The Conservatives’ ‘Charter for Budget Responsibility’ will stipulate that future governments must follow a budget surplus, but what are the ramifications of this?
Well, let’s start with the basics. The Conservatives, since they entered power in 2010, have mandated that they will cut the budget deficit (generated by increased borrowing both before, and particularly during the 2009 recession). They said it would be wiped out by now – but that hasn’t happened. In fact, far from it, we’re still running a significant budget deficit. And while no one is disputing that the budget deficit needs to be cut, to end up with a budget surplus is an incredibly difficult thing to do, even when the economy is growing.
Indeed, the new Charter will apply under ‘normal economic times’, when the economic growth is above 1% a year. Yet this will place spectacular constraints on any new government – economic growth is not the sole indicator of economic health, and shouldn’t be used as the sole determinant to apply the Charter.
We also have unemployment to factor in, which, while dropping at the moment, tells us nothing about where people are gaining employment – whether it’s mostly in low-paid work (primarily zero-hours contracts), in which case using unemployment as a barometer for economic health is almost irrelevant; or whether new employees are being paid well and contributing their disposable income to the economy via tax and consumption. We also have productivity, which has slipped in recent years in the manufacturing sector, despite our reasonably robust economic growth. Economic growth figures are useful, but cannot be used in isolation. And, as if attempting to manufacture a budget surplus was proving tough enough with growth figures above 2% as they are currently, if growth figures were closer to 1%, such a Charter would cause problems.
This is mainly because of the way the budget surplus is going to be achieved – by hacking the public sector to pieces, and restricting the size of the state to 35% of GDP. This will involve widespread cuts, from foreign aid to, particularly welfare, with young people being targeted particularly with the cessation of Housing Benefits and maintenance loans. It is basically austerity. But austerity is economically useless – it is nothing more than an outdated political construct, an excuse to increase inequality.
If the economy was the neck of a body, austerity would be the hands strangling it.
It constrains growth, in some cases reduces efficiency, and places more public services in private hands (mass privatisation like what the NHS appears to be at risk from). It paints a worrying picture, and it shows why the Conservatives cannot be regarded a bastion of economic responsibility. We could, very easily, have plunged into a recession at the start of this decade, when growth was sluggish, even despite base interest rates being at rock bottom (in a last-ditch attempt to boost consumer spending). We didn’t and the economy grew in spite of them (and not because of them), giving the erroneous belief that austerity was working, when it was not. Economists would appear to agree that austerity is not the way to grow an economy; simple Keynesian economics would appear to back this up. Ben Bernanke spoke about similar fiscal cuts occurring in the US saying it “would only slow the recovery without solving the longer-run problem.” The same applies here, which is why there should be a stand against such a Charter – and besides, is it not concerning that we have to bind governments by this Charter when they should be expected to spend our country’s finances responsibly anyway?
Labour wouldn’t appear to think so, and the way they’ve dealt with the Charter has been disappointing and confusing. Why would John McDonnell decide to agree with the Charter, and then perform a convenient U-turn to oppose it? It would appear Labour had momentarily forgotten their own repositioning as an anti-austerity party – while, at least the SNP (and Lib Dems, although they were, too, involved in the implementation of slapdash cuts while in coalition) have shown some consistency on the matter. And while I’m all for the party compromising on the economy – which they will need to do surely, regarding planned renationalisation of railways and energy sectors, which may be perceived as a backward step in the 80s – compromising is not the same as plain uncertainty. Such a U-turn will not do anything to repair the perception of Labour being indecisive and untrustworthy with the economy, nor will it do anything to repair the frictions developing in the party.
So, to the left, we have a party in flux and transition who don’t really seem to know what’s best for them or the economy – and on the right, we have a party blinkered by believing their own hype about their “economic recovery”, who are now dictating terms for future governments. The economic future will remain grey unless a good dose of common sense is applied – and that means scrapping this Charter and leaving governments to have free rein on how to handle the economy.
You’d think, after how exposed our economy was after the credit crunch in 2008, that we would have learnt a brutal lesson about spending responsibly and purposefully. We don’t need a Charter for that.