Why Labour’s deficit reduction plans are genuinely different to those of the government

Labour's deficit reduction plans for the next parliament are genuinely different to those of the Conservatives.

Labour’s deficit reduction plans are tough but also genuinely different to those of the Conservatives

Once upon a time the NHS was supposed to be the British religion. Today it’s arguably the deficit, with politicians of all stripes emphasising their own credibility by promising to ‘pay it down’.

For better or worse, this is where we are. For many of us on the left that’s deeply unfortunate – but it’s largely down to our failure to win certain arguments since the world economy exploded in 2008.

So deficit reduction is where we are – in this parliament and the next one – whoever is in office.

But that doesn’t mean that deficit reduction is the same across the board, despite what some may wish to tell you. Labour’s deficit reduction plans for the next parliament are genuinely different to those of the Conservative-led coalition, and are being laid out today by Ed Miliband.

We’ve had a quick look at some of these differences and why they’re important.

Ensuring that those with the ‘broadest shoulders’ really do pay their fair share

For all the jibes about his being out of touch, George Osborne is a politically astute chancellor. This is why, if you look at the distributional analysis of the recent Autumn Statement, it appears to show that the most well-off 10 per cent have shouldered the greatest burden of deficit reduction under this government.

Dist analysisj

See the black dotted line? It doesn’t quite chime with all the sound and fury about a coalition government ‘by the rich and for the rich’, does it?

Yet it would be a mistake to take this at face value: look at where the rest of the line sits – the poor are clearly hit the hardest after the top decile. In fact, they’re hit to such an extent that you might say the impact on the top 10 per cent is cover for the assault on the bottom 40 per cent.

Meanwhile when the coalition talks about the rich ‘bearing the greatest burden’ they’re mainly referring to entitlements they’ve removed from people who very often didn’t use them anyway. Meanwhile early in this parliament the coalition increased VAT – a tax we know disproportionately hits the poor.

Labour’s plan is both more straightforward and more transparent: a Mansion Tax on properties worth more than £2 million, an increase in the top rate of income tax – still the most progressive form of taxation – and a tax on bankers’ bonuses.

Dealing with the underlying problems that are causing the deficit to rise

As opposed to swinging the axe wildly in the fashion of the current chancellor.

Once upon a time the coalition talked a great deal about ‘rebalancing the economy’. However during the prolonged period of economic stagnation in 2013 and early 2013, George Osborne abandoned his supposed long-term goals in a dash for growth.

As such the country is now following a trajectory that is dangerously similar to the pre-crisis one – a house price boom and consumer spending based on ever-increasing personal debt. In their obsession with shrinking the state, the coalition has prioritised appearing ‘tough’ over being correct. As a result, services have deteriorated, welfare budgets have risen and slow progress has been made on the deficit.

To deal with rising welfare and falling tax revenue we really do need to tackle low pay, insecure jobs and housing shortage, as Labour points out.

Differentiating between productive spending and other outgoings

Not every pound spent is equal, and it’s folly for the government to seek to fix public spending at an arbitrary figure of 35 per cent of GDP.

We often hear public debt being compared to ‘the household credit card bill’. Yet it’s more illuminating to compare the public finances to that of a business – UK PLC if you like. In business there is a point at which debt becomes unhealthy, but if the business is profitable and wants to grow then it will invariably run up debts.

The mistake on Miliband’s part is to (apparently) rule out borrowing to invest: today the Labour leader stated that the manifesto will not have commitments funded by borrowing. However he also claimed that spending on public infrastructure – infrastructure which helps the country to grow – was very different from public spending more generally.

This sounds like a bit of a contradiction – does ‘productive investment’ not justify borrowing? What about capital borrowing for house building?

 

For better or worse, deficit reduction is the political reality against which Labour’s economic credibility is now being defined. Cut the deficit Labour must; but they’re making a genuine attempt to do it in a fairer and more intelligent way than the Tories.

James Bloodworth is the editor of Left Foot Forward. Follow him on Twitter

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58 Responses to “Why Labour’s deficit reduction plans are genuinely different to those of the government”

  1. AlanGiles

    Is anybody really taken in by Miliband and Balls?. They would say anything to grab power, but, frankly, we all know that all they would do is tinker with the current discredited strategy pursued by the Coalition.

    They haven’t got the will or the courage – or, frankly – the intelligence – to offer a genuinely alternative strategy. Balls and Miliband are not nearly as clever as they think they are

  2. Peter Martin

    ” Yet it’s more illuminating to compare the public finances to that of a business – UK PLC if you like.”

    No, No, NO ! All businesses are USERS of the £ sterling. The government, or state if you prefer, is in the unique position of being the ISSUER of the £. Unlike a business, the government has to issue more £ than it receives back in taxes. If it didn’t where would our financial assets come from?

    That’s such as obvious difference that it shouldn’t need to be pointed out. Maybe its just too obvious and therefore no one sees it?

  3. swat

    We need to go back to basics. The purose of the Labour Party is the redistribution of Wealth, fairly. Its purpose is also to create that Wealth, fairly, and not exploit working people, and producers. Once we’ve got that straight we can add a 3rd Principle ie: To each according to their need. For example if you are obscenely obese, then you are not only encouraged to cut down but forced to, by reasonable means. Or if you are obscenely wealthy you are forced to donate excess money to the State, by equitable taxation, for it then to be redistributed fairly..

  4. Ed Conduit

    The
    Piketty task: reclaim private profit for the general good

    Recent disclosures that Luxembourg is a haven for Amazon illustrates yet again the central economic problem of our time: how can private profit be reclaimed for the
    general good? The economist Piketty* argues that wealth disparity is an
    automatic consequence of high return on capital and low growth. In this
    analysis, the “cost-of-living crisis” cannot really be remedied
    without recouping private capital. These strategies are suggested:

    Restore the state as the major stakeholder in housing. The exchequer previously acted as lender to local government for house building. Loans were typically over 60 years and
    attracting 1% or 2% interest. A local authority could act as banker and expect
    returns for future investment in housing stock. This would restoring the role
    of local government as a public (avoiding the word “council”) housing
    provider and discontinuing the Thatcherite approach to sale of council houses. The
    exchequer itself is too clumsy a manager to initiate investment. Capital
    generally pursues the strategy of privatising profit and socialising loss, so
    the state merely becomes a milch cow if tries to implement Gosplans. Local
    government and some quangos are in a better position to advance loans against
    business plans. The market is more efficient at the local level, so the role of
    the state in food, cars etc. should be restricted to providing quality and
    safety standards.

    Enforce collection of corporation tax. Avoidance is being achieved by Amazon, Microsoft (Skype is its subsidiary), Starbucks etc. by notionally locating Luxembourg, or sometimes Ireland, as the European base for its profit-taking. One strategy would be for the EU to level the tax playing up to, say, 20%. Germany, France and Italy are currently
    pressing Mr Juncker about this, and Britain could back them. Conservatives and
    UKIP form the biggest MEP blocs in Europe but play no concerted role. UKIP’s
    intention to withdraw from the EU would reduce the ability of the UK treasury to increase its tax revenue. Another alternative would be tax electronic transactions. For example, a download of Microsoft Office to be used from a physical desk in the UK would incur transaction tax in the UK, not in Microsoft chooses to declare its HQ. Conservatives are opposed to such Tobin tax because of the presumed loss of autonomy of London finance centres.

    Focus graduate work skills on British growth areas. The Tony Blair policy on “education, education, education” in 2002 was partly right, but was also the biggest source
    (perhaps £90 billion?) of the public sector deficit. High skills are indeed necessary for the service-led economy we now find ourselves in. Successful areas include a) tourism to London, b) insurance, c) higher education itself as a saleable product d) high-end
    manufacturing.

    (a) London is by far the most visited capital in the world. Regular attractions include the museums and the West End, and the Olympics and the ceramic poppies have proved further attractors. There is still scope for attracting spending from UK pensioners for
    inward tourism. Although it is fashionable to be scornful of tourism courses,
    their graduates are keeping the island afloat!

    (b) Finance has been increasing as a share of the GDP by 1% a year and now exceeds manufacturing. We should see this evolution as consistent with Ricardo’s rule, rather than hankering for an industrial past.

    (c) Education qualifications at full cost through the medium of English remain highly attractive and degrees that generate income this way should be favoured. Universities currently regard their success mainly in terms of research publication. The economic productivity of graduates needs to be a major criterion.

    (d) Manufacturing has declined from 40% to 11% of GDP, but remains important in high-end areas, such as car and aircraft engine-management systems; it is not likely we will return to volume competition of car assembly, white goods, steel or shipbuilding. The
    output of UK graduates needs to be continually near the crest of the wave in
    terms of technology.

    *Piketty bases his argument on a formula that relates the rate of return on capital (r) to the rate of economic growth (g), where r includes profits, dividends, interest, rents and
    other income from capital; and g is measured in income or output. He argues that when the rate of growth is low then wealth tends to accumulate more quickly from r than from labour, and tends to accumulate more among the top decile and centile, increasing inequality. Thus the fundamental force for divergence and greater wealth inequality can be summed up in the inequality r > g. He analyzes inheritance from the perspective of the same formula.

  5. madasafish

    Glad to see that even fervent Labour suppporters who follow politics have no idea what the two Ed’s economic policies really are. I can now sleep soundly at night knowing I am not alone on this matter.

    Of course this article might be doing the two Eds a great disservice in implying they don’t know what they will do. It may very well be they do, but are afraid to share it with voters for fear of the consequences at the next election.

    So in summary, either the two Eds are incompetent charlatans who have as much knowledge of economic policy as the average doormouse.. OR when Ed Miliband states he wants politics to be “transparent” , he’s lying.

    Not a great choice is it?

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