Thursday, 17 June 2010

The politics of amnesia

One thing this government has achieved since coming to power has been to induce mass amnesia as to the cause of the economic mess we find ourselves in. Anybody would think the recession and the deficit was really caused by irresponsible public spending rather than the irresponsibility and greed of bankers and the private financial sector.

As the TUC point out, cutting public spending in a recession is voodoo economics and will only make the situation worse. Slashing public sector jobs – up to 750,000 we are now being told – will have a knock on effect on private sector jobs, further increasing unemployment. Rising unemployment means even less tax receipts while increasing the burden of welfare spending on benefits – increasing not reducing the deficit.

The ConDem cuts will hit the poorest in society hardest. And all this is justified by the argument that we have to keep our international credit rating. But as the economist Joseph Stiglitz points out, ‘appeasing the markets is like trying to reason with a crazy man; after Spain announced its cutbacks, the ratings agencies downgraded its debt because of lower growth prospects as a result of those cuts!’.

The best way to reduce the national deficit is to generate greater tax revenue through stimulating the economy. And we have been here before. The 1945 Labour government inherited a war-related deficit of 238% of GDP compared to 63.6% of GDP projected for this year. The debt was repaid over a period of decades yet it was during that time that we saw the creation of the NHS, a huge programme of council housing, investment in transport infrastructure, the improvement of social conditions and the revival of the economy. And even when Winston Churchill was elected Prime Minster in 1951 he did not reverse this policy.

Many Labour supporters would echo this argument. But the New Labour leadership has left itself wide open to the charge of dishonesty over its own cuts agenda. After all, Alistair Darling had his own £44 billion of cuts planned if Labour had been elected. A right-wing Labour government may not have set about the public sector with quite the same zeal as the Tories, who see a once in a lifetime opportunity to roll back the welfare state, but Labour has shown no sign of breaking from the neo-liberal obsessions with privatisation and deregulation that got us into this mess in the first place.

Polices which put the emphasis on tax reform, cutting wasteful spending projects and forcing the banks to lend to viable businesses can deliver higher levels of economic growth, increase revenues, and reduce the deficit. There are plenty of options if we want to make a start:

We are the 8th largest economy in the world but have the 3rd largest defence spending. Cutting Trident would save around £100 billion over 10 years. And just trimming the defence budget to the same level as Germany would save up to £17 billion a year.

Our corporate taxes at 40.6% are below the EU average of 43.9% - levelling up to the EU average raises another £46 billion a year. A crack down on tax avoidance and evasion by individuals would yield at least £15–20 billion more every year.

And since we now own large chunks of the High Street banks we should be using that leverage to direct investment.

There are alternatives to neo-liberalism. And now is the time to be outlining them. But they won't fit with the economic framework that defined New Labour. The Labour leadership debate should be focussing on the failures of the old policies and the need for a radical break. Unfortunately, most of the contenders seem more interested in pointing the finger at immigrants - those least responsible for our current difficulties.