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

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The problems with ending encryption to fight terrorism

Forcing tech firms to create a "backdoor" to access messages would be a gift to cyber-hackers.

The UK has endured its worst terrorist atrocity since 7 July 2005 and the threat level has been raised to "critical" for the first time in a decade. Though election campaigning has been suspended, the debate over potential new powers has already begun.

Today's Sun reports that the Conservatives will seek to force technology companies to hand over encrypted messages to the police and security services. The new Technical Capability Notices were proposed by Amber Rudd following the Westminster terrorist attack and a month-long consultation closed last week. A Tory minister told the Sun: "We will do this as soon as we can after the election, as long as we get back in. The level of threat clearly proves there is no more time to waste now. The social media companies have been laughing in our faces for too long."

Put that way, the plan sounds reasonable (orders would be approved by the home secretary and a senior judge). But there are irrefutable problems. Encryption means tech firms such as WhatsApp and Apple can't simply "hand over" suspect messages - they can't access them at all. The technology is designed precisely so that conversations are genuinely private (unless a suspect's device is obtained or hacked into). Were companies to create an encryption "backdoor", as the government proposes, they would also create new opportunities for criminals and cyberhackers (as in the case of the recent NHS attack).

Ian Levy, the technical director of the National Cyber Security, told the New Statesman's Will Dunn earlier this year: "Nobody in this organisation or our parent organisation will ever ask for a 'back door' in a large-scale encryption system, because it's dumb."

But there is a more profound problem: once created, a technology cannot be uninvented. Should large tech firms end encryption, terrorists will merely turn to other, lesser-known platforms. The only means of barring UK citizens from using the service would be a Chinese-style "great firewall", cutting Britain off from the rest of the internet. In 2015, before entering the cabinet, Brexit Secretary David Davis warned of ending encryption: "Such a move would have had devastating consequences for all financial transactions and online commerce, not to mention the security of all personal data. Its consequences for the City do not bear thinking about."

Labour's manifesto pledged to "provide our security agencies with the resources and the powers they need to protect our country and keep us all safe." But added: "We will also ensure that such powers do not weaken our individual rights or civil liberties". The Liberal Democrats have vowed to "oppose Conservative attempts to undermine encryption."

But with a large Conservative majority inevitable, according to polls, ministers will be confident of winning parliamentary support for the plan. Only a rebellion led by Davis-esque liberals is likely to stop them.

George Eaton is political editor of the New Statesman.

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