An Opportunity for Labour
The task of the Labour Party is to clearly differentiate itself from the Conservative Party. Rishi Sunak’s Winter Spending Review and the reintroduction of the Furlough have provided Labour with huge opportunities to do just that. Sunak’s House of Commons (HoC) statements on both issues reflect a battle taking place in the Conservative party over the role of the state in a capitalist economy. It is a battle that the pro-market/pro-austerity Tories hope to win. But therein lies Labour’s opportunity. It must present itself as the full employment, anti-austerity Party Westminster.On 5th November Rishi Sunak announced in Parliament that the Furlough scheme would continue until the end of March 2021. In July 2020 Sunak had announced that the Furlough scheme would end on 30th November. In every subsequent economic debate, he had refused to countenance retaining the scheme. The shadow chancellor Anneliese Dodds had continually insisted that November 30th was too early a date to end the scheme. It must have been a bitter moment for Sunak to have to agree to its continuation. But we suspect there is much more in this defeat than a simple extension of the Furlough scheme.
A year ago, none of us had ever heard of Rishi Sunak. As Johnson formed his new cabinet after the December general election victory, it was assumed Sajid Javid would be the new Chancellor. But Javid wanted to bring his own advisers with him. Johnson insisted that there should be an agreed set of advisers largely chosen by Dominic Cummings. Javid refused to accept this condition. Johnson found an alternative Chancellor in Rishi Sunak. This was not an isolated skirmish in the Conservative party. The Tories are divided over the role of the state in British society. Johnson and Cummings were determined to use the state to ensure that they win the next general election. Specifically, they would turn a blind eye to the size of the fiscal deficit and the National debt if that is what is required to win the 2024 election. One suspects that Cummings had taken on board the basic message of the Modern Monetary Theory (MMT) school that the fiscal deficit is an irrelevant statistic. Though he would never admit such a thing it will infuse much of his thinking. Opposed to that view are the Treasury and institutions like the Institute for Fiscal Studies (IFS) and the Office for Budget Responsibility (OBS).
On the surface it looks as if this is a simple technical dispute between the Conservatives and the Labour Party over how long the Furlough scheme should run. It is not. It is a major battle over the role of the state in British society. And it is a battle that is taking place in the Labour Party as well as the Conservative party.
In the Conservative Party the desire for a small state was forcefully put in the House of Commons on 5th November by the Conservative MP Harriett Baldwin, once a managing director at JP Morgan Chase:
‘Last week, the IMF singled out for praise the UK’s economic response to the coronavirus, citing the timeliness, the speed of response, the generosity and the flexibility of the approach. The managing director said: “We welcome the continuing efforts the government has made to refine its support measures”. Does my right hon. Friend also agree with the second part of what the IMF said last week, which is that over the medium to long term, we do need to put the UK public finances back on a sustainable footing? ‘
Sunak responded: The IMF ‘said, correctly, that over the medium term, we must restore public finances to a sustainable position. Now is the time to provide fiscal support through a very weak period, but we want to build resilience for future crises so that when the next one of these comes along, we can respond in the same strong and generous way that we have been able to do this time.’
The narrative that the public finances need to be put on a sustainable footing is a false narrative. The narrative has been used to impose a pointless austerity on the British people over the last decade and more specifically to achieve the ideological objective of reducing the role of the state in Britain.
It is a false narrative because it claims that the constraints that bind the economic activity of the British state are the same as those that bind a household. They are not. A household is a currency user. The British state is a currency creator. The British state is not limited in what it can spend into the economy and has not been limited since the Bretton Woods variation of the Gold Standard was abandoned in 1971 so that America could more easily finance its military activities.
The Covid19 pandemic has made it particularly obvious that the British state is not financially constrained. Rishi Sunak did not have to check the government’s bank balance to see if he could afford to finance the Furlough scheme. He simply instructed the Bank of England (BoE) to mark up the accounts of all those who were defined as eligible to receive the Furlough payments.
None of this is, of course, publicly stated. Instead there is a huge pretence that the funds that pay the Furlough costs must come from the private sector and that if the private sector were unwilling to lend the funds to the government then the Furlough could not have been implemented and, furthermore, that if the private sector were unwilling to lend the funds to the government at low interest rates then the Furlough scheme could not have been implemented. This is a quite false description of the economics of a currency creating state. A currency creating state does not need to borrow to fund its spending and if government bonds are sold to the private sector it is the state that decides the maximum interest that any such bonds will earn. The summary of the BOE Monetary Policy Committee meeting on 4th November gave the lie to this false narrative:
“The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. In that context, its challenge at present is to respond to the economic and financial impact of the Covid pandemic. At its meeting ending on 4 November 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%. The Committee voted unanimously for the Bank of England to maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion. The Committee voted unanimously for the Bank of England to continue with the existing programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also for the Bank of England to increase the target stock of purchased UK government bonds by an additional £150 billion, financed by the issuance of central bank reserves, to take the total stock of government bond purchases to £875 billion.” (Monetary Policy Summary of the Monetary Policy Committee meeting ending on 4 November 2020)
We have stated that there is a battle in the Conservative Party over the role of the state in a currency creating country. However, there is a similar battle going on in the Labour Party. Anneliese Dodds has improved her position on this as the pandemic has continued. Initially she took an approach on Furlough spending that suggested that the Labour Party would have managed the Furlough spending better than the Conservative Party, that it would have more careful with the public finances by making the spending more targeted. In her more recent addresses to the HoC she has been bolder and has come close to saying that the size of the fiscal deficit and national debt are not important. What is important is the level of unemployment. It remains to be seen whether she can take that next brave and vital step if Labour are to be truly able to grapple with Conservative economic policy.
She has not been helped by Keir Starmer’s intervention in Prime Ministers Questions on 11th November. Sir Keir chose to question the paying of some £130mm for face masks to a private sector company which delivered no masks. He chose to express his concern using the term “tax payers’ money”, a term carefully developed and promoted by Margaret Thatcher:
“…There is a real question about the way that contracts are being awarded and about basic transparency and accountability. I know the Prime Minister does not like that, but this is not the Prime Minister’s money; it is taxpayers’ money. The Prime Minister may well not know the value of the pound in his pocket, but the people who send us here do, and they expect us to spend it wisely.”
The Daily Telegraph took great glee in Starmer’s need to present himself as the guardian of fiscal rectitude. In an article entitled “Honorary Tory Starmer had a touch of Thatcher about him” it stated “Sir Keir Starmer gave every impression of stuffed-shirt Toryism as he berated the Government at PMQs yesterday. At times he sounded almost Thatcherite in his domestic thrift and insistence that there is no such thing as public money……It may be premature to declare Sir Keir ‘one of us’…..but let’s give him the benefit of the doubt.”
So, in one of his first interventions on economic matters Starmer has taken the Party a step back from the more thoughtful position being developed by Anneliese Dodds. Taxpayers’ money has figured little in Dodds’ more recent statements which were instead increasingly concerned with the issue of unemployment. The Labour Party needs to return Full Employment to the political agenda if it is to win the next general election. A commitment to Full Employment is the Tories’ weak point. Labour should own it as their strong point.
We have stated earlier that there is a battle in the Conservative Party over the role of the state in a currency creating country. The recent infighting at Downing must be interpreted in this context. The removal of Lee Cain and the departure of Dominic Cummings most likely represent a victory for the Treasury view in the Conservative Party. Labour would do well to use these developments to raise their own profile as the party that does not accept that any level of unemployment is acceptable, as the party that believes it is the duty of a currency creating state to ensure that those who wish to work but whom the private sector does not wish to hire are given work of value to the local community which is paid for by the state. The Green New Deal policy launched by Dodds and Miliband suggests that they are attracted by a commitment to full employment as a policy. We can only hope that Starmer’s inability to distinguish between a currency using household and a currency creating state does not scupper this huge opportunity for Labour to reassert itself as the party of the working class – both new and old.