Why Labour has not "surrendered" on public spending

Contrary to what conservatives suggest, Balls hasn't capitulated to Osborne. He supports stimulus now and investment after 2015.

Daniel Finkelstein is the latest fiscal conservative to hail Labour's apparent Damascene conversion to austerity. In today's Times he writes of Ed Balls's alleged "intellectual surrender", "the argument he once boldly made, that deficits don’t matter, has gone". 

Balls's speech last week was a significant moment. Not only did he reaffirm that Labour would have to keep most or all of the coalition's spending cuts, he stated that it would have to make its own (and suggested some too). But Finkelstein is wrong to present this as an epoch-defining capitulation to compare with 1976. 

To begin with, Balls's support for stimulus now remains unwavering. Under the political cover of the IMF, he called for the coalition to bring forward capital spending increases from 2015, "financed by a temporary rise in borrowing", in order to promote growth. Contrary to what Finkelstein suggests (recalling Jim Callaghan's famous words), he still believes that you can "spend your way out of recession". More borrowing, more spending remains the Keynesian remedy  prescribed by Balls. The consistent error of the right has been to equate support for stimulus with support for a larger state. As Balls has always acknowledged, a stimulus is, by definition, temporary. In the words of his hero Keynes, "The boom, not the slump, is the right time for austerity at the Treasury." The true intellectual surrender would be for Labour to endorse Osborne's strategy of piling cuts on cuts, a path it has rightly rejected. 

But Finkelstein also overstates the extent to which Labour has committed itself to austerity after 2015. For Balls, Osborne's spending limits are a "starting point", not a blueprint. With growth of just 1.1 per cent since 2010 (compared to 2.9 per cent in Germany and 4.9 per cent in the US), he has adopted the prudent stance of preparing for the worst. But should growth surprise on the upside, he will be able to raise the baseline.

Nothing in Balls's speech precluded the possibility of Labour spending significantly more once a genuine recovery is underway. After all, the surge in expenditure under the last government (an average annual increase of 3.4 per cent) only came after Gordon Brown had stuck to the Tories' "eye-wateringly tight" spending limits. In the case of capital spending, Balls has already hinted that Labour will pledge to invest more than Osborne. As he said, "And for the future, we need to invest in the homes, transport and infrastructure Britain needs and ensure a recovery made by the many. Of course, here too we will only set our plans for investing in Britain’s future in the light of the economic circumstances at the time, and the needs of economic growth". 

Last week was not an "intellectual surrender"; it was an attempt to give Labour the political cover to be radical. 

George Osborne and Ed Balls attend the State Opening of Parliament on 8 May, 2013 in London. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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By refusing to stand down, Jeremy Corbyn has betrayed the British working classes

The most successful Labour politicians of the last decades brought to politics not only a burning desire to improve the lot of the working classes but also an understanding of how free market economies work.

Jeremy Corbyn has defended his refusal to resign the leadership of the Labour Party on the grounds that to do so would be betraying all his supporters in the country at large. But by staying on as leader of the party and hence dooming it to heavy defeat in the next general election he would be betraying the interests of the working classes this country. More years of Tory rule means more years of austerity, further cuts in public services, and perpetuation of the gross inequality of incomes. The former Chief Secretary to the Treasury, Seema Malhotra, made the same point when she told Newsnight that “We have an unelectable leader, and if we lose elections then the price of our failure is paid by the working people of this country and their families who do not have a government to stand up for them.”

Of course, in different ways, many leading figures in the Labour movement, particularly in the trade unions, have betrayed the interests of the working classes for several decades. For example, in contrast with their union counterparts in the Scandinavian countries who pressurised governments to help move workers out of declining industries into expanding sectors of the economy, many British trade union leaders adopted the opposite policy. More generally, the trade unions have played a big part in the election of Labour party leaders, like Corbyn, who were unlikely to win a parliamentary election, thereby perpetuating the rule of Tory governments dedicated to promoting the interests of the richer sections of society.

And worse still, even in opposition Corbyn failed to protect the interests of the working classes. He did this by his abysmal failure to understand the significance of Tory economic policies. For example, when the Chancellor of the Exchequer had finished presenting the last budget, in which taxes were reduced for the rich at the expense of public services that benefit everybody, especially the poor, the best John McConnell could do – presumably in agreement with Corbyn – was to stand up and mock the Chancellor for having failed to fulfill his party’s old promise to balance the budget by this year! Obviously neither he nor Corbyn understood that had the government done so the effects on working class standards of living would have been even worse. Neither of them seems to have learnt that the object of fiscal policy is to balance the economy, not the budget.

Instead, they have gone along with Tory myth about the importance of not leaving future generations with the burden of debt. They have never asked “To whom would future generations owe this debt?” To their dead ancestors? To Martians? When Cameron and his accomplices banged on about how important it was to cut public expenditures because the average household in Britain owed about £3,000, they never pointed out that this meant that the average household in Britain was a creditor to the tune of about the same amount (after allowing for net overseas lending). Instead they went along with all this balanced budget nonsense. They did not understand that balancing the budget was just the excuse needed to justify the prime objective of the Tory Party, namely to reduce public expenditures in order to be able to reduce taxes on the rich. For Corbyn and his allies to go along with an overriding objective of balancing the budget is breathtaking economic illiteracy. And the working classes have paid the price.

One left-wing member of the panel on Question Time last week complained that the interests of the working classes were ignored by “the elite”. But it is members of the elite who have been most successful in promoting the interests of the working classes. The most successful pro-working class governments since the war have all been led mainly by politicians who would be castigated for being part of the elite, such as Clement Atlee, Harold Wilson, Tony Crosland, Barbara Castle, Richard Crossman, Roy Jenkins, Denis Healey, Tony Blair, and many others too numerous to list. They brought to politics not only a burning desire to improve the lot of the working classes (from which some of them, like me, had emerged) and reduce inequality in society but also an understanding of how free market economies work and how to deal with its deficiencies. This happens to be more effective than ignorant rhetoric that can only stroke the egos and satisfy the vanity of demagogues

People of stature like those I have singled out above seem to be much more rare in politics these days. But there is surely no need to go to other extreme and persist with leaders like Jeremy Corbyn, a certain election loser, however pure his motives and principled his ambitions.

Wilfred Beckerman is an Emeritus Fellow of Balliol College, Oxford, and was, for several years in the 1970s, the economics correspondent for the New Statesman