“It won’t work, it’s not necessary and it will harm people”: that’s the one-line summary of how Labour should react to tomorrow’s Autumn Statement (17 November), which looks likely to raise taxes and cut public spending by around £60bn by 2027.
Jeremy Hunt looks like he will extend the deadline for reducing government debt as a share of GDP from three years to five years. But that target still forces the government to raise tens of billions in extra taxes, while allowing inflation to erode real-terms spending on schools, council services and policing.
Hunt’s arguments rest on three false assertions. First, that the only route to growth is Liz Truss’s tax-cutting agenda and that it has been tried and failed. Second, that only harsh measures to fill the “fiscal black hole” can calm the markets and reduce the interest rates on government borrowing. Third, that tax rises are needed to stifle inflation (now 11.1 per cent), which is the underlying driver of high borrowing costs.
Labour’s task is to demolish this logic, and to win the wider public over to the virtue – and necessity – of investment-led, green growth.
The fiscal black hole argument is the easiest to undermine, and numerous professional economists have been doing so in the media – in sharp contrast to the lost ideological battles of 2008-10. Rob Calvert Jump and Jo Michell, of the universities of Greenwich and the West of England respectively, show that the “black hole” only exists if you set an arbitrary debt reduction target. Furthermore, the UK’s public finances are sustainable: there is no fiscal crisis, only a very real and tangible crisis of public service budgets.
On the International Monetary Fund’s definition of debt sustainability – that balanced books look economically and politically feasible in the medium term – the UK’s debt, which is lower as a share of GDP than every G7 country except Germany, looks sustainable.
It is the inflation argument that Labour will find harder to deal with. The debt-to-GDP ratio is susceptible to three variables: the size of the debt itself, interest rates on government borrowing and economic growth.
Rishi Sunak and Hunt argue that, by taking demand out of the economy now – through tax rises and spending cuts – they are leading the fight against inflation. Indeed, by focusing on inflation they can set up Labour – and its trade union affiliates – as the bad guys.
But the “austerity to fight inflation” argument can be demolished. First, because we already have a counter-inflationary tool in the Bank of England. It has raised interest rates from 0.1 per cent in March 2020 to 3 per cent now, and expects an 18-month-long recession during which inflation falls below the 2 per cent target.
If the Bank states, as it has done categorically, that 3 per cent interest rates are enough to bring inflation below target next year, why do you need further measures to deepen the recession?
And in the second place, most of the inflation is coming from external sources – in the form of energy, food and transport costs contingent on the Ukraine war, and shortages generated by the fragmentation of global supply chains after Covid-19. Depressing UK demand does nothing to stop the price of gas, silicon chips and iPhones rising.
As for the argument that “Truss dashed for growth and failed, so we must accept austerity”, this is where Labour and the other progressive parties must change the conversation entirely. The crisis we’re in was created by layer upon layer of blind Tory policymaking. The austerity of the 2010s fundamentally weakened the economy. So did Brexit, which has exacerbated the skills shortage that blights every sector, and permanently weakened sterling – without any concomitant boost in exports. So did Boris Johnson’s let-it-rip approach to Covid, which has increased the number of people not working due to long-term sickness to 2.5 million people.
The only way out of a doom loop – in which deficits lead to austerity, and austerity to recession, and recession to higher deficits – is to achieve higher long-term growth. Truss and Kwarteng failed because, cosseted in their ideological cocoon over the summer, they ignored two decades’ worth of evidence that only investment drives growth; that tax cuts are ineffectual in a society where there is no centrally organised industrial strategy; that wealth does not “trickle down” if you enrich the rich.
[See also: Jeremy Hunt’s Autumn Statement was a George Osborne tribute]
Labour has a plan for long-term growth and it should stick to it. Under the shadow business secretary Jonathan Reynolds and the shadow chancellor Rachel Reeves, the plan has evolved from aspirations to clear targets: double onshore wind, triple solar power, quadruple offshore wind; decarbonise the electricity system by 2030; train tens of thousands of doctors and nurses; build new, green steel production facilities; use defence spending to drive a domestic industrial renaissance.
To achieve this, we will have to borrow to invest: the £28bn-a-year that Reeves has promised until 2030 should remain the central spine of Labour’s promise. It is not only good economics, it’s good politics: Sunak is ideologically opposed to green investment. In January this year he in effect committed the Treasury to a policy of “intergenerational justice” on climate change – meaning that any investment needed to decarbonise Britain must come from taxation, not borrowing. There is zero chance of that happening during the austerity of the next five years.
So Labour should enter the debate over the Autumn Statement prepared to fight and win an ideological battle. The cuts Hunt imposes will push some public services to breaking point. With councils and schools already facing bankruptcy, waiting times at hospital A&E departments extending beyond 12 hours, and dramatic skills shortages due to falling real pay, the public sector needs an urgent cash injection, not cuts.
Spending cuts will lead to real and immediate suffering: they will harm the most frail and vulnerable people in society; they will leave millions of public-sector workers facing penury; they will weaken already fragile safeguards. And they won’t work. I don’t know what mental gymnastics the Office for Budget Responsibility will perform in order to sign off Hunt’s plans as “credible” – I only know that this institution rubber-stamped the Osborne-Cameron doom loop.
Hunt and Sunak will needlessly worsen the recession we’ve entered and likely tank the economy so badly that they have to come back for more cuts and more tax rises. The alternative is clear, and has been spelled out by the Stop the Squeeze campaign: tax wealth, tax windfall profits, tax unearned incomes and close tens of billions in tax loopholes.
There is rising existential dread in elite circles over the state of the public sector: the Economist observes that we have an unpalatable combination of rising taxes and worsening services. Sooner or later this will translate into a new version of the Truss agenda: the “creative destruction” of the welfare state.
Labour has a clear alternative: fair, green growth. We cannot give an inch to the arguments of the austerians in the next few days; indeed, now is the time to defeat them in open combat.
[See also: The Tories are trapped with no good options]