It’s the demand side, stupid
This election campaign has been unusual in many respects, yet one peculiarity stands out. In contrast to recent elections, the economy has barely featured as an issue.
Labour has done an excellent job of turning the agenda away from Brexit and has had success with the double launch of its manifesto. Whether accidental or intended, the leak allowed a focus on the policies to revive public services while the official launch gave an opportunity to establish a strong, credible fiscal stance.
The attention paid to fiscal policy was a defensive move intended to address a potential weakness. Excellent handling of the issue has persuasively demonstrated that there is an alternative to austerity. However, tax and spend is not economic policy and Labour has a position on future prosperity which will be effective, which is different from the Tories and which deserves to be sold in the later stages of the election.
A key plank of Labour’s economic strategy is investment. The manifesto promises a National Transformation Fund to invest £250 billion over ten years on improving infrastructure. Private sector investment will be facilitated by a National Investment Bank supported by a network of Regional Development Banks. Labour’s industrial strategy will give direction to private investment through a mission oriented approach to address the challenges of the future and pushing Britain towards the technological frontier.
By contrast, the Tory path offers yet more austerity, with a continuation of the low wages and low investment that has held Britain’s economy back.
Labour hasn’t yet done enough to explain why the Tory economic strategy failed and could only fail. The explanation lies on the demand side. Suppressing wages, low public investment and poor private investment weigh on demand and lead to low growth. The main source sustaining demand in recent years has been household spending financed by credit. That is unsustainable. Household indebtedness cannot rise forever and will sooner or later end catastrophically.
Labour’s path boosts demand by infrastructure investment, private sector investment and allowing wages to rise. The distinction between Labour’s economic policy and the Tory programme is most evident when we look from a demand side perspective.
It is possible to argue Labour’s case from the supply side. The investment focus not only sustains demand in the short term but provides for sustained growth in prosperity in the long run. Public infrastructure helps firms to be more productive and private investment drives increasing productivity of labour. In contrast to the unsustainable demand based on household debt an investment based strategy provides the continual increase in productivity which pays for higher wages.
After decades when Keynes was neglected and supply side policy dominated political discourse, it may be tempting to frame the issue this way. However, while technically correct, the supply side argument fails to explain of why wage control and cuts do not lead to a healthy economy.
Labour made a strong start to the campaign when it accused the Conservative government of ‘holding back Britain’. In the closing stages of the campaign, we need to see the detail of why their polices are a drag on the economy and how Labour offers a distinct alternative.
Labour’s pitch in this election should have two elements. The first is the traditional strength in rebuilding public services, from health and social care to policing and prisons. The second is a new approach to the economy where government acts to sustain investment and keep the economy moving.
The demand side argument makes clear why ending austerity is good economics.
Jos Gallacher is a member of the Economic Policy Commission of Labour’s National Policy Forum
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