The pre-budget report announced by chancellor Alistair Darling on Monday of this week was trailed by days of media speculation about its contents. It was widely seen to represent the government’s definitive statement on how to tackle the economic crisis.
The reaction to the report was no less muted. The Tories and the right wing press have attacked the government for allegedly reverting to its “Old Labour” tax-and-spend instincts in its pre-budget report.
Liberal commentators, in contrast, have hailed the budget as a breakthrough. It’s certainly true that Darling’s plans have chucked out a whole series of former “golden rules”.
A year ago it would have been inconceivable for New Labour to propose raising income tax for the wealthy or ripping up its public spending limits.
The reason for the change of heart is the global economic crisis that threatens to plunge the globe into a recession on the scale of that of the 1930s.
This crisis will hit Britain particularly badly, since financial services play such a large role in the country’s economy.
The government’s big fear is that the “credit crunch” could trigger a catastrophic cycle of businesses going bust, companies sacking their workers, homes being repossessed and goods lying unsold on the shelves.
We are already seeing the panic over credit spreading outside the City limits. What started as a freeze on banks lending to each other has now become a freeze on banks lending to businesses across the wider economy.
Alistair Darling’s proposed answer to this is a “fiscal stimulus”. The idea is that lower taxes and increased public spending can put “cash in people’s pockets”, encouraging them to spend money on consumer goods, which will then lubricate the system.
The VAT cut is designed to do this – though Darling’s plans rely on retailers passing on their tax savings to the consumer, rather than pocketing them in the form of higher profits for their shareholders.
We have already seen how banks and other mortgage lenders have been very reluctant to pass on interest rate cuts to home owners that have borrowed money from them.
More seriously, Darling’s plans assume that the recession will be a “short, sharp shock” and that the British economy will start to recover in 2010.
These assumptions are based on the same kind of projections that miserably failed to predict the current crisis.
Most economists think the crisis will be much deeper and longer than the government believes. And if this is the case, the government will be faced with further problems.
Its current proposals go nowhere near the kind of intervention necessary to save jobs and homes.
It could cut taxes and increase spending even further. But this would mean facing down the right wing of the ruling class, which is already up in arms at the relatively mild transgressions of its neoliberal dogma.
We need to fight to ensure that Labour does not buckle under this pressure.
But we also need to fight for a different response from the government – one that places the interests of ordinary people above those of the privateers and profit-hunters.