Labour’s Self-Defeating Deficit Fetishism

by George_East on April 14, 2015

ed-milibandAt yesterday’s launch of the Labour manifesto Ed Miliband exuded confidence.  Pretty much all commentators agreed that it was one of his best performances since becoming Labour leader, reminiscent of his speeches to the Labour Party Conference in 2012 and 2013, rather than the car crash of last year.  Its focus (perhaps with that deficit-forgetting speech in mind) and that of Labour was fiscal rectitude.

Labour’s pitch to the voters was made as clear as can be: it is you can trust us with the economy because we will reduce the deficit ‘year on year’ and that they will ‘not borrow an extra penny’. These are both things which are consistent with the media view of the financial crisis and its aftermath: that it was caused by over-spending by the last Labour government and that the deficit is the number one problem.  As such Labour found itself getting reasonably good press today.  And appears to be delighted with itself and its tactical acumen.

The problem is that the tactical acumen (if that is what it is) is strategically disastrous.  Indeed perversely, even if Ed Miliband somehow finds himself as Prime Minister in the days after 7th May, he may well have ensured that his government will fail.   The reasons it is a strategic disaster are threefold: the politics, the economics and the unpredictability of the future.  I want to say something about each of them in turn.

The biggest single reason why yesterday was a disaster is that Labour has now wholly conceded the basis for Osbornomics despite that fact that (whatever the media say) George Osborne has been a terrible chancellor presiding over a misconceived and damaging economic policy.   This government inherited an economy that was growing out of recession much as would be expected in the light of the 2009 stimulus measures of Alistair Darling and Gordon Brown.  George Osborne’s June 2010 budget and his dire and false warnings that Britain was on the verge of Greek style bankruptcy soon put paid to that.  Strong growth was turned by the third quarter of 2010 into an economy that was flat lining and that is pretty much how it stayed for 3 years.    In 2013 there was a pivot in government policy easing up on austerity (with an election looming) and the economy has gradually sprung back to life.  The overall consequence as former MPC member Danny Blanchflower has pointed out is that this government has presided over the slowest recovery from a recession since the South Sea Bubble three hundred years ago.  If this is success, I would hate to see what failure looks like.

Yet Labour has now bought into the wisdom of focusing on the deficit rather than growth (which will itself bring down the deficit) and spending cuts rather than stoking the engine room of the economy.  By doing so they have conceded that George Osborne, who could not have been more wrong over the last 5 years, was right.   All this does in political terms (though Labour seem unable to see it) is emphasise that the Tories are to be trusted on the economy.   Unless a counter-argument is being made, why would you not trust the party that has pursued these policies since 2010 over the one that has come to them in the course of an election campaign.   It is politically moronic and may be enough in itself to see Labour’s slim chances on 7 May 2015 slip away altogether.  The next 3 weeks will consist of lots of stories of how the money ran out and how that Ed Miliband can only be taken seriously if he apologises for the last government.


Then there is the pure economics.  The deficit is not the issue.   The issue is the lack of aggregate demand caused by deleveraging of debt in the private sector and the hoarding of savings.   How do we know this.  We know this because it is what the market is telling us.  Interest rates have been at 0.5% now for  6 years, inflation is at 0% – this is an economy with huge over supply, not one (despite what the Tories will tell you) which is in good shape.

Yields on Long Term  government debt are at record lows, such is the demand.  The market signal is therefore not that there is too much government debt, but that there is too little.  There is huge demand for safe assets in the form of gilts.   The importance of this is not just theoretical but also very real in policy terms.  The government of the day can currently borrow for capital investment on infrastructure practically for free.  This may be a once in a generation opportunity for a progressive government to renew and build public assets.    Instead Labour are bragging about how they are not going to ‘borrow an extra penny’.

This brings me on to the final point, events dear boy events.  If the last decade has taught us anything it is, surely, that the inter-connectedness of the world economy, particularly the financial economy is such that economic shocks could come at any time.  It now seems like the maddest of all hubris that in the 1990s and first half of the 2000s many economists and politicians believed that the economy had become self-regulated in risk terms.  We know now that it is instead self-magnifying.  A failed bank there can end up in a financial crisis here.   Yet Labour’s totally insane commitment is to reduce the deficit ‘year on year’, effectively precluding the kind of government financial intervention that might be needed as a result of Grexit or another big bank failure or Israel nuking Iran or a myriad and one other things.   This commitment is so nuts that it is not one that George Osborne has committed to (instead the Tories deficit reduction plans stretch over a parliament) or one that Alistair Darling or Gordon Brown would ever have signed up to.

The consequences for the country (and as a result a Labour-led government) of this commitment if they do get into government could be utterly catastrophic.

I think yesterday marked Labour’s peak in this election campaign and that the trajectory now is down.  Labour only have themselves to blame.

{ 3 comments… read them below or add one }

Mike Killingworth April 14, 2015 at 8:12 pm

No one knows how much government debt there should be. It has to be offset by private sector credit, of course: but that credit might take many forms, and it is far from clear which forms are to be preferred to others.

Nor, come to that, are the definitions of those terms beyond debate – all economic concepts are but means to ends, after all.


John Stone April 15, 2015 at 6:32 am

Looks like the Tories have played a game of bait and switch, backing Labour into a corner where they feel they need to out-osborne Osborne then embarking on their own set of uncosted give aways. It’d be funny if it wasn’t so devastatingly sad. Have to say Ed Balls has not for the first time been suckered.


Ray_North April 15, 2015 at 8:49 am

I agree with that John.
(good article George)


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