“Conservative economics are what broke Britain – replicating them won’t fix it.”
Grace Blakeley, Economist and Author
Ahead of the General Election, Grace Blakeley sets out five reasons Labour needs a new fiscal policy. You can watch her short video produced by Momentum or read the full transcript below.
Britain has had enough of the Tories. But a Labour Government is promising less than ever. Why?
In two words: Fiscal Rules.
But what exactly are these fiscal rules – and are they a good idea?
Rachel Reeves has stated: “We will not waver from strong fiscal rules….the current budget must move into balance, so that day-to-day costs are met by revenues.”
As a result, she says, we can’t afford to do things like:
- Boost funding of our public services
- Invest £28bn a year in the green economy
- Scrap the two-child benefit cap
- Roll out free school meals
The reality, so we are told, is that there’s no money left. But that isn’t really true.
Here’s 5 reasons why Labour needs a new fiscal policy.
Reason Number 1: The Rules are Arbitrary
Rachel Reeves has said that she will stick to the Tories’ self-imposed rules, but she doesn’t have to.
There is no economic law that says they have to be in place.
There have been six different targets in the last nine years.
Fiscal rules are a choice – and an arbitrary one.
And constraining yourself with nonsensical rules is a really bad choice.
Just look at Germany, which was the worst-performing major economy last year in part thanks to its absurd ‘debt brake’. Even the austerity-loving IMF has told Germany it needs to reconsider its rigid fiscal rules.
The Labour Leadership likes to insist they’ll be inheriting the worst economic situation since World War two. But in 1945, the country faced a higher debt to GDP ratio than we have today.
Despite this, the Labour Government invested heavily, nationalising nearly a quarter of Britain’s industry, building one million council homes and establishing the NHS.
And from our crumbling public sector to the climate crisis, we face equally huge challenges today.
Number 2: Governments don’t have credit cards
So we know that fiscal rules are not immutable. But shouldn’t we still worry about rising government debt, as much as we would worry about a big credit card bill?
Well despite what Margaret Thatcher said, government spending is nothing like a household budget.
While interest rates are currently high (but falling), borrowing is still cheaper for the government than it is for private businesses.
It always is, because the government debt of a country like the UK is seen as an extremely safe asset – an asset that lots of investors want to own.
Government spending also affects the economy in a way that the spending of one individual does not.
The Tories like to talk about running the state like a business, so let’s use their metaphor.
Imagine if your local pub responded to a fall in sales by selling all its bar stools, watering down the beer and firing all its workers. That pub would hardly be likely to return to profitability when the economic context improved.
The fact is, successive governments have sold off all our public assets on the cheap, allowed our critical infrastructure to fall into disrepair, and failed to invest in the education, training and care people need in order to work.
Today, this means that the government is spending vast sums of money subsidising the private owners of formerly public assets; businesses can’t access the infrastructure and workers they need; and many people are too sick and stressed to work productively.
Number 3: There are other ways of raising money to invest
A household can’t decide to tax the wealthiest person in their neighbourhood. A government can, and should.
But Labour’s Leadership won’t countenance new taxes on wealth, which Tax Justice UK estimate could raise more than £50 billion annually.
And taxing wealth is hugely popular, as is re-nationalising public infrastructure like rail, mail, water and energy.
When owned publicly, the money these companies make is returned to the public purse, where it can be reinvested to improve services, rather than siphoned off to private shareholders. Research has shown this would pay for itself within seven years.
Number 4: The Multiplier Effect
Jim O’Neil, a former Goldman Sachs banker and Conservative minister, recently wrote about government failures in terms of long-term investment, citing the multiplier effect.
So what is the multiplier effect?
It refers to the process through which the impact of government spending is multiplied throughout the wider economy.
For example, if the government invested in building a bridge for £1 million, the total economic impact would be far greater than the initial investment. The employees building the bridge would spend their cash in the local economy, boosting revenues for local businesses, which could then employ more people who could also go out and spend.
Over the long term, the bridge might encourage new businesses to incorporate in the area, or make existing ones more productive. But arbitrary fiscal rules stand in the way of these investment dividends.
As the Institute for Public Policy Research has argued, the UK is suffering from a chronic lack of investment in both public and private sectors.
Instead, Britain’s investment levels have lagged consistently behind most other OECD nations, in both the public and private sectors, for decades.
If public sector investment had been kept at the G7 average over the last 16 years, the British government would have invested an additional £208.4 billion in real terms.
For comparison, that’s five times the investment needed to build northern powerhouse rail.
In dropping its pledge to invest £28bn in the green economy, Labour is sacrificing billions more pounds worth of support to the economy.
And of course, by failing to adapt and mitigate for the climate crisis, we increase our costs in the long run too.
Meanwhile, investments in green energy,, an industry which is predominantly based outside of London and the south east, would also help to address Britain’s long-standing regional inequalities.
But as prominent economists have stated, providing this desperately needed investment would require scrapping “petty and arbitrary fiscal rules”
Number 5: Austerity doesn’t work
Conservative economics are what broke Britain – replicating them won’t fix it.
We can see what the Tories’ fiscal approach has given us: a cost of living crisis, with food, energy and housing costs sky high and millions suffering in destitution.
We have the greatest depression of wages since the Napoleonic Wars.
We have public infrastructure and public services which are crumbling across the board.
And while all of this happens, the richest have gotten richer and richer.
Austerity always ends up costing the public more long term, because problems mount and costs rise, whether that’s emergency school repairs or a less healthy population requiring more medical treatment.
As 70 leading economists argued recently, we need Labour to lay out an alternative economic vision.
Labour doesn’t have to abandon fiscal rules entirely. But the Party absolutely does need to change the way it views government spending, and refute the austerity logic which devalues investment.
We need a Labour Government to forge a different economic path, based on public investment, public ownership and social and economic justice.
We need Labour to bury the failed dogmas of fiscal conservatism, privatisation and Thatcherism.
We need Labour to offer hope.
- You can follow Grace Blakeley on Facebook, Twitter/X and Instagram.
- You can grab a copy of Grace’s new book ‘Vulture Capitalism: Corporate Crimes, Backdoor Bailouts and the Death of Freedom‘
- This article is a published transcript version of the video published by Momentum.
