Dear Mr Alexander,
Thank you for your letter on the Spending Review which I received today.
You claim that none of the Labour leadership candidates have “set out any coherent alternative plan”. You also describe the government’s economic plans as “unavoidable” and “fair”.
None of these statements are correct.
I have set out very clearly in my speech at Bloomberg why the coalition’s approach is economically misguided and dangerous because it will lead to lower growth, higher unemployment and could risk a double-dip recession.
I also set out the case for an economically credible alternative that will be better for both our public finances and public services, by boosting jobs and growth now and reducing the deficit over a steadier period of time.
My speech challenges the view you have signed up to since the election – and which runs through your letter – that cutting the deficit sharply and at all costs is the sole and most urgent priority for our economy, even if it means lower growth and higher unemployment, which will not only damage our public services but ultimately lead to a higher deficit because of lower tax revenues and higher spending on things like jobseekers allowance.
Could you explain why your party changed its mind so quickly on this fundamental issue?
On Budget Day on March 24, in a BBC interview alongside me, Vince Cable said: “it would be very foolish to embark on rapid cuts now, deepening the recession and widening the deficit”. And your manifesto said: “if spending is cut too soon, it would undermine the much-needed recovery and cost jobs. We will base the timing of cuts on an objective assessment of economic conditions, not political dogma”.
Yet on 11 May in the coalition talks with Labour, you called for immediate cuts in public spending this year – contrary to the platforms both my party and yours had fought the general election on and therefore an impossible basis for any agreement. You are also implementing a rise in VAT, despite campaigning against this during the general election.
Could you tell me what changed in those short few days after the election?
Far from supporting the case for immediate cuts, the emerging data from the last few months strengthens my case.
First, encouraging growth figures in the second quarter and the deficit for 2009/10 coming in £12billion lower than Alistair Darling forecast in his March Budget indicate Labour’s plans were working. However, since the coalition’s emergency Budget we have seen increasing signs of economic slowdown in Britain, with UK consumer confidence, business optimism, and mortgage starts. The Office of Budget Responsibility has also admitted that the cuts will depress jobs in both the public and private sectors.
Second, while before the general election your coalition partners repeatedly warned that the UK economy was at grave risk of being ‘downgraded’ by the international credit rating agencies because the deficit was not being paid down fast enough, last month Moody’s raised the prospect of downgrades for economies across Europe – including the UK – for precisely the opposite reason: because of the threat of lower growth and higher unemployment on deficits.
Third, there are growing concerns about the state of economies around the world, particularly in the US. While policy-makers in the US are asking what more they can do to support their fragile economy, it is extraordinary that you are pursuing a deflationary strategy that is in danger of repeating the mistakes of the 1930s and 1980s.
My Bloomberg speech, a copy of which I attach, challenges the prevailing consensus on the deficit which is reflected in your letter. However, I am encouraged that even members of the coalition parties are slowly beginning to recognise that they may be making a mistake.
The Mayor of London Boris Johnson – a member of the Party you are now in coalition with – wrote yesterday in the Daily Telegraph:
“The consensus around drastic and immediate deficit reduction is in danger of breaking down. That is because one of the key arguments no longer looks as strong as it did… the deficit must certainly be reduced. The question is how far and fast this can be done without provoking a double dip recession”.
The respected Financial Times commentator Martin Wolf wrote last Friday:
“Mr Balls is right on two central points. First, a parliamentary term is a political reality, not an economic one. Second, plans for cuts must respond to the economy itself. The “Treasury View” of the 1930s is back. If the government could not borrow, there would indeed be no alternative. But it does; so there is. Mr Balls is quite right to say so. He is right, too, to warn of the risks. The economic ”hurricane” he foretells might arrive rather soon.”
And the leading economist Professor David Blanchflower wrote in the New Statesman last week:
“At Bloomberg in London on 27 August, Balls made what was probably the most impressive and insightful speech on the UK economy by a British politician in a long while… In his speech, Balls shredded the arguments in favour of austerity that were made by the Chancellor, George Osborne, at the same venue just ten days earlier… Worryingly, the coalition still appears to have no plan B, though house prices have apparently begun to fall again and the number of first-time buyers has dropped sharply. The government’s plans, which Balls rightly calls “heartless and wrong-headed”, are the road to disaster.”
As for the claim in your letter that your plans are “fair” and the Chancellor’s statement that his Budget was “progressive”, I would refer you to the Institute for Fiscal Studies analysis published last month which concluded:
“Once all of the benefit cuts are considered, the tax and benefit changes announced in the emergency budget are clearly regressive as, on average, they hit the poorest households more than those in the upper middle of the income distribution in cash, let alone percentage, terms.”
The strategy you are pursuing is not progressive but regressive; it is not unavoidable, but a political choice; it is not rooted in economic analysis or history, but an ideological drive to scale back public services and undermine our welfare state.
There is an alternative and I will continue to stand up and make the case for it.
Ed Balls MP