The UK’s debt is forecast to peak at 97 per cent of GDP in 2023-24. So what? That’s the question that will shape the next ten years of politics in Britain and our society until the middle of the century.
Rishi Sunak may have adopted a host of Labour policies – from reversing cuts in corporation tax to a launching green investment bond – but the centrepiece of today’s budget was a switch to fiscal austerity from April 2023, which will involve around £68bn of spending cuts and tax rises until 2026. Survival now, austerity later is the Tory strategy, and it opens a clear political opportunity for Labour and its depressed left, if it is prepared to take it.
Sunak said that today was not the time for clear fiscal rules – but he did spell out some: no government borrowing to finance day-to-day spending, preventing debt from continuing to rise, and borrowing to invest as long as debt interest remains low. This new, implicit cap on debt at 100 per cent of GDP is driven by two concerns: that the interest payments might spiral, as the yields on government bonds rise, and that rising inflation could also add to the cost of debt servicing.
Those of us who’ve fought the liberal centre’s strategy of austerity since 2008 have to recognise this today as a moral victory. The Tories could have sat around, like the Germans and the Dutch inside the Eurozone, cheese-paring Universal Credit and the furlough scheme. Instead they were bounced – by the exigencies of Brexit and the need to please their new, working-class voters – into a significant short-term extension of the Covid stimulus.
Paying people not to work and companies not to trade, and spraying money around the dodgy end of the business fraternity to meet the urgent demand for PPE, does not look pretty to the ultra-neoliberals on the Tory back benches, but it stopped the UK going under.
Labour now has to face an existential fact: it is no longer fighting the severe austerians. The laughable notion, peddled by right-wing economists in the aftermath of the 2008 financial crisis, that you can cut your way to growth through “expansionary fiscal austerity” has been killed by Covid.
Labour is up, instead, against politicians who plan to buy their way into power at a general election as early as 2023, but who – as Keir Starmer pointed out – have no strategy to alleviate insecurity, poverty and inequality. Sunak and Boris Johnson have prepared a neat trap for Labour as it concretises its election offer. A serious plan for green investment, or to fix social care, or to fully fund the NHS would mandate the cancellation of the £68bn austerity programme planned by the government for the middle of this decade. That is what British politics will be about for the foreseeable future.
The Tories’ message to the “Red Wall” and those in Labour’s target seats will be: Johnson may be a buffoon who screwed up the lockdown and crashed the economy, but he delivered the vaccine and was happy to pay millions of people to sit out the danger at home.
It’s time for Labour to spell out an alternative, both fiscally and morally.
The fiscal alternative starts with its response to Sunak’s implicit new fiscal rules. A debt limit of 100 per cent of GDP is higher than the target of around 80 per cent that David Cameron and George Osborne imposed on themselves, when they inflicted a decade of austerity on the NHS, the armed forces, the police and local councils.
If we look back at nearly three decades of busted debt ceilings, the only rationale for them was to allow rich people to decide what services and welfare benefits poor people can receive. In the name of an arbitrary debt ceiling, Tony Blair’s first government squeezed public spending. In the name of a debt ceiling, Alistair Darling went into the 2010 general election promising austerity. And over the following decade, Cameron and Nick Clegg enfeebled the public realm by pursuing the same logic.
Debt ceilings give the economic right the ability to dictate arbitrary proscriptions on public investment. And yet they are always busted in a crisis. The reason is: free-market capitalism has delivered an era of decline. Not the decline of speculative apartment buildings, or coffee bars, or low-wage delivery services, or planet-destroying air travel. No, all of that has boomed.
But the central mechanism of capitalism, the rate of return on risk-free lending, has been on a one-way ticket to Palookaville. When Margaret Thatcher took office, the yield on a ten-year government bond was around 14 per cent, when Tony Blair took office it was around 9 per cent, the financial crisis pushed it below 5 per cent and in 2020 it stood at zero. This secular decline into economic stagnation is a global phenomenon. The only serious question is whether it is permanent.
But economic stagnation is not what Sunak and the Office for Budget Responsibility truly fear. What they fear is that the bond markets take irrational fright at even a tiny increase in the inflation rate. Since much of capitalism is sustained by the life-support of zero or real sub-zero interest rates, that would simultaneously raise interest payments and squeeze profits.
It is Sunak’s implicit new debt ceiling that will be used to justify university students having to pay £9,000 a year, council tax rises and spending cuts, and limiting green energy investment to the paltry sums announced today (£12bn against the £88bn Labour promised in 2019). And it will be used to rule out forever any kind of radical, transformative agenda on social, climate, housing and economic justice.
If Labour accepts the logic of “97 per cent and no more” you can forget the Ed Stone: you might instead just as well erect a tombstone for social democracy. But there is no need to accept it. The UK is a monetary sovereign. Its central bank has swallowed £450bn of the £485bn of debt issued in 2020-21. We are effectively lending to ourselves. If this does your head in, after a lifetime of listening to journalists compare government finances to a household budget, and generations of politicians claiming the central bank is “independent”, I can only sympathise.
I hold no sympathy for the advocates of Modern Monetary Theory, which claims that only governments create value, and thus can go on lending to themselves forever. But the experience of Japan shows there is a lot of headroom left above a debt-to-GDP ratio of 100 per cent. Unless Labour makes use of that space, you can forget a social-democratic agenda. That’s the stark conclusion we have to draw from Sunak’s budget.
Starmer’s takedown of the Chancellor was accurate and admirable: the Tories destroyed the foundations of the welfare state under Cameron and Osborne and refused to fix them under Johnson. The Budget was devoid of ambition on the NHS, social care, affordable housing and the climate crisis.
But Labour now needs the courage to translate that critique into a commitment – not something pulled out of a hat six weeks before an election – but a clear alternative socialist budget for 2023-27, which rejects Sunak’s spending cuts, retains his progressive tax rises and pledges to go on borrowing.
Joe Biden has unleashed a stimulus in the US that, if matched here, would mean the government borrowing and spending an extra £200bn. That is the scale of commitment I want to see from the shadow chancellor, Anneliese Dodds. The rationale is clear. Either Western democracies power their way out of the Covid crisis, repairing and replacing worn-out infrastructure, hospitals, energy and transport systems, or the political malaise that sent thousands of far-right activists clambering through the windows of the US Capitol will spread and deepen.
We’ve spent £485bn in a single year on riding out an economic shock. We need to spend at least half of that again to repair the foundations of the economy and society, and probably much more in order to meet the net-zero carbon target.
Will the national debt be higher? Yes. But unlike the past year’s spending, it will leave assets on the balance sheet in terms of wind farms, tidal barrages, frigates, tram networks and coastal defences. Both the Treasury and the Labour front bench have toyed with the idea of calculating the government’s “net worth” rather than merely its debts. If that’s what it takes for policymakers to convince themselves that formal debt ceilings should be broken, I’m happy to go along with the fiction.
The bottom line from today is that, having won the moral argument against austerity during a pandemic, Labour must go on fighting the Tories on fiscal strategy and vision. And it must turn the moral differences into physical sums of pledged borrowing, and lodge the arguments in the minds of the electorate. If Labour’s front bench won’t do that, gripped as they are by aversion to ideological definition, then the task of the left becomes all the more well-defined.
The real answer to the question – why Starmer and not Johnson? – is moral: it’s about the kind of society Labour stands for. That is a society that does not stigmatise refugees, nor revel in the deportation of Jamaican criminals, nor deploy troops on neo-imperial adventures, nor doom its young people live to precarious and penny-pinching lives, nor prioritise mortgage giveaways over solid investment into public housing.
Starmer recently quoted Harold Wilson to the effect that Labour is either a moral crusade or it is nothing. I don’t like the word crusade, but if you’re going to use it, that’s what the crusade should be about.