Dividing Lines: The economy

Continuing his series on the major policy divisions in politics, Rafael Behr tackles the economy.

What’s the issue?
This is the big one. When the coalition was formed it claimed its governing purpose was to rescue Britain from an economic emergency. The remedy devised by George Osborne was an immediate course of spending cuts to reduce the Budget deficit and limit the rise in public debt as a proportion of gross domestic product. The theory was that a shock-and-awe display of fiscal discipline would reassure international investors that Britain was a “safe haven” from global turbulence. Cutting the public sector is also meant to release growth potential in the private sector, which was thought to have been “crowded out” by state expansion under Labour.

Is it working?
No. The economy didn’t grow at all last year. It is 3.3 per cent smaller than at its boom-time peak. Osborne is on course to fail his self-imposed tests of credibility – eliminating the “structural” deficit (the part of government overspend that doesn’t vanish automatically when the economy is operating at full capacity) and reducing public debt as a proportion of GDP by the end of this parliament.

What went wrong?
The government says its inheritance from Labour was worse than previously thought and that the eurozone crisis has blown recovery off course. Labour says the rush to austerity has drained demand out of the economy; when companies and households were too indebted or too frightened to spend, the government should have stepped in to stimulate activity – hitting the gas instead of slamming on the brakes.

So, Labour would turn on the money taps again?
Economically, that is the logic of Ed Balls’s position but politically he is in a bind. Lots of people are persuaded that an underlying cause of the crisis was “Gordon Brown spending all the money”. Whenever Balls attempts to make his macroeconomic argument, he ends up trying to rehabilitate the reputation of a period in Labour’s record that even many on his own side think is better off left for dead. Besides, by the time of the next election, the public finances will be in such a woeful state that there will be no spare capacity to increase spending. The campaign will be about who cuts what and with what end in mind.

Couldn’t the government borrow to spend?
Yes. And it is quietly doing just that, because there is no growth. There is a case for saying that the low long-term interest rates available now make it a good time to borrow for investment in such things as housing and transport that would create jobs and strengthen our economic capacity.

Even Osborne has discreetly conceded the point that cuts alone won’t kick-start growth. In his Autumn Statement last year, the Chancellor said he would find £5bn for infrastructure investment, but the money has to be carved out by making cuts to other budgets. He has painted himself into a corner, insisting any dilution of austerity would be a disaster and portraying borrowing as inherently wicked. So, to be true to their own political script, the Tories have to pretend to be less reliant on borrowing than they are. It is higher now than at the last election, and rising. David Cameron recently claimed that the government is “paying down the debt” but by any measure it simply isn’t.

That’s a bit sneaky, isn’t it?
Very. The question is how long they’ll get away with it. There is a strong expectation that the credit-rating agencies will downgrade the UK this year, torpedoing Osborne’s “safe haven” claim. Balls’s problem is that he struggles to call out the Tories for relying on debt: his core macroeconomic analysis demands the same fiscal remedy. Intellectually, his position can be made coherent but it relies on a distinction between “good” Labour borrowing – premeditated to spur growth – and “bad” Tory borrowing – accidental, driven by a failed austerity plan. The difference is not immediately obvious to many voters.

Besides, no one doubts that the Tories at least want to limit public spending, while Labour risks looking like it wants to duck that challenge altogether. In order to reassure swing voters that it is a careful steward of taxpayers’ money, the opposition could end up accepting spending restraints that don’t permit the kind of stimulus that has been central to its macroeconomic prescription.

So Labour thinks we should be borrowing more but doesn’t feel comfortable admitting it, and the Tories are borrowing more but pretend they aren’t?
Pretty much. A vital difference is that many Conservatives think the government isn’t cutting budgets deeply enough. The Tory hawks think the way out of the growth impasse is on the “supply side”– cutting back on regulations and employment rights in the belief that excessive bureaucracy is stifling enterprise. Labour sees that as a sign the Tories are using the financial crisis as a pretext to pursue an old agenda of shrinking the role of government in public life. It doesn’t, Labour says, tackle the underlying problem of inadequate demand.

What do the Lib Dems think?
Their instincts are with Labour. Nick Clegg has conceded that infrastructure spending was cut too hard in the coalition’s early days. Yet within the broad outline of austerity the Lib Dems are lashed to Osborne’s mast; they sign off on his budgets.

That doesn’t sound very comfortable.
In this debate, no one is.

 

Rafael Behr's "Dividing Lines" series appears regularly in the New Statesman magazine.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

This article first appeared in the 04 February 2013 issue of the New Statesman, The Intervention Trap

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Emmanuel Macron offers Theresa May no comfort on Brexit

The French presidential candidate warned that he would not accept "any caveat or any waver" at a press briefing in London.

Emmanuel Macron, the new wunderkind of French politics, has brought his presidential campaign to London. The current favourite to succeed François Hollande has a natural electoral incentive to do so. London is home to 300,000 French voters, making it by France's sixth largest city by one count (Macron will address 3,000 people at a Westminster rally tonight). But the telegenic centrist also took the time to meet Theresa May and Philip Hammond and to hold a press briefing.

If May hoped that her invitation would help soften Macron's Brexit stance (the Prime Minister has refused to engage with his rival Marine Le Pen), she will have been left disappointed. Outside No.10, Macron declared that he hoped to attract "banks, talents, researchers, academics" away from the UK to France (a remark reminiscent of David Cameron's vow to "roll out the red carpet" for those fleeing Hollande). 

At the briefing at Westminster's Central Hall, Macron quipped: "The best trade agreement for Britain ... is called membership of the EU". With May determined to deliver Brexit, he suggested that the UK would have to settle for a Canadian-style deal, an outcome that would radically reduce the UK's market access. Macron emphasised that he took a a "classical, orthodox" view of the EU, regarding the "four freedoms" (of people, capital, goods and services) as indivisible. Were Britain to seek continued financial passporting, the former banker said, it would have to make a significant budget "contribution" and accept continued immigration. "The execution of Brexit has to be compliant with our interests and the European interest".

The 39-year-old avoided a nationalistic tone ("my perspective is not to say France, France, France") in favour of a "coordinated European approach" but was unambiguous: "I don't want to accept any caveat or any waver to what makes the single market and the EU." Were the UK, as expected, to seek a transitional arrangement, it would have to accept the continued jurisdiction of the European Court of Justice.

Elsewhere, Macron insisted that his liberal economic stance was not an obstacle to his election. It would be fitting, he said, if the traditionally "contrarian" France embraced globalisation just as its counterparts were rejecting it. "In the current environment, if you're shy, you're dead," he declared. With his emotional, straight-talking approach (one derided by some as intellectually threadbare), Macron is seeking to beat the populists at their own game.

But his views on Brexit may yet prove academic. A poll published today showed him trailing centre-right candidate François Fillon (by 20-17) having fallen five points since his denunciation of French colonialism. Macron's novelty is both a strength and a weakness. With no established base (he founded his own party En Marche!), he is vulnerable to small swings in the public mood. If Macron does lose, it will not be for want of confidence. But there are unmistakable signs that his forward march has been halted. 

George Eaton is political editor of the New Statesman.