Brian Easton wonders why the British Labour Government is penalising its poor

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

We have the spectacle of the Starmer-led British Labour Government taking measures which are making some of the most struggling Brits worse off. It has got to the point where Labour’s parliamentary backbench is revolting and the government has had to make partial concessions – the latest is a backdown over cutting disability and sickness benefits. It’s hard not to see Keir Starmer and Chancellor of the Exchequer, Rachel Reeves, practising fiscal austerity.

The underlying reason is that the British economy is stagnating. Since the 2008 Global Financial Crisis there has been no real growth in British per capita GDP. The economy is producing a quarter less than it would have if the pre-GFC trend had continued. (There are other affluent economies which are similar, so it is not just Brexit.)

You may think that if per capita GDP is flat, then things are not getting any worse, and ask why some people have to be made worse off. Leave aside that when there is an average of zero economic growth there are many people whose income is decreasing (offset by those whose incomes are increasing); averages can be misleading.

As this column has had occasion to point out, when focusing on the average, output (income) is not the same as wellbeing, nor does an increase in output necessarily mean progress. Indeed some rise in output may be associated with making things worse.

The most recent example was how smartphones – which have added to GDP – seem to have made adolescents worse off. Once young adults reported themselves happier than mid-age adults and about the same as the elderly. It was described as the ‘U Curve’ of wellbeing by age but today’s generation say that on average they are more miserable than all those older – happiness increases with age. The youth’s state may not be economically induced – we do not have the research evidence although one can think of causal processes – but it illustrates how ‘progress’ may not be progress. This is but an example. Do be cautious about equating GDP growth with social progress.

Additionally in Britain, and for much of the West, there are plans to increase military spending – mainly as a result of Russian aggression but not helped by Trump or Netanyahu. The output may increase national security but I doubt that people think it adds to their personal wellbeing. However, it diverts public spending from activities that they think will do so.

A further ongoing issue is that during a period of fiscal austerity some measures are delayed – in New Zealand we have held back on building public infrastructure – and the consequences of the failure eventfully catch up, adding to the fiscal pressures.

The British fiscal position is gloomy. Currently the budget deficit is about 5 percent of GDP while the public debt-to-annual GDP ratio is near 100 percent. While these figures may be defined slightly differently from New Zealand’s, they are certainly higher than ours. So the economy has little room for a boost in private and public spending. What to do?

The easy option is to talk about boosting sustainable economic growth, but despite the clamour of (conflicting) policy proposals, few are based on evidence or even explain the current long-term stagnation (and, to be honest, I am puzzled too). Even those policies which might boost growth will do so sometime in the future (when the current proponents are no longer in power).

Why not borrow more? This would amount to future generations paying for current consumption (and might explain why young adults are so melancholy). But most countries are nearing their public borrowing limits, in that lenders are becoming increasingly reluctant to hold more government debt. In a curious way (and presumably unintentionally), lenders are guarding the interests of future generations (although not out of benevolence). *

Britain’s independent Office for Budget Responsibility has warned that British public finances are in a relatively vulnerable position, with pension costs, climate change and volatile bond markets all posing significant risks. It observed that the UK has ‘the sixth-highest debt, fifth-highest deficit and third-highest borrowing costs among 36 advanced economies’. There is not a lot of room for fiscal manoeuvre, so Reeves has had to restrain or cut national expenditure.

That need not be public expenditure. Private expenditure could bear the burden by raising tax levels. Thus far, Reeves has been unwilling to do so in a major way, although she introduces increases where she thinks she can get away with it. (Jacinda Ardern ruled out her government raising tax rates, thereby drastically limiting Labour’s ability to implement the policies its supporters wanted including reducing inequality and child poverty. Nevertheless, desperate for revenue, her Minister of Finance, Grant Robertson, inched in new taxes whenever he could get away with it.)

I am not sure why Reeves and Starmer are so loath to raise tax levels other than the usual one that taxpayers don’t like them (but they don’t like the alternative policies of inadequate public services either). In New Zealand there are also vociferous neo-liberal lobbies which are opposed to any increases in taxation and therefore, being good fiscal conservatives, support cutting government spending. (Some of their work identifying shoddy government spending is to be applauded. They should be on select committees.)

So a Cabinet has to make choices. Think of it having a list ranging from the unavoidable (say, in the British case, increased military spending) to the nice-to-have, each accurately costed. (Actually they don’t; this is a simplification.) The list will include possible public spending cuts with financial gains. Tot up how much money there is to spend, go down the list until it is all spent, and cut off all those below it. It is not as simple as that but it illustrates the spirit of the exercise.

There will be divisions within cabinet. The amount of consultation outside will vary both directly with caucus and indirectly by budget leaks. The 1958 Black Budget was notorious for there being little consultation; the following Holyoake Government had very full consultation with its caucus. That would be difficult given the British Labour caucus totals more than 400 MPs.

Whatever the extent of the consultation, over 100 members of the caucus threatened to vote against some of the recent measures. The Starmer-Reeves Government made concessions. (There had been earlier upwellings but the Labour Government did not pay them enough attention.)

I’ve laboured through this process – even then it has been simplified – because the nature of the resistance is similar to what commonly happens here. The criticism was about a particular policy but there was no attention given to the underlying cause of fiscal restraint and no mention of how any alternative policy was to be funded. It was likely that the Labour cabinet was not enthusiastic about the cuts. They just had higher priorities on their list – healthcare would have been one (and the dissenters would have been just as unhappy had some healthcare programs been cut).

The economist who sees tradeoffs – there is no such thing as a free lunch – finds such public debates uncomfortable. There are almost overwhelming demands for the government to spend more (or to cut taxes so the private sector can spend more) but the constraints it faces are typically ignored or vague. Curiously, the ‘left’ tends to be more precise, with more specific proposals to raise taxes to fund their spending demands; the right tends to be vaguer about what public spending should be reduced to pay for their demanded tax cuts. Both drift towards taxing future generations – that is, borrowing.

The Starmer-Reeves Government plans to fund the concessions they made to their revolting caucus have been deferred to the end of the year. The hints are that there may be a tax increase. It is not easy governing in times of stagnation – being in Opposition is almost better and certainly easier.

* There is a crude Keynesianism that governments are borrowing from their public and have almost unlimited borrowing power. It would be tiresome to detail all it faults – Keynes would have been appalled; he spent a lot of effort negotiating US loans for Britain – but a key one is that countries are open to the world and are borrowing directly or indirectly offshore.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.