A Budget Fit For A Keynes?
When the Liberal Democrats made him Prime Minister in 2010, David Cameron and Chancellor George Osborne accused Labour of leaving the country bankrupt, with a massive debt and huge deficit. Liam Byrne, Labour’s Chief Secretary to the Treasury had left a note to his successor saying, “Dear Chief Secretary, I’m afraid to tell you there is no money left”. A crass comment, immediately exploited by the coalition. The following ten years of austerity were therefore deemed necessary to get the country’s finances into a reasonable shape. Government departmental budgets were cut and tightened all round. Local government in particular was badly hit, leaving councils with little choice other than to cut funding for social care and to close libraries, Sure Start centres and youth venues. All this had a massive negative impact on local communities. But reducing the debt and closing the deficit, it was claimed, took priority over all else.
With Boris Johnson installed as Prime Minister all that has changed. The debt and the deficit are now of little concern. Johnson and his government have put clear blue water between today’s Conservative party and the party as it has been since Thatcher. This move away from previous support for fiscal prudence is justified on the grounds that careful management of the country’s finances over the last decade through brutal austerity, has resulted in a strong economy and the opportunity to spend bigtime.
Now that Johnson can boast that Brexit is done, (when it clearly isn’t), and the economy is sorted, (when it is still in the doldrums), the government can act as a fairy godmother and sprinkle stardust everywhere. But all this talk of a strong economy is mere bluff to hide the real economic facts. The economy is not strong. Productivity is stagnant, business investment has stalled, and wages have only just reached the level they were at in 2010, the result of a decade of unnecessary austerity. Jeremy Corbyn pointed out repeatedly that austerity was a political choice, not an economic necessity.
The Cameron coalition government and that led by Theresa May could have borrowed at low interest rates for capital investment to further stimulate the economy and create well paid jobs. (It was growing when Labour left office in 2010).The Johnson government has recognised this, even though the national debt will increase hugely. Labour Affairs welcomes this reverse in Conservative policy. Borrowing to grow the economy is sound Keynesian economics. Labour should congratulate the government on adopting the policies in its 2019 ‘Marxist’ election manifesto.
At the 2019 general election the Conservative manifesto promised to balance the books by 2023. A pledge they hope to fulfil. But the effects of Brexit and the Covid-19 virus will make closing the deficit by 2023 virtually impossible. Brexit and the virus will impact negatively on businesses and individuals. As the virus spreads there are alarming signs that companies are going bust with workers losing their jobs. This was acknowledged in last month’s budget. (And in the measures announced since.) It was referred to as a coronavirus budget. But the looming threat of a hard Brexit also hung over it.
Opposition to the change in the ideological direction of the Conservative party will come, not from Labour, but from the small-state, tax cutting section of the Conservative party in parliament. The budget envisages a big role for the state, while tax cuts have been kicked into the long grass. But the Chancellor’s first priority is to tackle the virus epidemic. In his budget speech he promised that “Whatever extra resources our NHS needs to cope with Covid-19 it will get. Whatever it needs, whatever it costs, we stand behind our NHS”.
Public spending will rise by £170bn over five years, with an estimated total of £928bn in public spending in 2020/21, an increase of £81bn over 2019/20. Superficially attractive, but nowhere near enough to make up for the losses of the years of austerity. And it pales into insignificance compared to the £600bn for infrastructure investment over the next five years.
The Chancellor announced an emergency cash injection of £12bn for the NHS, business and households to fight the coronavirus, with the promise of a further £18bn. But in unveiling a £350bn package of government-backed loans to help business, less than a week after his budget statement, the Chancellor recognised that the country is facing its greatest crisis since the Second World War. A war on the virus was declared and we know from experience that there is always a magic money tree to finance a war. The fact is that the government can create as much finance as it deems necessary. The claimed need to balance the books was a ruse. We can only hope that the present crisis leads to a rejection of ‘household economics’ which is entirely inappropriate for a state that is sovereign over its own currency. Money that the government creates cannot be owed to itself. By buying bonds the government is actually reducing the national debt. However, the pretence is still kept up that the books will be balanced and the deficit reduced over the medium term.
The extra cash for the NHS is welcome, but it will not heal the wounds caused by ten years of austerity. Austerity has left the NHS with a shortfall of 100,000 vacancies and 17,000 fewer beds. Johnson promised an extra 50,000 nurses if the Conservatives won the election. But nurses and doctors can’t suddenly be conjured like rabbits out of a magician’s hat. It takes years of education and training. Doctors and nurses will continue to be recruited from overseas
While money for the coronavirus crisis and big infrastructure projects made the headlines, there were mixed offerings elsewhere in the budget. Help for those affected by ten years of austerity and for underfunded social care was meagre or absent altogether, and therefore largely unreported. Working-age benefits, including universal credit, will increase by 1.7%, after a four-year freeze. But nothing for social care, although it is widely accepted there is a serious crisis.
The increase in the minimum wage will help low paid workers. However, the self-employed and workers in the gig economy are excluded from the increase. Extra money for the affordable homes programme should help low income first time buyers. And an increase in beds for rough sleepers should ease the pressure on rough sleeping on our streets. But in general public services, including local government, received little help.
And there were other downsides to the budget. Experience shows that the continuing freeze on fuel duty and the £27bn for road building over the next five years will simply increase capacity on our roads. When more roads are built, more vehicles fill the space created. Air pollution will increase. Currently, 90% of the UK’s carbon emissions come from road vehicles. The emphasis should be on improving local bus services, particularly in rural areas, and creating safer cycling routes in our cities and towns. And there was not a word from the Chancellor on making the nation’s buildings energy-efficient, which reduces energy use and heating costs.
Standing at the despatch box, delivering his budget statement, the Chancellor sounded as if the increased spending was entirely the gift of the new government, when parts of it had been planned by his predecessors. His plans may go pear-shaped if there is a downturn in growth over the next three years or so. The cut in the bank rate, in two stages, from 0.75% to 0.1%, the lowest in the bank’s 326 years history, plus £200bn through its quantitative easing programme, is designed to avoid that. Fingers will be crossed in Downing Street, with the Prime Minister and his Chancellor hoping that a further downward twist in events will not upset their plans.
The coronavirus crisis presents Labour with an opportunity to re-orientate thinking on how the economy should work. The current belief in both major parties is that the government is deeply dependent on the private sector for the funding it needs to undertake its responsibilities. In fact the government has no funding problems. As we pointed out earlier, it can create as much finance as it deems necessary. The UK is not in the Eurozone and therefore has control over its own currency. The UK is a currency issuer and has no need to borrow money from the private sector to fund what it needs to do. Labour should ram the message home that the government can do whatever is necessary to grow the economy. By doing so, it will show that the decade of Conservative austerity, driven by a reactionary ideology, was a huge mistake.