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14 October 2015

Better to U-turn than drive into the wall

John McDonnell has had an embarrassing 24 hours - but the end result is a better policy than he had this time last week. 

By Stephen Bush

It’s fair to say that the last 24 hours – in which Labour painfully u-turned on its support for George Osborne’s Fiscal Charter – have not been the most successful of John McDonnell’s political life.

Having signed up to the Conservatives’ fiscal charter without consulting his colleagues a fortnight ago, he announced Labour’s opposition to the measure again without consultation – and without a clear idea as to why. A worsening global economy, the government’s failure to bail out the steelworks in Redcar have both been wheeled out as excuses.

Of course, a fortnight ago, Redcar’s steelworks was still on the brink and the global economy’s “Titanic problem” – a shortage of lifeboats, an excess of icebergs – was very much a factor two weeks ago.

And to be frank, there are no circumstances in which Osborne’s fiscal charter was good economics or good politics. The economics of it are straightforwardly bad: by committing to an overall surplus, the government effectively rules out borrowing to invest in infrastructure.

As Chi Onwurah, one of Jeremy Corbyn’s shadow ministers, explained on the Staggers over the summer:

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“The Osbornomic farmer wouldn’t borrow to buy a tractor unless crop prices were falling. The Osbornomic househunter would not take out a mortgage unless her salary was being cut. The Osbornomic CEO would only invest in a new product line when revenues were falling.”

It’s a bit like promising never to go into your overdraft, even if your car breaks down and you need to get it fixed to go to work next week. Signing up to it would have meant, as I wrote a fortnight ago, that Labour would be going into the next election calling for hefty tax rises not just on the top rate (45p in the pound) but also the higher (40p) and basic (20p) rates of income tax.

Going into the election promising across-the-board tax rises is politically toxic, and with wage recovery still sluggish and large numbers of people struggling to get by, could choke off demand in the economy just as surely as Osborne’s overzealous fiscal retrenchment.

The problem for McDonnell is all of this was obvious just two weeks ago. Labour’s MPs on the Treasury Select Committee had already dismantled the charter in July. Although the two Eds committed Labour to a current account surplus, the new, much more austere alternative, would have been beyond the pale for them, too.

That’s why the parliamentary Labour party is so angry. Many suspect the U-Turn comes not because of changes in the economy, but because McDonnell simply hadn’t read or understood the charter. Incompetence – a frequent bugbear under Miliband – is seen as a greater sin than profligacy.

But, all that said, ignore for a moment how Labour got here. U-Turns are politically embarrassing, yes. But the biggest political mistakes tend to come from a failure to U-Turn. As Andrew Adonis said to me: “good governments U-Turn, and U-Turn frequently: take the poll tax. At every point, a U-Turn would have been better than carrying on with the policy: at the Green Paper, at the White Paper, after it had been trialled in Scotland. In the end, the government fell, and the new one U-Turned on it anyway.” The same holds true for Oppositions. 

As I wrote yesterday, the government’s problems over tax credits are so deep-rooted that a simple U-Turn may not be enough to get them out of the hole. But kicking the implementation of Osborne’s minimum wage hike and the cuts to tax credits in the long run, while embarrassing for the Chancellor, would be a better move than driving straight into the wall. The same is certainly true for McDonnell, who for all his avoidable embarrassment, has a better policy today than he did this time last week.