John McFall on why it’s time for Osborne to ditch the cruel hoax of austerity politics
In his manifesto defining Mais Lecture of Feb 2010, before he became Chancellor, George Osborne clearly laid out what he termed a new approach to macroeconomic policy as well as financial policy.
He asserted that economic theory and evidence both suggested that the macroeconomic policy combination most likely to encourage recovery is tight fiscal policy.
Austerity politics was the name both Osborne and the Prime Minister were keen to promote for this experiment. Over three years later the empirical evidence points firmly to the massive failure of this approach. Among other failures, the casualty list encompasses increasing unemployment (particularly youth levels of one million), ballooning child poverty and zero growth in the economy.
As incoming Chancellor, Osborne inherited an economy growing by 2.6% in the third quarter of 2009 to the 3rd quarter of 2010. Today, we see that by the thinnest of margins, we’ve avoided a triple dip recession. But it doesn’t take away from the fact that overall growth since the General Election has been barely above zero – 0.006% per quarter.
Now, even the markets have turned against Osborne’s austerity policy. This week Bill Gross, Pimco manager of the world’s largest bond fund – at almost $300 trillion – was crystal clear in concluding that fiscal austerity in the short term was not the way to produce real growth. “You’ve got to spend money!” he declared, adding that it was a mistake to think bond markets wanted governments to adopt severe fiscal belt-tightening.
Having sacrificed growth on the altar of despair for the past three years, waiting for nature to take its course, the task for Osborne and Cameron is to urgently rebuild confidence in the country. A message of austerity, devoid of hope, was never going to convince an electorate – whether here or anywhere in Europe – that government is on their side.
The case for optimism has to be made.
I have just seen Ken Loach’s film, The Spirit of ’45. In the most appalling economic and desperate human circumstances at the end of the Second World War (when, incidentally, debt as a percentage of GDP was almost 250%), Attlee’s Labour government turned dreams into reality for many millions of impoverished individuals and families. Today, with debt at over 70% to GDP levels, as a result of the financial crisis, why can’t we embrace even a modicum of the hope and spirit of 1945?
Remember, on the eve of the financial crisis in 2007, UK net public debt at 36% was close to its lowest ratio to GDP in the past 300 years. In addition, public spending as a percentage of GDP by the Labour government of 1997-2010 was 39.7% while for the Conservative government of 1979-1997 it was greater at 43.3%. These are powerful statistics to fight the myth that spending with Labour was out of control. So making the case for ambitious yet necessary initiatives is important.
With interest rates and the cost of government borrowing is at rock bottom, now is the time to invest in our infrastructure to make it fit for purpose for the twenty first century.
For the past four or so years, I have been calling for a Business Investment Bank. A state-backed Enterprise Bank would fill the current equity gap and offer longer lengths of repayment to viable businesses which will help SMEs starved of funding due to the short-termism of private sector lending.
Why don’t we replicate the astounding success of the then Labour government when it established the Open University (of which I am a proud graduate) in 1969? A twenty first century successor could be a UK wide Digital University, underpinned by super-fast broadband and smart grids. In the longer term this would do more for social inclusion and help combat the rising tide of income inequality than all initiatives to date. In fact, let’s think really big by having as an objective all university learning material on the net. That way, irrespective of income or status, one can enter through the digital gates of our finest institutions from the privacy of one’s own home or dwelling.
It is always the case that the future never has a big enough constituency. Those fighting for present gain almost always win out. At a time when the social contract in society is broken – when once everyone was receiving a share of the prosperity pie, sadly many millions will be experiencing no gain and considerable pain for the foreseeable future.
In politics we are acutely aware that time and the world do not stand still – change is the law of life. As John F Kennedy observed, those who look only to the past or the present are certain to miss the future.
By ditching the cruel hoax of austerity politics – a hoax because it doesn’t work and cruel because it hurts those who are already hurt the most – we can make a start on ensuring that we don’t miss out on the future.
Lord John McFall of Alcluith is a member of the Joint Parliamentary Commission on Banking Standards and a backbench Labour Peer in the Lords
Published 25th April 2013