My Lords, I endorse the Minister’s fitting recognition of Lord Peston, who was my professor of economics at Queen Mary College, University of London, and whose brilliance, along with that of the noble Lord, Lord Smith of Clifton, enabled me to get a first-class honours degree—something which produced a barrage of letters in the Daily Telegraph denouncing university standards at the time.
I was struck by last week’s figure for government borrowing in the financial year just ended, 2015-16. What caught my notice was not that the Chancellor had exceeded his borrowing target again—we are used to that now, he is a serial offender. What stood out for me was the £74 billion borrowing figure itself, as £74 billion was exactly the borrowing figure forecast by my noble friend Lord Darling in his final Labour Budget, in March 2010. He planned to bring down Britain’s budget deficit to £74 billion in 2014-15—the limit of his five-year forecasting horizon. It was precisely this level of planned borrowing, £74 billion, that the new Tory Chancellor condemned when he took over at the Treasury. It would take Britain too close to the “brink of bankruptcy”, he fulminated, insisting Labour could never be trusted.
Instead, he replaced it in June 2010 with new, tougher targets, halving Labour’s planned borrowing in 2014-15 from £74 billion to £37 billion and setting himself a tight borrowing target of £20 billion for 2015-16. Both those targets were missed by a mile. All the Chancellor’s scaremongering about Britain becoming another Greece proved to be nonsense. Just like under Labour Chancellor Darling, even during the banking crisis, Britain has had no problem financing our budget deficit: the yield on UK government debt dropped to an all-time low of 1.22% in February. The Chancellor keeps crying wolf but the bond market is behaving more like Britain’s best friend, just as it did under Labour.
Labour argued six years ago, and has continued to do so since, that the Chancellor’s austerity strategy was the wrong way to tackle Britain’s debt and deficit problems. We said that pursuing such deep cuts so quickly risked curtailing growth, thereby making his borrowing targets unattainable, because it is on the growth rate of the economy, not just prudent public finance housekeeping, that budget deficits and the debt burden ultimately depend. Slow growth puts a brake on consumer spending and business investment, which causes tax revenues to tail off, pushing up government borrowing and adding to debt. Sadly, our fears were fulfilled as the Chancellor’s austerity first completely halted Labour’s carefully nurtured growth following the global banking crisis and the ensuing recession, and then caused the recovery we had generated to stall for three years.
Few Finance Ministers have pursued austerity with more vigour than Britain’s Chancellor. In 2013, he boasted that he had squeezed the UK economy more tightly than any of the other advanced economies. At least that claim was valid: Britain’s fiscal squeeze was twice as tight as in the USA or the eurozone. But it cost the country dear. When recovery finally came, it did so at a much slower pace than recoveries from earlier recessions: much more slowly than recovery from the recessions of 1973 to 1976, 1979 to 1983 or 1990 to 1993; more slowly even than recovery from the great depression of 1930 to 1934. It took the UK economy three years longer than America or Germany to get back to pre-crisis levels of GDP. This explains the assessment of the former chief of the Federal Reserve, Ben Bernanke, last October that austerity went too far in Britain after 2010.
Today the Chancellor remains behind schedule on debt and over budget on borrowing. He will continue to miss his targets, because his fiscal strategy for this Parliament is a carbon copy of the failed austerity policy he pursued in the last one. The Institute for Fiscal Studies expects growth between now and 2020 to be held back by the drag of “fiscal consolidation”—the technical term, as your Lordships will know, for cuts—which is greater in the UK than among any of the other OECD developed countries. As the Chancellor’s March budget made clear, not only is austerity set to drive UK economic policy for the next four years but the fiscal squeeze will be tighter than before, and once again much tighter than anything envisaged by the world’s other advanced economies.
Missed debt and deficit targets are only the obvious indicators of failure. The real cause for concern is that economic growth is slowing down. The economy is running out of steam and losing momentum. Everywhere you look, growth forecasts are being downgraded. The CBI and the Bank of England downgraded theirs in February. In March, the Chancellor’s own financial housekeeper, the Office for Budget Responsibility, judged that growth was slower last year than the year before, and will be even slower this year. Last week, the IMF cut its forecast for UK growth in 2016 to less than 2%. Everyone is on the alert for further signs of a slowdown.
What is driving the Chancellor’s disastrous austerity strategy is his commitment to the neoliberal aim of shrinking the size of the state. His idea for constant budget surpluses except during a recession amounts to a 1920s-style pre-Keynesian recipe for a permanent squeeze on public spending after tax cuts that deliberately put a budget surplus beyond reach. It is the Osborne equivalent to the Tea Party’s “starve the beast” strategy in the US, which aims to cut back the role of the state. It is totally unnecessary if the aim is to cut the debt-to-GDP ratio, as the whole of our history for the last 200 years testifies, but it serves his ideological aim of small government.
There is an alternative which is economically credible and authoritative, a Keynesian policy to replace a failing neoliberal one. Our priority today should be faster, fairer, greener growth. We need growth because only an expanding economy can provide the resources needed to tackle the problems that confront society, such as chronic housing shortage, a decaying social infrastructure, inadequate educational opportunities, especially for the disadvantaged, combined with high student debt, a shortage of vocational skills, a mismatch between health and social care, lack of childcare and an accelerating crisis in elderly provision.
We need faster growth because that holds the key to bringing the public finances back into balance, to generating the work that 900,000 unemployed young people want and millions more unemployed, insecure or underemployed people need, and to raising real incomes. We need fairer growth because unequal societies are unhealthy societies in which everyone loses out as all forms of social ills rise and economic growth rates slow.
We need greener growth because without vigorous action to meet the threat posed by climate change, such as by backing a low-carbon economy and actively promoting renewable energy schemes, such as the entirely privately funded Severn Barrage, environmental disasters can only become more frequent and intense.
Contrary to the stifling grip of neoliberal orthodoxy within the Westminster bubble, faster, fairer, greener growth is eminently feasible. The scope for fiscal action to boost public investment in housing, in the social infrastructure, in training and skills and in green growth is substantial. It would mean the Government borrowing more today, yes, but in order to borrow less tomorrow by giving the economy a fiscal stimulus and raising Britain’s economic growth rate above the pedestrian 2.1% per year expected by the OBR for the next five years.
Would such a stimulus increase government borrowing? In the short term, as I say, yes, but in the medium to longer term, no. Boosting economic recovery may well require more public borrowing in the short term. It is the right thing to do to get the economy growing faster, to maintain the momentum of growth and reduce borrowing over the medium term. Higher public spending and borrowing today can mean lower borrowing tomorrow if it achieves faster growth, with tax revenues rising as total spending in the economy increases, and welfare bills falling as unemployment comes down.
It has been tried before and it has worked. President Obama’s 2009 stimulus package after the banking crisis added to the US federal deficit at the time, but US interest rates fell, spending and output rose and dole queues shortened. As a proportion of his expanding GDP, America’s overall deficit has shrunk every year since 2009.
A £30 billion per year increase in annual public investment for two years as part of a 10-year programme to renew Britain’s failing social infrastructure would give a boost to growth at a time when the OBR expects the economy to slow down. By contributing to a higher plateau of ongoing public infrastructure investment, it would also provide a spur to industrial innovation and faster future growth, as well as full employment. Higher current public spending paid for by a mix of higher, fairer taxation, extra charges and greater efficiency would allow us to protect public services from the worst of this Government’s planned spending cuts.
What makes faster growth feasible in the short term is the margin of spare capacity in the UK economy that could be brought back into operation, yielding extra, catch-up growth for several years, just as it did as Britain recovered from the depression between 1933 and 1936, when growth exceeded 4% per year, fuelled by a housebuilding boom— and do we not desperately need such a housebuilding boom now? The belated, slow, faltering economic growth under the Chancellor has delayed deficit reduction. Instead, scrapping austerity could have taken up—and could still take up—the slack in the economy, such as the millions of people who are underemployed and working fewer hours than they would prefer.
A stimulus of £30 billion per year for two years of extra capital investment in infrastructure, housebuilding, education, skills and a low-carbon industry would rapidly expand the economy and cut the budget deficit by boosting tax revenues as people earned and spent more, working hours rose and fewer families needed to look to the state for benefit support. Such a modest and, with historically low interest rates, eminently affordable £30 billion budget boost remains the only way to begin creating a fairer, more sustainable economy at the same time as bringing the public finances into balance.
The scope for doing so is much greater than the Government or the OBR will concede; for example, Oxford Economics noted in 2014 that if its estimate of the amount of slack in the economy, and thus the scope for faster growth, was correct,
“none of the spending cuts planned beyond 2014-15 would be needed to return the deficit to pre-crisis levels”.
By the time of the March 2015 Budget, the Oxford Economics team reckoned that Britain’s output gap was six times bigger than the OBR did, leaving plenty of room for fast, catch-up growth prompted by such a stimulus package.
Much the same argument, along with the case for growth, has convincingly been made by other eminent economists, such as Paul Krugman, Jonathan Portes, Simon Wren-Lewis, Martin Wolf, Bill Martin and Bob Rowthorn. We were reminded a few months ago by the Institute for Fiscal Studies that over the Labour decade up to the start of the financial crisis in 2007-08, the UK experienced an unprecedented period of sustained economic growth. GDP growth averaged 3% a year. That is the least we should be aiming for now.
By the way, to correct another myth, before the global financial crisis crashed all the economies of the world, the previous Labour Government ran a prudent, extremely successful economy, with record growth and employment, low interest rates, low inflation, low national debt and low borrowing—lower, indeed, than we had inherited from the Tories in 1997. Britain’s 2007 budget deficit was £39 billion, or 2.7% of GDP, before the banking crisis. It was dwarfed by the colossal cost of state support to Britain’s failing banks, which was equivalent to some 90% of GDP. Something a bit lower on the budget deficit scale in 2007 would therefore have been irrelevant to the stratospheric impact of the banking crisis or how the Government were able to manage it.
For 30 years after the Second World War, progressive Keynesian full employment policies combined with welfare state policies delivered economic and social stability right across Europe, promoting the necessary investment and faster economic growth, as well as more just, more equal societies and fewer class differences. For nearly four decades now, we have suffered from neoliberalism—that is to say, a small government ideology favouring market forces wherever possible and tolerating state regulation only where absolutely necessary. Economic and social inequality has widened massively. Not just the poor but the middle classes have experienced a relative decline in living standards while the rich have become super-rich. Meanwhile, Britain has a record trade deficit, dreadfully low productivity, manufacturing decline, ballooning private debt, yet another housing asset bubble, growing inequality, job insecurity and sluggish private investment. Some basis indeed for the Government’s claim that their economic plan is working.
Today, the stakes could not be higher: whether Britain can become a compassionate, much more equal society founded on a strong, productive technology sector; or whether we are to be condemned to have an economy plagued by financial short-termism, servicing the interests of only a rich elite. The alternative agenda, however, is emphatically not some wild, irresponsible, unelectable platform of tax and spend, as critics will doubtless complain of my prospectus. Instead, it invites a resurrection of Britain’s post-Second World War mission, based on hard-headed economics and evidence —a modernised Keynesianism, some might say. That, not the Government’s fetish for neoliberalism, should remain both the source of our inspiration and the vision for our age.