Osborne won the battle on austerity, now Labour must look to the future

Rather than re-running the arguments of 2010, the party must start and sustain a debate about what a good, healthy economy looks like.

Earlier this week, George 'Slasher' Osborne gave a speech from a not-so-carefully chosen building site at One Commercial Street, London, E1, in the centre of the City, where he claimed that the economy was 'turning the corner'. Presumably he couldn’t find a suitable site to give the speech from in Newcastle, Birmingham or Liverpool; maybe he was afraid to venture north?  His choice of venue speaks volumes giving the growing disparities between north and south.  

Over the last few months, there have been several positive indicators, including the recent Purchasing Manager Indices (PMIs) as well as data on consumer confidence, retail sales, production and exports.  The recent poor export data suggests that there is still a long way to go before any recovery hits 'escape velocity'. There remain risks to the downside, including from the eurozone, but also from the consumer, who is currently dis-saving, and investment seems unlikely to take off. The rise in bond yields to over 3% also represents a major risk to recovery and may, in the end, force the MPC to engage in further quantitative easing.  It amounts to what the committee called an "unwarranted" monetary tightening.  If, as Osborne claimed, falling bond yields reflected the success of his policies then rising yields should reflect badly; he can’t have it both ways. Moreover, the deficit reduction plan has stalled for the last two years and there is little prospect of it improving.

We need to put all of this in context. Osborne has been responsible for the slowest recovery for more than a century. GDP per capita is now around 7% below its starting level. Four of the last 11 quarters have seen negative growth and we have had two quarters in a row of growth - 0.3% in Q1 2013 and 0.7% in Q2. The chart below illustrates that, 66 months in, the UK economy is still approximately 3% below its 2007 peak. This compares with the recessions of the 1920s and 1930s when at a similar point GDP was just under 7% higher. GDP after the shallow recession of the 1990s was 10% higher. In the period 2009 Q4 - 2010 Q3, output under the Labour government’s policies rose by 2.4%. I start from Q4 2010 on the basis that it took some time for the coalition's policies to take effect. The OBR even had to upgrade its estimate of how strong growth was. In the 11 quarters since then, 2010 Q4 - 2013 Q2, the economy has grown by a total of 1.8%, of which 0.7% occurred in 2012 Q3 because of Labour’s investment in the Olympics. 

The UK is still 2.9% below its 2008 starting level, whereas all of the other major countries, with the exception of the Netherlands and Italy, are above it. The UK has grown 1.8% since 2010 but this is markedly slower than the United States, Canada, Australia and Germany. So under Osborne, the UK has performed worse than France, which does not have its own currency and is unable to engage in quantitative easing. The UK has done worse than the EU, the euro area and the OECD.

Slasher went on to claim that the recent sharp pick-up in the PMIs and some better housing data meant he had been vindicated. He argued that what he called the "fiscalist" story - that spending cuts and tax rises have had a large impact on output - was wrong. Sadly for him, on the same day he claimed this the prestigious National Bureau of Economic Research published a major study of the impact of Osborne himself on the economy, and the news wasn’t good.

In this important new paper, Òscar Jordà of the Federal Reserve Bank of San Francisco and Alan Taylor of the University of California Davis, argued that the adverse impacts of austerity have been underestimated. They examined Osborne’s post-2010 austerity to determine the share of responsibility that should be borne by the decision to instigate austerity in a slump. The answer, they concluded, is "about three fifths...By 2013...the cumulative effects of these choices amounted to about 3.0% of GDP…Our model also suggests that additional drag from the 2010–12 policies will also continue to be felt into 2014–16, even not allowing for any further austerity." They also argue that, in all likelihood, this may well be an underestimate of the true effect. They concluded that "the vast majority of the difference between the actual UK recovery and what the OBR forecast can be attributed to the Coalition’s austerity policy choices in 2010–13."

The chief political problem for Labour remains the effectiveness of the Tory contamination of the idea of debt; that 'the money ran out' and that it was spent by Labour, and that the boom was a party fuelled by debt. It follows that austerity is a necessary antidote to excess. By extension, say the Tories, the solution to a problem caused by debt cannot possibly be more debt. The challenge for Ed Miliband and Ed Balls, then, is not just that people don't trust them on the economy, it is that they have lost control of what it means to be economically competent. They can talk all they like about living standards, under-employment and wage stagnation. But it sounds as if they are talking about social symptoms, not the essential judgments that underpin sound economic management.

Labour failed to pin the post-2010 stagnation on Osborne - that period is seen by too many people as a continuation of suffering made inevitable by the 2008 crash - and now the two Eds are facing an election campaign where something they see as self-evident - who is really responsible for the past three years of suffering - is too easily portrayed as self-serving partisanship and denial.

Ed Balls is now in a very difficult position. It is bad enough in politics to say 'I told you so' when, deep down, everyone knows you called it right. It is much worse to say it when there is a concerted campaign to say that, actually, you were wrong all along.

The task, then, is to start and sustain a debate about what a good, healthy economy looks like. What kind of jobs? What kind of society does the economy support? Who benefits? Only the south east? What about the workers? That allows Labour to capitalise on the plausible perception that the Tories have just about scraped together enough expansion to keep them and their friends in clover while, as usual, the rest of us fall behind.

Labour has to come up with a coherent plan that appeals to the median voter. Focusing on unfairness and the fact that the coalition has presided over declining living standards is a good idea. But being Osborne-lite won’t work. So many people are hurting and need some hope. Coming up with credible plans to raise real wages, create jobs and reduce youth unemployment looks like the way forward. 

George Osborne astonishingly claimed in his speech "our economic plan is the only sustainable way to raise living standards." This is Labour’s chance to show that simply isn’t the case. There is a lot of work to do.

Ed Miliband and Ed Balls at the Labour conference in Manchester last year. Photograph: Getty Images.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

Getty
Show Hide image

“We can’t do this again”: Labour conference reactions to Jeremy Corbyn’s second victory

Overjoyed members, determined allies and concerned MPs are divided on how to unite.

“I tell you what, I want to know who those 193,229 people are.” This was the reaction of one Labour member a few rows from the front of the stage, following the announcement of Jeremy Corbyn’s victory at the Labour party conference. She was referring to support received by his defeated contender, Owen Smith, who won 38.2 per cent of the vote (to Corbyn’s 61.8 per cent).

But it’s this focus on the leader’s critics – so vehement among many (and there are a lot of them) of his fans – that many politicians, of either side, who were watching his victory speech in the conference hall want to put an end to.

“It’s about unity and bringing us all together – I think that’s what has to come out of this,” says shadow cabinet member and MP for Edmonton Kate Osamor. “It shouldn’t be about the figures, and how many votes, and his percentage, because that will just cause more animosity.”

Osamor, who is supportive of Corbyn’s leadership, is not alone in urging her colleagues who resigned from the shadow cabinet to “remember the door is never shut”.

Shadow minister and member of Labour’s National Executive Committee (NEC) Jon Ashworth – not a Corbyn loyalist, but focusing on making the shadow cabinet work together – shares the sentiment.

Standing pensively in front of the now-empty stage, he tells me he backs shadow cabinet elections (though not for every post) – a change to party rules that has not yet been decided by the NEC. “[It] would be a good way of bringing people back,” he says. “I’ve been involved in discussions behind the scenes this week and I hope we can get some resolution on the issue.”

He adds: “Jeremy’s won, he has to recognise a number of people didn’t vote for him, so we’ve got to unite.”

The former Foreign Secretary Margaret Beckett, another MP on the NEC, is sitting in the audience, looking over some documents. She warns that “it’s impossible to tell” whether those who resigned from Corbyn’s shadow cabinet would be willing to return, and is concerned about talent being wasted.

“We have a lot of excellent people in the party; there are new people now in the shadow cabinet who have had a chance to show their mettle but you need experience as well as ability,” she says.

Beckett, who has urged Corbyn to stand down in the past, hopes “everybody’s listening” to his call for unity, but questions how that will be achieved.

“How much bad blood there is among people who were told that there was plotting [against Corbyn], it’s impossible to tell, but obviously that doesn’t make for a very good atmosphere,” she says. “But Jeremy says we’ll wipe the slate clean, so let’s hope everybody will wipe the slate clean.”

It doesn’t look that way yet. Socialist veteran Dennis Skinner is prowling around the party conference space outside the hall, barking with glee about Corbyn’s defeated foes. “He’s trebled the membership,” he cries. “A figure that Blair, Brown and Prescott could only dream about. On average there’s more than a thousand of them [new members] in every constituency. Right-wing members of the parliamentary Labour party need to get on board!”

A call that may go unheeded, with fervent Corbyn allies and critics alike already straying from the unity message. The shadow justice secretary Richard Burgon is reminding the PLP that, “Jeremy’s won by a bigger margin this time”, and telling journalists after the speech that he is “relaxed” about how the shadow cabinet is recruited (not a rallying cry for shadow cabinet elections).

“If Jeremy wants to hold out an olive branch to the PLP, work with MPs more closely, he has to look very seriously at that [shadow cabinet elections]; it’s gone to the NEC but no decision has been made,” says Louise Ellman, the Liverpool MP and transport committee chair who has been critical of Corbyn’s leadership. “That might not be the only way. I think he has to find a way of working with MPs, because we’re all elected by millions of people – the general public – and he seems to dismiss that.”

“If he sees it [his victory] as an endorsement of how he’s been operating up until now, the problems which led to the election being called will remain,” Ellman warns. “If we’re going to be a credible party of government, we’ve got to reach out to the general electorate. He didn’t say anything about that in his speech, but I hope that perhaps now he might feel more confident to be able to change direction.”

Corbyn may have called for cooperation, but his increased mandate (up from his last stonking victory with 59.5 per cent of the vote) is the starkest illustration yet of the gulf between his popularity in Parliament and among members.

The fact that one attempt at a ceasefire in the party’s civil war – by allowing MPs to vote for some shadow cabinet posts – is in contention suggests this gulf is in danger of increasing.

And then where could the party be this time next year? As Osamor warns: “We should not be looking at our differences, because when we do that, we end up thinking it’s a good thing to spend our summer having another contest. And we can’t. We can’t do this again.”

Anoosh Chakelian is deputy web editor at the New Statesman.