Can Labour defuse the "borrowing bombshell"?

An increasing number of Labour MPs believe that the party must make an explicit case for borrowing to invest if it is to counter the Tories' attack line of choice.

In 1992, it was the “tax bombshell” that sank Neil Kinnock and John Smith’s election hopes. The Conservatives believe that the “borrowing bombshell” will do the same to Ed Miliband and Ed Balls in 2015. The shadow chancellor’s refusal to rule out running a deficit to fund higher capital investment has given the Tories the target they wanted. A Times front page warning “Labour’s spending spree to cost £25bn” and Danny Alexander’s subsequent claim that the party would “pile another £166bn of borrowing on to the debt mountain” were the opening shots in the long war that will now be waged on Labour’s economic credibility.

Faced with this assault, the opposition’s instinct remains to change the subject: to its pledge to achieve a current budget surplus, to the living standards crisis, to George Osborne’s failure to meet his deficit targets. Balls and his aides state both publicly and privately that no decision will be taken on whether to borrow to invest until closer to the election, when the state of the economy is clearer. But few in the party believe it will be possible for Labour to achieve its priorities – a mass housebuilding programme, universal childcare, the integration of health and social care – without doing so. As one shadow cabinet minister told me: “We all know that a Labour government would invest more.” The question, rather, is a tactical one: when and how does Labour make the case for “good borrowing”?

The party starts, as all sides acknowledge, from a position of weakness. The Conservatives’ framing of the crash as the result of overspending by the last government has succeeded in crowding out all alternative accounts. It is the belief that Labour was profligate in the past that allows the Tories to warn that it would be profligate in the future. Yet the facts are on the opposition’s side. In 2007, both the deficit (2.4 per cent of GDP) and the national debt (36.5 per cent) were lower than in 1997 (3.4 per cent of GDP, national debt of 42.5 per cent). It was the crash that caused the deficit (which swelled to 11 per cent after a collapse in tax receipts), not the deficit that caused the crash. But politics is not an Oxford economics seminar. The perception among the public that the last government spent too much is so ingrained that the numbers no longer matter. There is little to be gained from repeatedly contesting this myth, just as there is little to be gained from an insincere apology. The outcome of the election will depend on Labour winning an argument about the future, not the past.

An essential part of this will be a commitment to invest in those areas, such as housing and childcare, that support long-term prosperity. But given the fiscal constraints that Labour would face in office, with £12bn of tax rises required merely to maintain departmental spending cuts at their present pace, it will almost certainly have to borrow to make up the shortfall.

In private, Miliband’s advisers argue that the voters are able to distinguish between borrowing to fund day-to-day spending and borrowing for investment, just as they distinguish between “borrowing to fund the weekly shop” and “borrowing for an asset like a house”. But the Labour leader is not yet prepared to make this case in public. Since an ill-fated interview last year on Radio 4’s The World at One, in which he refused eight times to admit that Labour would borrow more than the Conservatives, Miliband has focused deliberately on market reforms that would not cost government money: freezing energy prices, expanding use of the living wage and restructuring the banking system. When he has made promises that would require new funding, such as the construction of 200,000 homes a year by 2020, the question of borrowing has been deferred.

It is an ambiguity that increasing numbers of Labour MPs believe can no longer be maintained. If the party waits until early 2015 before showing its hand, they warn, it will be too late to win the voters round. The former cabinet minister John Healey told me: “The terms of debate about borrowing are still dominated by the simple sloganeering from the coalition … I think we have to break that argument; there is clearly good borrowing and bad borrowing.” Another former cabinet minister, Peter Hain, similarly argued: “We ceded the territory in the months after May 2010 by being preoccupied with an overlong leadership election. We’ve got to win it back, basically.”

Healey urges Labour to turn the Tories’ household analogies against them: “It makes sense to borrow to buy a house, especially if your mortgage payments are less than your rent. It makes sense to borrow money to buy a car if that allows you to then travel to take up a job that pays better and brings in more.”

The case for borrowing to invest could be made more easily if Labour were to have what one MP calls a “fiscal Clause Four moment”: an act that convinces voters it means what it says about “iron discipline”. It is this ambition that explains Balls’s continued threat to withdraw support for High Speed 2 and the doubt over Labour’s commitment to Trident. But while the party continues its search for an emblem of fiscal responsibility, the Tories are remorselessly increasing their lead on this issue.

Rather than proselytising for borrowing, as Labour’s most ardent Keynesians propose, or entering an auction on austerity, as its most ardent fiscal conservatives suggest, Miliband’s ambition remains to shift the debate towards building “a different kind of economy”, one beyond the conventional terms of exchange on tax and spend. In an era of depressed living standards, it is a gamble that may serve his party well. But if the next election proves more like its predecessors than many expect, he risks being left defenceless beneath the bombshell.

Ed Miliband and Ed Balls at the Labour conference in Manchester in 2012. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

This article first appeared in the 05 February 2014 issue of the New Statesman, Cameron the captive

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I was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.