FAITH BASED ECONOMICS

Naked politics and a gamble on the private sector leading the recovery guided George Osborne's spending review

George Osborne has more in common with Gordon Brown than he would like to admit. His criticism of Labour’s longest-serving chancellor is that he was driven too much by political strategy, by ‘dividing lines’ designed to frame an argument one way or another.

Yet this chancellor’s approach is relentlessly, obsessively political. Earlier this year, the Tories could have rejected any one of Alistair Darling’s tax measures to address the deficit – the 50p rate, the bank bonus levy or others – but the one Osborne picked was the national insurance proposal because he wanted to drive a wedge between Labour and business.

During the election campaign and since he has constantly framed what the Tories have always wanted to do – shrink the size of the state – as not being an ideological obsession, but a patriotic task, made necessary because of the deficit which, in turn, he argues was caused by Labour incompetence.

Thus the Tories’ political strategy requires them never to talk about the recession as a worldwide event or as being caused by irresponsibility in the financial sector. For them it is a weapon to accuse Labour of losing the plot economically, with themselves playing the role of the rescue team.

The formation of the coalition helped give Osborne cover for cuts as a patriotic duty – ‘together in the national interest’. The relief in Conservative circles that these are coalition cuts, and not just Tory ones, is palpable. It shares the blame and helps insulate them against the charge that they are Thatcher’s children, running amok with their public spending axe. How they must love using Nick Clegg and Vince Cable as human shields.

Osborne’s political strategy coloured the whole spending review process. It shaped the balance between departmental cuts and welfare spending. He took the Institute of Fiscal Studies’ projection of Labour departmental cuts of 20 per cent – even though this assumed no welfare savings and was never accepted by Labour – and was so determined to reach his departmental targets that he kept cutting welfare until he got there.

In the same way, politics requires the Tories to deny the need for a plan B or a second option should economic recovery slow or there be unpredictable consequences of these measures.

But it is the public who will pay the price for this politically driven strategy. It is they who will pay the price in terms of job losses, having to move home because of housing benefit changes and countless other consequences of the measures announced in the spending review.

Apart from the detail, politics has also informed the scale of these cuts. Given the chancellor’s obsession with positioning on every other issue, how much of his timescale is really economically necessary and how much of it is driven by preparation for possible tax cuts before the next election?

The claim that the cuts proposed were smaller than Labour would have carried out has already fallen apart. It was dependent on alleging that Labour would have saved nothing through welfare reform – which is not the case – and took no account of other taxation measures we may have proposed, such as those set out in Alan Johnson’s speech a couple of days before the spending review.

But how should Labour respond more broadly? First, we must not allow the Tories to get away with trashing our economic record in government. It may be obvious but constant reminders are needed that this was an international economic and banking crisis, not a British one caused by the Labour government.

Nor did Labour lose control of the public finances. We went into the recession with the second lowest debt levels in the G7. Rising debt was a consequence of declining tax revenues and, in part, the necessary consequence of the action we took to get the country through the recession. And the benefits of that action can be seen in the fact that unemployment, home repossessions and business failures are all about half the levels they were in previous Tory recessions.

If we don’t defend our record, no-one else will. At stake is the economic credibility we worked so hard to achieve; the Tories want to destroy it for a generation. We kept our economic credibility in government and we must keep it in opposition, too.

Second, we must reject the idea that it’s the Tory plan or no plan at all for the deficit. That is the binary choice they pose because they want to paint us as deficit deniers. Deficits can’t be run for ever but there is both a legitimate and necessary debate to be had about the speed at which debt is brought down and the balance between cuts and tax measures. Here Johnson’s pragmatism is a strength and Osborne’s politically driven approach a weakness.

Third, we need to broaden the debate. The next five years can’t only be about the deficit. It has to be about Britain’s economic future, about where the jobs of tomorrow will come from. And Labour, as a party of wealth creation as well as distribution, should lead that debate.

The coalition does not see it as part of its job description even to ask the right questions in this area, let alone answer them. Their rejection of any active government role in industry inhibits them from making the most of technological and global change. Their tearing up of regional development agencies is leading to a fragmentation of local economic development with business increasingly sceptical about the meagre resources available to the replacement organisations.

This argument about our economic future presents Labour with both an opportunity and a responsibility. The opportunity is to answer a question that people around the country are asking as they see the private sector struggle to get back on its feet and the public sector retrench with half a million job losses. The responsibility is because, although we oversaw the biggest rise in GDP per head in the G7 between 1997 and 2009, its impact was uneven. There were huge opportunities if you were in a connected part of the country with a diverse economy, but this was far less true if all you saw were the pillars of the local economy taken down and moved overseas.

So if Britain is to remain optimistic about globalisation, as I believe we should, then we have to do a better job of making sure all parts of the country are included in our economic story, not just some.

Osborne will continue to try to game us, pushing us one way and another. But this most political of chancellors cannot yet know what impact his spending review will have. His is, in the end, a faith-based economics, betting the farm that the private sector will step up to the plate as the biggest cuts since the war are imposed, and that he will be in a position to offer a sunnier outlook – with tax measures to go along with it – come the next election. Our response must be both a different position on the deficit but also a story of the economic future that every corner of Britain can be part of.

This article is also available on the Progress Online website. Posted on 2 November 2010.

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