Labour should make the economic case against welfare cuts

Welfare cuts aren't just bad for the poor, they're bad for growth too. Miliband and Balls should say so.

Labour and other opponents of the government's welfare cuts have so far focused on their unfairness. How can ministers charge social housing tenants for their "spare rooms" (the notorious "bedroom tax"), cut council tax support by 10 per cent (forcing thousands of families to pay the tax for the first time) and cap benefit increases at just 1 per cent while simultaneously handing 13,000 millionaires an average tax cut of £100,000 a year? But in doing so they are in danger of ignoring another important argument against the measures: welfare cuts aren't just bad for the poor, they're bad for growth too. 

When George Osborne announced most of the government's welfare reforms in his first Budget and in the 2010 Spending Review (the bedroom tax was described as "limiting social tenants’ entitlement to appropriately sized homes") it was on the assumption that the economy would be growing at nearly 3 per cent a year (the OBR originally forecast growth of 2.8 per cent in 2012 and 2.9 per cent in 2013). It is now expected to grow by just 0.6 per cent. Rather than cutting into an expanding economy, Osborne will be cutting into a stagnant one. And austerity, as the OBR reminded David Cameron last week, has  consequences. For every £100 of welfare cuts, GDP is reduced by around £60 a year. 

To anyone with an elementary understanding of economics, this will come as no surprise. If the government reduces someone's benefits by £728 a year (the average annual cost of the "bedroom tax"), that's £728 less for that person to spend on goods and services. And since, as Paul Krugman sagely observes, "your spending is my income" (and "my spending is your income"), it's not just the claimant who loses out, it's shops and businesses too.

In addition, since the poor are more likely to spend, rather than save, what little they receive, welfare cuts are around twice as economically harmful as tax increases (the OBR estimates that output is reduced by £60 for every £100 of welfare cuts, compared to £35 for increases in VAT and £30 for increases in income tax). It's for this reason that wise governments allow welfare spending to rise in times of stagnation. While borrowing temporarily increases as a result, higher benefits (known as the  "automatic stabilisers") are an essential means of maintaining consumer demand. In October 2012, George Osborne remarked: "We have never argued that you stop what economists call the automatic stabilisers operating - the lower tax receipts and extra government payments [such as higher benefits] that follow if, for example, the global economy turns down." In his recent New Statesman essay, Vince Cable similarly claimed: "Unlike the Treasury in the interwar period, which insisted on balanced budgets, the coalition government has been Keynesian in approaching fiscal policy in a broadly counter-cyclical manner by letting stabilisers operate."

But Osborne’s decision to cap benefit increases at 1 per cent (alongside other pro-cyclical measures) runs entirely against such logic. Welfare payments will now fall, rather than rise, in line with inflation, reducing real-terms incomes. As a result, Britain’s anaemic economy will be even more prone to recession. Welfare cuts, in short, aren't just bad for the poor, they're bad for all of us. And it's time Labour and the left said so.

Work and Pensions Secretary Iain Duncan Smith speaks at last year's Conservative conference in Birmingham. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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The 2017 Budget will force Philip Hammond to confront the Brexit effect

Rising prices and lost markets are hard to ignore. 

With the Brexit process, Donald Trump and parliamentary by-election aftermath dominating the headlines, you’d be forgiven for missing the speculation we’d normally expect ahead of a Budget next week. Philip Hammond’s demeanour suggests it will be a very low-key affair, living up to his billing as the government’s chief accounting officer. Yet we desperately need a thorough analysis of this government’s economic strategy – and some focused work from those whose job it is to supposedly keep track of government policy.

It seems to me there are four key dynamics the Budget must address:

1. British spending power

The spending power of British consumers is about to be squeezed further. Consumers have propped up the economy since 2015, but higher taxes, suppressed earnings and price inflation are all likely to weigh heavily on this driver for growth from now on. Relatively higher commodity prices and the sterling effect is starting to filter into the high street – which means that the pound in the pocket doesn’t go as far as it used to. The dwindling level of household savings is a casualty of this situation. Real incomes are softer, with poorer returns on assets, and households are substituting with loans and overdrafts. The switch away from consumer-driven growth feels well and truly underway. How will the Chancellor counteract to this?

2. Lagging productivity

Productivity remains a stubborn challenge that government policy is failing to address. Since the 2008 financial crisis, the UK’s productivity performance has lagged Germany, France and the USA, whose employees now produce in an average four days as much as British workers take to produce in five. Perhaps years of uncertainty have seen companies choose to sit on cash rather than invest in new production process technology. Perhaps the dominance of services in our economy, a sector notorious hard in which to drive new efficiencies, explains the productivity lag. But ministers have singularly failed to assess and prioritise investment in those aspects of public services which can boost productivity. These could include easing congestion and aiding commuters; boosting mobile connectivity; targeting high skills; blasting away administrative bureaucracy; helping workers back to work if they’re ill.

3. Lost markets

The Prime Minister’s decision to give up trying to salvage single market membership means we enter the "Great Unknown" trade era unsure how long (if any) our transition will be. We must also remain uncertain whether new Free Trade Agreements (FTAs) are going to go anyway to make up for those lost markets.

New FTAs may get rid of tariffs. But historically they’ve never been much good at knocking down the other barriers for services exports – which explains why the analysis by the National Institute for Economic and Social Research recently projected a 61 per cent fall in services trade with the EU. Brexit will radically transform the likely composition of economic growth in the medium term. It’s true that in the near term, sterling depreciation is likely to bring trade back into balance as exports enjoy an adrenal currency competitive stimulus. But over the medium term, "balance" is likely to come not from new export market volume, but from a withering away of consumer spending power to buy imported goods. Beyond that, the structural imbalance will probably set in again.

4. Empty public wallets

There is a looming disaster facing Britain’s public finances. It’s bad enough that the financial crisis is now pushing the level of public sector debt beyond 90 per cent of our gross domestic product (GDP).  But a quick glance at the Office for Budget Responsibility’s January Fiscal Sustainability Report is enough to make your jaw drop. The debt mountain is projected to grow for the next 50 years. All else being equal, we could end up with an incredible 234 per cent of debt/GDP by 2066 – chiefly because of the ageing population and rising healthcare costs. This isn’t a viable or serviceable level of debt and we shouldn’t take any comfort from the fact that many other economies (Japan, USA) are facing a similar fate. The interest payable on that debt mountain would severely crowd out resources for vital public services. So while some many dream of splashing public spending around on nationalising this or that, of a "universal basic income" or social security giveaways, the cold truth is that we are going to be forced to make more hard decisions on spending now, find new revenues if we want to maintain service standards, and prioritise growth-inducing policies wherever possible.

We do need to foster a new economic model that promotes social mobility, environmental and fiscal sustainability, with long-termism at its heart. But we should be wary of those on the fringes of politics pretending they have either a magic money tree, or a have-cake-and-eat-it trading model once we leap into the tariff-infested waters of WTO rules.

We shouldn’t have to smash up a common sense, balanced approach in order for our country to succeed. A credible, centre-left economic model should combine sound stewardship of taxpayer resources with a fairness agenda that ensures the wealthiest contribute most and the polluter pays. A realistic stimulus should be prioritised in productivity-oriented infrastructure investment. And Britain should reach out and gather new trading alliances in Europe and beyond as a matter of urgency.

In short, the March Budget ought to provide an economic strategy for the long-term. Instead it feels like it will be a staging-post Budget from a distracted Government, going through the motions with an accountancy exercise to get through the 12 months ahead.

Chris Leslie MP was Shadow Chancellor in 2015 and chairs Labour’s PLP Treasury Committee

 

 

 

Chris Leslie is chair of Labour’s backbench Treasury Committee and was shadow Chancellor in 2015.