Consider the PM’s words: “We are compelled to devise special measures to meet the temporary difficulties. The critics will have to face facts and deal honestly with the interests of the country.” His friend the Chancellor concurs: “The national position is so grave that drastic and disagreeable measures will have to be taken. If I ask for some temporary sacrifice, it is because it is necessary to make future progress possible.”
Not David Cameron and George Osborne but Labour’s Ramsay MacDonald and chancellor Philip Snowden, speaking in 1931. Two years after the biggest financial crisis of the last century, MacDonald and Snowden said spending cuts were unavoidable to slash the deficit and satisfy the markets.
Their strategy was to ease pressure on sterling and hope that downward pressure on wages would boost competitiveness and trigger a private-sector led economic recovery. When the Labour cabinet failed to back the plan, they formed a coalition national government to drive the plan through.
John Maynard Keynes described Snowden’s 1931 “emergency budget” as “replete with folly and injustice”. He wrote to an American correspondent: “Every person … who hates social progress and loves deflation … feels that his hour has come and triumphantly announces how, by refraining from every form of economic activity, we can all become prosperous again.”
And the result? The promised private sector recovery failed to materialise as companies themselves sought to retrench. Unemployment soared. The Great Depression soured world politics and divided societies.
Now a new coalition again says cuts are unavoidable. When I say they are wrong – that the cuts are too deep, too fast and a political choice, not economic necessity – Cameron echoes MacDonald and calls his critics “deficit deniers”.
In 1929 it was the Liberal David Lloyd George – with Keynes’s encouragement – who stood against the tide and argued fiercely against MacDonald’s cuts. This time, the Lib Dems are on the wrong side of history. Who needs Keynes, says the new coalition. They enthuse about a private-sector led economic recovery; they say the governor of the Bank of England and the financial markets demand deficit reduction.
This is nonsense. First, there is no precedent to believe that, with slowing growth in our main trading partners and companies deleveraging, public sector retrenchment will stimulate private sector growth. The 1930s and 1980s proved the opposite. The new OBR has admitted the cuts will depress jobs in both public and private sectors, starting with the loss of jobs building new schools.
This argument is as specious as the Coalition’s claim that the reason why we have a large deficit is because of Labour’s spending prolificacy. The truth is that Britain started the crisis with lower nation debt than America, France, Germany and Japan. It was a global crisis triggered by the irresponsibility of bankers not public servants.
Second, while I respect Mervyn King, 1931’s bank governor Montagu Norman also strongly advocated the “Treasury view” that cuts were necessary. Sometimes even bank governors get it wrong especially when the political and media wind is blowing so strongly in one direction.
Third, the idea that the UK faces a “Greek-style” financial crisis if we do not cut the deficit faster is a fiction.
What matters to market credibility is not how tough politicians talk, but if their plans can work. They want a credible medium term path for fiscal sustainability and stable growth. What they do not want is uncertainty over whether a sudden fiscal adjustment is deliverable and over the impact it will have on growth.
Time and again in recent years, we have seen the market lose confidence – usually in emerging market economies – because their fiscal adjustment plans may look tough but lack credibility. A vicious circle begins of investor flight, reduced projections for growth, a worsening fiscal position, and further loss of market confidence.
In Greece, the markets have looked at the draconian spending cuts that the rest of Europe is demanding from the Greek government, seen the resulting general strikes and riots in the streets, decided that those spending cuts are undeliverable, that the Greek economy would struggle to grow, and have lost confidence accordingly.
The Greek crisis may have started with concerns over the government’s ability to service its debt, but it is now a more fundamental question about whether its economy can grow and its society can remain stable.
By contrast – outside the Eurozone and with long-term real interest rates at 0.8% for both 10 year and 30 year bonds – Britain faces no difficulty servicing its debts.
However, in following the rest of Europe down a reckless commitment to immediate deficit reduction, we are now seeing the very real worry of financial markets – not in bonds but equities – as fears of a double-dip recession grow.
Savage cuts that hit the economy or are politically undeliverable won’t achieve sustainable deficit reduction or build market confidence. A slower, steadier plan, which does not put jobs, growth or services at risk, is more likely to succeed and have market credibility.
That’s why I told Gordon Brown and Alistair Darling in 2009 that – whatever the media clamour – trying to halve the deficit in four years was a mistake. The pace was too severe to be credible. Now the Lib-Con coalition is going £40bn a year further. Instead of learning from history’s mistakes, they seem hell-bent on repeating them.
Yet there are Labour voices who believe our credibility depends on hitching ourselves to the coalition’s handcart. That is wrong. I believe this risks condemning Britain to a decade of deflation, unemployment and social division.
There is an alternative. Like Keynes and Lloyd George, it is Labour’s responsibility to set it out. It must be a clear plan for growth, a more sensible timetable for deficit reduction, and a robust explanation of why that will better support our economy and public finances.
That more credible plan for reducing the deficit only once growth is fully secured must include tough spending cuts in some areas and fair tax rises – such as starting the top rate of tax at £100,000 – but not raising VAT or the draconian slashing of frontline services. With the rest of Europe already sliding back into recession, we must do this with urgency and passion – for the sake of jobs, our economy, and our future.
Tags: Big decisions, Budget, cuts, David Cameron, economy, employment, funding, government, growth, investment, jobs, Leadership, public sector, tax, VAT
Agree with you until the last paragraph. It is not necessarily the case that cuts will be required if the economy is able to recover naturally. By investing in public services (and areas that may have been considered the private sector i.e. building) at a time of economic difficulty, we can build a base for economic recovery. I think that if we stopped handing out PFI contracts and managed the process of building schools and hospitals ourselves, we’d be keeping a whole range of workers off the dole and creating real opportunities for growth that we could take advantage of. At the Progressive London conference in March, Johann Hari put for forward the idea of a green new deal which would build green energy initiatives and ensure the UK was well-placed for the future when the rest of the world will want to buy green energy. It made sense to me.
Certainly I am disappointed that in the run up to the election, Labour seemed to have abandoned Keynesian principles and the only difference we presented was that we would make cuts slower than the others. Arguing for investment would have been the bold move and would either have caught the people’s imagination or not but we couldn’t have been any worse than we were – the party that didn’t have the answers one way or another.
Obviously I agree with you on VAT. I was in New Zealand in May when the New Zealand Tories introduced a GST rise and a tax cut for the wealthiest people in the country. This is patently political and creates no benefit for the country. It would be the same here.
By the way – I was at the West Ham hustings last night and was glad that you talked about these matters openly. I asked why we didn’t say these things before the election and you said you’d lost the argument. Is there any way we can reduce the possibility of being left with the wrong arguments at elections in the future?
[...] Get in touch Follow me on « Don’t repeat the mistakes of the 1930s; there is an alternative, says Ed Balls in The Guardian [...]
Halt the privatisation of the NHS. There were no mandate for this, it was not part of labours manifesto, it was not a directive from Europe , it is not will of the people. The drivers for such change are anti-democratic, immoral and for socialism an ideological enigma which places the labour party at a crossroads. Does Labour follow the neo-liberalist approach(Blairites) easing it’s social conscience by being seen as a paler right wing movement than the Conservatives ,or does it regain it’s identity as a social movement and hence it’s social being by doing something revolutionary … commit itself to public ownership. The privatisation commitment has been endorsed by all three main political parties Social Enterprises are seen to be the way forward, or is it backward. Social Enterprises when examined are not social revolutions but half way houses to acknowledging full blown market conditions. Purporting to be democratic, diguising the lack of accountability, Pretends to put people power at the heart of what it does when in reality is simply dictated to by bankers, money lenders and lottery funders. A health service based on a lottery ticket and service provision based on postal code. I urge the Labour movement to stand on a socialist platform , it itself is popular not a neo-liberalist populist propaganda agenda. Invest in public services ensure sustained growth as you say in Keynesian economics.