George Osborne spent an hour telling people they’ve never had it so good. But after five years of the Tory government, working people are still an average £1,600 a year worse off.
If the Conservative Council in Broxbourne were to order all the businesses in Waltham Cross and Hoddesdon to close, only permitting them to open after two years, what would happen? In the months after the shops re-opened, the Tories would claim they had created economic growth. But we’d be a heck of a lot poorer than we would be if we’d just allowed the shops to stay open right? Of course, but this isn’t taken into account when we measure crude economic growth. If it’s higher than the quarter before, you have growth. Period. As the Nobel-prize-winning American economist Paul Krugman says “if you stop hitting the economy over the head with a baseball bat you will soon see growth, maybe quite high growth – but that doesn’t mean the baseball bat policy was a good one”.
This is not too dissimilar a situation to what has occurred in the United Kingdom since 2010. When the Coalition took power the economy was growing. It was repairing from the largest global financial shock since 1929. It then stuttered to a halt and threatened to sink into a double and even a triple dip recession. Three years later, after unprecedented levels of cheap money had been pumped into the system and the Tories eased up a little on austerity, sustained growth finally picked up.
Back in 2010 the public sector net deficit was large to be sure, but the funds hadn’t been raised to chuck away, they had been used to buy bank shares, financial securities and assets – many of which are now being returned to the private sector at a profit to the taxpayer. This was always Labour’s plan. It was sensible for government to take a stake in the financial system, learning the lessons of the 1930s, to stop it collapsing. But as the economy repaired from a massive global shock, it was necessary to be gentle with it. Not to kick it off its sickbed the second it was out of intensive care. That’s why Labour entered the 2010 general election aiming only to halve the deficit between 2010 and 2015. But the Tories said that would be irresponsible – they wanted to eliminate it completely. In reality they now boast of having halved it only (i.e. meeting Alasdair Darling’s original “irresponsible” plan). But their failure to eliminate it hasn’t been for want of trying. Osborne’s cuts to spending and investment have been very deep. And he is planning even more severe cuts to meet his (latest) arbitrary target of seeing Net Debt falling by 2017, meaning he has to cut very hard in the first two years of the next parliament if re-elected. He wants to re-start industrial-strength austerity.
Because wage growth in the real economy has been so low (negative for most of the last five years for most families) income tax receipts have fallen away, meaning that the government has seen its tax take fall, badly, and the deficit fall more slowly. At the same time, government investment in our national infrastructure – crucial if we are to compete as a nation in the future – has also been severely cut. This is short-termism of the worst kind: self-harm masquerading as a long-term plan. Most worryingly of all is that our trade deficit with the rest of the world is now at a record high. This is the deficit that really matters. We are simply not selling enough to the rest of the world to allow exports to make a contribution to our economic performance and we won’t do so for any of the next five years if the Office for Budget Responsibility is right. Pull us out of the EU and the situation will probably get worse.
Now add to the mix the final, toxic, inheritance of five years of the Tories: an appallingly low productivity rate relative to other rich countries. The sad upshot from our increasingly low-wage, “flexible” labour market has been low private investment in new plant, technology and skills. When the government exacerbates this by cutting its own capital spend you can guess what happens next. The latest figures show that that the French (for example) are hugely more productive than we are in the UK. In fact they could take Friday off and still produce more in four days than we can in five.
So what has been driving this final return to growth in the UK? The sad truth is that far too much has been coming from debt fuelled consumer spending, manifesting itself in that perennial British disease, very high house price inflation and excess gambling on financial securities rather than long-term investment in the real economy, small businesses and R&D.
To meet these challenges The Tories’ programme as set out in this Budget sees more cuts, deeper cuts and massive cuts to welfare. Plus sustained cuts to investment.
Labour’s approach? Skills, apprenticeships, a proper rise in the minimum wage (not a token 20p hand-out the second before an election), a new energy infrastructure. And more investment from government in our future. Most importantly, Labour will not take some arbitrary accounting benchmark to judge our success. Yes we will aim to cut the deficit on current spending by 2020 for sure but we will do so at a pace dictated by the health of the economy. We will unashamedly invest in our national infrastructure and in our skills base – knowing that that is the real way to ensure higher wages in the future – and we will ensure the public services we rely on are protected.
The choice is clear. Now let’s win this thing.