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Austerity Politics & Blaming Labour

December 31, 2010
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An opinion I hear fairly regularly when discussing politics with friends and acquaintances is that the Labour Party is to blame for the current high levels of public debt, and that it’s essential we pay down this deficit quickly, through harsh austerity measures, in order to prevent further financial collapse.

I take issue with this claim, as I don’t believe that any single party should shoulder the blame. I also believe that this argument is a gross simplification which is representative of a deep misunderstanding of macroeconomics in mainstream political discourse. I’d like to try and explain why this assertion is incorrect, but first we need to go back to basics.

Now, let me clear two things up: Firstly, contrary to some rumours, I am not a member of the Labour party – or any other political party for that matter – so I’m coming from an entirely non-partisan position here, and secondly, there is too much debt, and the situation does need dealing with. However, I believe that there are some significant problems with the methods currently being proposed to achieve this.

It is true that we’re currently in debt, and lots of it. According to The Economist’s Global Debt Clock, the UK’s debt is currently reaching 77% as a percentage of GDP (Gross Domestic Product, the amount of goods and services produced in a year). However, this is far from unprecedented, and there’s little here to justify the urgency of the coalition’s spending cuts. For example: between 1920 and 1960, the level of government debt never dropped below 100% of GDP, and after the second world war the national debt reached highs of 250%. As Johann Hari put it recently: “If we are “bust” in 2010, we have been bust for almost all of our modern history”.

The UK also has far fewer debt-related complications than some of our friends in the G20. Ireland, France, Portugal, Canada, Italy and Greece (to name but a few) have deficits far in excess of ours, and in the case of Japan, are currently running a deficit of almost 200% of GDP. The UK is also assisted by the fact that our debt is mostly internal, and that our maturity rates are longer on average than those of many European countries.

Something which is taken for granted by many is that debt is overtly a bad thing, although this is not strictly true in the case of government debt. When the economy tanks, as ours did back in 2008, the private sector and many small businesses stop investing, they also fire staff and cease recruitment. The banks also get similarly spooked, and become highly reluctant to lend money to businesses and members of the public. In these instances, Keynesian economics dictates that government spending should (for a time) take the place of private investment. Keynes himself referred to this as ‘priming the pump’, an injection of capital into the economy to get things moving again. This can be observed both in the banking bail-outs, and in the increase in welfare payments to support those left out of work as a result of the financial crash.

What might make sense for a household could, for the government, deepen a recession. When times are hard households tend to tighten their belts – reducing their spending and borrowing. But if everyone does this at the same time, the effect is counterproductive: total demand for goods and services falls, which makes it harder for businesses and individuals to generate an income, and everyone ends up worse off. This is exactly what is happening now, which is why it is essential for the government to compensate for households’ reluctance to spend and invest.

Countering the Cuts Myths – Red Pepper

These were all lessons learned after the financial crash of the 1920s, and became the prevailing ideology right up until the birth of neoliberalism in the 1980s, which came to dominate following the elections of Thatcher and Regan.

Some vague form of Keynesian economics has been initially utilised to cope with the crash, both in Britain and in the US, although as we’re all now aware, this government support is coming to an end in the form of austerity, and coalition decisions will shortly begin to cause us some serious social and economic problems. This is where the issue of blame comes in, and why it is so damaging when it is used as a justification for cutting public services.

I’d now like to address the following question: where do charges that the Labour Party are solely to blame for the debt crisis originate from? Labour is accused of raising the level of public spending to unmanageable levels, and whilst this is correct to some extent, spending was raised from what were historically low levels by the end of John Major’s stint in Number 10. However, there are three reasons why public spending rose under the Labour leadership. Firstly, when Labour came to power they did invest in worthy projects such as school refurbishment and addressing funding shortages within the NHS. Secondly – and far more importantly – the banking bail outs caused an unavoidable rise in welfare spending to support those finding themselves worse off (on lower wages, or unemployed) after the crisis. Finally, the collapse in tax revenue, also as a result of the financial meltdown, has resulted in there being less cash available to the government, plunging us further into debt. It’s certainly arguable that the last two events would have occurred regardless of who was in power.

So the coalition government is correct in their assertion that public spending rose under Labour, this however does not equate to blame for the deficit. The financial crisis was caused largely as a result of financial deregulation, which began in the 1980s under the Neoliberalism of Thatcher and Regan, and (now here’s where Labour take their own share of the blame) continued under Tony Blair.

The financial markets (particularly in the US) suddenly found themselves with free reign over their business practices, and began to offer mortgages to ‘sub-prime’ members of the public in a deeply irresponsible manner. According to US journalist Danny Schechter in his film ‘Plunder: The Crime of Our Time’, one US mortgage lender even had a policy available with the internal acronym of NINJA, which stood for ‘No Income, No Job or Assets‘. These mortgages were bundled up and sold to unsuspecting financial institutions around the world, who had no idea whatsoever of just how worthless their investments were, and once these homeowners began to default on their payments, the entire house of cards came tumbling down.

Meanwhile, hedge fund managers, who did know just how worthless these mortgage bundles were, began to bet against them, raking in huge profits in the process, as investors cash was wiped out, homeowners found themselves evicted and banks worldwide were brought to the brink of collapse, saved only by massive government bail-outs. In the UK, the cost of these bail-outs reached over £850bn, and neither Cameron nor Clegg have stated that the bail-outs could have been avoided, or that Labour were in any way wrong in their decision to push the country into massive debt by saving the banks.

So whereabouts specifically does the Labour party’s public spending come into this as a justification for austerity? The short answer is, it doesn’t. It simply represents a convenient excuse to push through an ideology of smaller government, and even less regulation. It’s what author Naomi Klein called Shock Therapy: exploiting a perceived crisis in order to push through unpopular policies which would otherwise have been unacceptable to the general public.

So this austerity isn’t economically necessary; it is economically disastrous. The country that followed the Osborne script most closely – Ireland – just had the worst collapse of any industrialised country since the Second World War. So why are the Conservatives doing it? It seems to stem from a combination of ideological zeal and disconnection from the reality of ordinary British people’s lives.

Johann Hari – Austerity

For you and I, austerity means slashing council budgets, reducing welfare spending, cutting public sector employment, closure of community centres and libraries, shrinking NHS funding, the end of EMA and the raising of tuition fees. It also means that the threat of further privatization of public services (such as the Post Office and the NHS) looms larger and larger. The well respected Institute for Fiscal Studies (IFS) clearly states that the cuts are unfair, regressive, and hit the poorest in society hardest. Nobel prize-winning economists such as Paul Krugman and Joseph Stiglitz also argue that austerity will not work in the UK, and that the lessons of the past have been forgotten by Osbourne and Co.

Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

Paul Krugman – British Fashion Fictims

So where do we go from here? The tuition-fees protests, along with those of UK Uncut have shown that issues can be brought to the forefront of political debate through protest and direct action, and the Trade Unions are already discussing how 2011 will see a ‘surge in strike action’ as ordinary members of the public begin to feel the effects of cuts to essential services. Its also clear that alternatives to austerity are available, but are so-far being ignored by those in power.

So, whilst those in the City who created the financial crisis continue to claim massive bonuses, many predict a backlash just as virulent as the one which followed the introduction of the poll tax back in the 1980’s. One thing is for certain, 2011 is going to be a decisive year for the coalition.

6 Responses to Austerity Politics & Blaming Labour

  1. […] certainly made it clear that they’re not going to accept lying-down an ideologically-driven austerity agenda which will endanger employment prospects, health and social mobility for people across the UK. A […]

  2. […] editors asserting that we’re in this mess because of runaway public spending? There are some dissenters, but in mainstream media and political discourse, the re-writing of history is almost […]

  3. 28 Weeks Later… : JonathanDavis.me.uk on June 29, 2011 at 1:04 pm

    […] Austerity Politics & Blaming Labour – In this article I spoke of the trend towards blaming Labour party spending for the fiscal deficit, whilst overlooking the massive problems caused by the banking crisis. It looked at austerity politics and discussed whether this could eventually cause more harm than good during a period of recovery. […]

  4. […] editors asserting that we’re in this mess because of runaway public spending? There are some dissenters, but in mainstream media and political discourse, the re-writing of history is almost […]

  5. […] other words, the Republican Party is adopting the austerity mentality which is bankrupting Europe as we […]

  6. […] other words, the Republican Party is adopting the austerity mentality which is bankrupting Europe as we […]

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