, you have to cut for longer.

The deterioration of the public finances will guarantee George Osborne tough headlines for his mini-Budget Autumn Statement. Labour argues that it stands vindicated: the government's strategy has failed. But is anyone listening to the Labour case -- and even if they are, will it change how they vote?

Labour's first problem is that it is still blamed for the deficit. Whilst it was conducting a lengthy leadership election last year, the coalition partners successfully persuaded the public that gross profligacy during the Labour years was to blame for the ballooning deficit. In a neat piece of political framing, the Coalition said Labour had "maxed out on the country's credit card", thereby making a symbolic association between high household debt and government deficits. An electorate suffering a hangover from a consumption binge and the bursting of a housing market bubble was in receptive mood. Labour had presided over a splurge, and spending had to be cut.

Labour has never given a convincing answer to this charge. It hasn't consistently articulated an alternative account of why the deficit grew so large during the 2008/9 financial crisis, other than to blame the global economic meltdown and admit to the failure of its light-touch regulation of the City of London. Consequently, it remains vulnerable to the criticism that it is in denial about the deficit.

Yet it doesn't have to be boxed into this corner. In reality, Labour got the tax -- not spending -- side of the tax-spend equation wrong. Although it should have been running a small surplus in the run-up to the crisis, its big failure was consistently to over-estimate tax revenues. And ultimately, this was about the structure of the economy itself: the tax base was too reliant on revenue from the City, the housing market and wealthy individuals. A quarter of all corporation tax was being paid by City firms before the recession.

When the crisis struck, these sources of revenue collapsed, leaving a huge hole in the public finances. But whereas in Germany a loss of economic output in the recession of between 6 per cent and 7 per cent of GDP -- roughly the same magnitude as in the UK -- led to a deficit of 3.5 per cent of GDP, in the UK the deficit reached nearly 12 per cent of national output. As the chart from the Autumn Statement today below shows, lacking a resilient, broad tax base, the UK's public finances were far more exposed than many other countries on the Continent (conversely, the fact that the UK has its own currency and Central Bank gave it the flexibility and tools it needed to fight the economic downturn: had it joined the Euro, a fully-fledged sovereign debt crisis would have been on the cards immediately).

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Labour should acknowledge its responsibility for the deficit in these terms, rather than apologising for over-spending as its critics demand. Indeed, a reckoning with its fiscal record of this kind is precisely what would allow it to build a bridge to the kind of responsible, long-termist, rebalanced capitalism that Ed Miliband has made such a central part of his platform. A fairer, more robust political economy in the UK would produce more resilient public finances: prudence would be built on firmer foundations that self-declared fiscal rules. Without such an account, the deficit weighs like a drag anchor on Labour's economic credibility.

The party's second problem is a paradoxical one. It is this: the more it is right about the Coalition's "too far, too fast" fiscal strategy, the greater the task it sets itself to persuade the public to trust it again on the public finances at the next General Election. Labour has got it broadly right on fiscal strategy over the last year. The Keynesians are getting the better of the argument. But politically, all the talk of cuts simply reinforces the perception that Labour doesn't acknowledge the need for fiscal rectitude in the medium term. Labour spokespeople eschew being drawn too far into declaring which cuts they would make, for fear of confusing the electorate on their central argument about growth and jobs (indeed, there doesn't even appear to be a consistent script that Labour frontbenchers use when asked to describe what cuts or tax rises they would make to bring down the deficit). Instead, they talk up the impact of cuts in almost every department. The party has made no tough spending choices -- nothing at least that the electorate might recall.

It is on this score that Osborne has now ridden to Labour's rescue. By pushing back his structural deficit reduction plans into the next Parliament, he has forced Labour to acknowledge what its position would all along have entailed: that if you cut less now, you have to cut for longer. In his speech to the IPPR last week Ed Miliband made a virtue of this fact, saying to Osborne that if he failed to eradicate the structural deficit in this Parliament, Labour would have to finish the job. Commentators immediately pricked up their ears. Labour was on a path back to fiscal prudence.
Osborne has today set out further fiscal tightening of £8 billion in 2015/16 and £7 billion in 2016/17 on the cyclically-adjusted current budget. That means that we know the broad spending position for the first two years of the next Parliament, just as we did in 1997 when Labour said it would match Ken Clarke's plans. The same electoral arithmetic is clicking into place today.

Of course, had it been in power Labour would have arrived at the same place by a different route. It will also mercilessly attack the government for having failed meet its targets because of weak growth and high unemployment. But the central political fact remains that at the next election, Labour will now be in the business of fiscal rectitude in a way that it has previously not had to acknowledge.

It should now use the opportunity presented by this changed political landscape to develop new, politically compelling routes to social democracy that don't rely on spending increases. Instead, it should rest instead on the central pillars of deep economic reform, switches of spending into public services that support higher living standards, like childcare, and the reform of public services to secure greater efficiency and effectiveness for given levels of spending. If it completes these tasks, it may find it has much to thank Osborne for.

Nick Pearce is Director of IPPR

Nick Pearce is Professor of Public Policy & Director of the Institute for Policy Research, University of Bath.

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Brexit will hike energy prices - progressive campaigners should seize the opportunity

Winter is Coming. 

Friday 24th June 2016 was a beautiful day. Blue sky and highs of 22 degrees greeted Londoners as they awoke to the news that Britain had voted to leave the EU.  

Yet the sunny weather was at odds with the mood of the capital, which was largely in favour of Remain. And even more so with the prospect of an expensive, uncertain and potentially dirty energy future. 

For not only are prominent members of the Leave leadership well known climate sceptics - with Boris Johnson playing down human impact upon the weather, Nigel Farage admitting he doesn’t “have a clue” about global warming, and Owen Paterson advocating scrapping the Climate Change Act altogether - but Brexit looks set to harm more than just our plans to reduce emissions.

Far from delivering the Leave campaign’s promise of a cheaper and more secure energy supply, it is likely that the referendum’s outcome will cause bills to rise and investment in new infrastructure to delay -  regardless of whether or not we opt to stay within Europe’s internal energy market.

Here’s why: 

1. Rising cost of imports

With the UK importing around 50% of our gas supply, any fall in the value of sterling are likely to push up the wholesale price of fuel and drive up charges - offsetting Boris Johnson’s promise to remove VAT on energy bills.

2. Less funding for energy development

Pulling out of the EU will also require us to give up valuable funding. According to a Chatham House report, not only was the UK set to receive €1.9bn for climate change adaptation and risk prevention, but €1.6bn had also been earmarked to support the transition to a low carbon economy.

3.  Investment uncertainty & capital flight

EU countries currently account for over half of all foreign direct investment in UK energy infrastructure. And while the chairman of EDF energy, the French state giant that is building the planned nuclear plant at Hinkley Point, has said Brexit would have “no impact” on the project’s future, Angus Brendan MacNeil, chair of the energy and climate select committee, believes last week’s vote undermines all such certainty; “anything could happen”, he says.

4. Compromised security

According to a report by the Institute for European Environmental Policy (the IEEP), an independent UK stands less chance of securing favourable bilateral deals with non-EU countries. A situation that carries particular weight with regard to Russia, from whom the UK receives 16% of its energy imports.

5. A divided energy supply

Brexiteers have argued that leaving the EU will strengthen our indigenous energy sources. And is a belief supported by some industry officials: “leaving the EU could ultimately signal a more prosperous future for the UK North Sea”, said Peter Searle of Airswift, the global energy workforce provider, last Friday.

However, not only is North Sea oil and gas already a mature energy arena, but the renewed prospect of Scottish independence could yet throw the above optimism into free fall, with Scotland expected to secure the lion’s share of UK offshore reserves. On top of this, the prospect for protecting the UK’s nascent renewable industry is also looking rocky. “Dreadful” was the word Natalie Bennett used to describe the Conservative’s current record on green policy, while a special government audit committee agreed that UK environment policy was likely to be better off within the EU than without.

The Brexiteer’s promise to deliver, in Andrea Leadsom’s words, the “freedom to keep bills down”, thus looks likely to inflict financial pain on those least able to pay. And consumers could start to feel the effects by the Autumn, when the cold weather closes in and the Conservatives, perhaps appropriately, plan to begin Brexit negotiations in earnest.

Those pressing for full withdrawal from EU ties and trade, may write off price hikes as short term pain for long term gain. While those wishing to protect our place within EU markets may seize on them, as they did during referendum campaign, as an argument to maintain the status quo. Conservative secretary of state for energy and climate change, Amber Rudd, has already warned that leaving the internal energy market could cause energy costs “to rocket by at least half a billion pounds a year”.

But progressive forces might be able to use arguments on energy to do even more than this - to set out the case for an approach to energy policy in which economics is not automatically set against ideals.

Technological innovation could help. HSBC has predicted that plans for additional interconnectors to the continent and Ireland could lower the wholesale market price for baseload electricity by as much as 7% - a physical example of just how linked our international interests are. 

Closer to home, projects that prioritise reducing emission through tackling energy poverty -  from energy efficiency schemes to campaigns for publicly owned energy companies - may provide a means of helping heal the some of the deeper divides that the referendum campaign has exposed.

If the failure of Remain shows anything, it’s that economic arguments alone will not always win the day and that a sense of justice – or injustice – is still equally powerful. Luckily, if played right, the debate over energy and the environment might yet be able to win on both.

 

India Bourke is the New Statesman's editorial assistant.