Cuts are not the answer: Labour needs more diverse solutions to the crisis

By Colin Burgon MP

Over the past 18 months we have lived through a financial and economic crisis of international capitalism that is unprecedented since the great depression of the 1930s. Historically unmatched levels of state intervention have been required to stabilise the western economy, which at many times has stood on the verge of collapse.

How ironic it is that the agency of government has done the rescuing; an idea that is anathema to all those neo-liberal free-marketeers who took as their guiding mantra Ronald Reagan’s comment that government is not the solution, but the problem.

The Government’s intervention has crossed the political divide. George Bush’s right-wing Government nationalised the two giant US mortgage market companies and in Britain the Labour Government have made bank interventions that have so far cost us about £140 billion, which is equivalent to more than 10% of UK GDP and more than will be spent on the National Health Service this year.

The state interventions have ended any supremacy claimed by those ideological fanatics who previously argued that unrestrained free markets were the answer to all economic problems. They have spent the past 30 years seeking to extend the market into more and more areas of our life and have also promoted the domination of finance over all other sectors of our economy.

Yet just one year later, the same free market zealots in the world of politics and their friends in their media now want to take the axe to the public sector, allegedly to address the problems faced by the economy.

We should ask ourselves three questions.

* First, how did a financial collapse that brought such damage to the wider economy suddenly become the fault of such people as nurses, teachers, carers and other working people?

* Secondly, why should the majority of the population suffer, as they will if public services are severely cut?

* And thirdly, and perhaps most importantly, will severe cuts help solve the economic problems that we face?

The debate on economic recovery has wrongly and harmfully become dominated by those who argue that only by cutting public services can the issue of growth and the national debt be addressed. That has now become accepted wisdom; it is the received orthodoxy. However, it was once the received medical orthodoxy that the bleeding of patients was a necessary step to recovery. Thankfully, that orthodoxy was overthrown due to the experience of its deadly effects. It therefore needs to be said, loud and clear, that national debt is the symptom, not the cause, of the recession. To seek to address the debt by attacking Government expenditure fails to tackle the real causes of the economic crisis that have created a deficit.

By engaging in the cuts agenda, either now or in the next few years, we will cause long-term damage or risk a Japanese-style lost decade – or, as some economists are calling it, a zombie economy. Such an economic situation would hit the public finances even more dramatically, leaving us with even larger debts. Instead of the obsession with cuts we need a growth agenda that will allow Government revenues to rise and unemployment to fall and that will, in turn, reduce the debt.

As such an approach breaks with the consensus that has emerged on cutting public services, it may be helpful to put the current levels of national debt into an historical and international context. Government debt, which is at 55% of GDP in this financial year, is estimated to peak at 78% in 2014. Although that figure is high, it is far from unprecedented historically. According to the recent House of Commons paper “Background to the 2009 Pre-Budget Report“, Government debt was more than 100% of GDP every year from 1945 until 1963. The same paper adds: “UK debt would still be below that of Italy, Japan and the US, and broadly similar to that of France and Germany” at the end of 2010.

Of course, the national debt should be reduced in the future, not least as interest repayments soak up vital resources that could be better spent on schools, hospitals and elsewhere, but contrary to the claim of those on the right, increasing the deficit has been necessary during the worldwide recession – especially as it was so deep. As William Keegan recently explained it in the Observer:

“the large deficit…is not the problem: it is an integral part of the solution. It is the reason why we have not experienced the kind of full-scale 1930s-style depression which would have been on the cards without drastic fiscal action.”

Furthermore, anyone seriously wishing to address the debt rather than to pursue outdated and ineffective ideological goals might first want to look at how the debt has come about. They would find that it is the consequence of three things: declining Government revenues; the large bank bail-outs, which amount to more than 10% of GDP; and, to a much lesser degree, an increase in Government expenditure. Treasury figures estimate an increase in public sector net debt of 18.9% of GDP between April 2008 and April 2010, excluding the bank bail-outs.

The majority of the increase in the debt has been caused by a fall in Government receipts. As the House of Commons paper “The Outlook for the Public Finances” explains, it is normal during a recession for revenues to fall. Similarly, Government expenditure has also risen, as expected in a recession. That inevitable rise in Government expenditures is due to the so-called “automatic” processes that take place in a recession, such as, for example, more benefits being paid out as more people become unemployed.

As only a minority of the deficit has been caused by the increase in Government expenditure, the calls to cut the public sector display economic incoherence. As Professor David Blanchflower, former member of the Bank of England’s monetary policy committee, told the Opposition:

“Cutting public spending in a recession is a really bad idea.”

I urge even those people on the Government benches who are tempted by it to reject it.

So what is the way forward?

It is clear that resuming economic growth is the way to restore the health of the public finances. Investment is the most important source of economic growth. But the latest House of Commons Economic Indicator shows that business investment continues to plummet – down 19.9% on a year ago.

So what practical polices do we need to address the vital issues of investment and growth?

First, we need the Government to use their majority holdings in a number of banks to force the banks to increase investment and lending levels to businesses and to families to revive the economy and housing market.

Secondly, in those areas where market failure is greatest and private investment has collapsed the most, the Government need to step in and invest directly themselves. Large-scale state investment in transport and housing in such areas would be economically, as well as socially, useful.

Thirdly, in the really long term, we desperately need to rebalance the economy away from its reliance on finance and develop the industries of the future. The UK has the potential to generate 400,000 jobs in green industries, but to fulfil that potential we need state-led investment on a green new deal that would be of tremendous immediate economic benefit and of long-term environmental benefit.

Fourthly, we can help reflate the economy through increasing levels of consumption by putting money into the pockets of those most likely to spend it. The last 30 years of neo-liberalism have witnessed a smaller and smaller proportion of the economy going to wages. If the Government were to reverse that by raising taxation on the super-rich and then handing over exactly the same amount of money to ordinary families, overall consumer spending would rise, helping the economy to move out of recession.

Finally, for those who advocate cuts, there are areas of public spending that can be cut. We do not need to renew Trident and, although I used to support them, I no longer think that we need ID cards. By cutting those projects, tens of billions of pounds could be saved at a stroke.

This package is only a small example of what could be done. It would be a popular message and it would deal with the debt and the much larger issue of restoring economic growth.

The alternative to going for growth is a cuts agenda, but cuts are not savings. They would remove demand from the economy and the recession would worsen as the negative multiplier effect kicked in. On this, we need to learn the lessons of history. Roosevelt announced his new deal in 1933, and things went well for three years after the banks were regulated and there was a big increase in public spending. Then, afraid of public debt and under pressure from the right, he began to cut, sending the economy back into a recession from which it did not recover until just before the Second World War.

We can also learn from countries that are a bit closer to Britain than America. If we look just across the Irish Sea, we can see the slash-and-burn tactics being employed by the Irish Government. The Fianna Fáil Government have overseen savage cuts to the public sector and a real fiscal tightening-something so beloved of the right wing in this country. That has been to the detriment to the wider economy in Ireland, which has continued to worsen whilst the Irish government’s support has plummeted from 41 per cent at the last general election to record lows of 17 per cent in recent months as the majority have suffered. Labour colleagues should take note of these economic and political developments in Ireland.

We are entering a period of great ideological debate following a period of great economic crisis. That debate boils down to these questions: has the neo-liberal consensus of the past 30 years been correct, and what is the role of Government?

By way of an answer, I shall draw on the words of Roosevelt himself. He said:

“What is the State? It is the duly constituted representative of an organized society of human beings, created by them for their mutual protection and well-being. ‘The state’ or ‘The Government’ is but the machinery through which such mutual aid and protection are achieved.”

This is a valuable lesson for Labour to learn over the coming months.