Labour’s new leadership is getting tied up in knots over the deficit.
MPs voted last week on Tory chancellor George Osborne’s fiscal charter. He says it will force governments to maintain a budget surplus even in “normal times” from 2019.
This means the government will never be allowed to run a deficit—to spend more money in a year than it gets through taxes.
Osborne and the Tories have used getting rid of the deficit to justify austerity.
Though no amount of austerity has stopped him missing all his made-up deficit targets.
Labour shadow chancellor John McDonnell had initially said he would back the charter. But in the end he rightly whipped Labour MPs to oppose it.
McDonnell has a strong record of fighting austerity—even from his own party.
Yet he insists he is not a “deficit denier” and that Labour is still committed to getting rid of the deficit.
So why is the deficit so important?
Politicians talk about “living within our means” to make it sound like common sense. But the government’s finances are nothing like those of an individual or household.
Governments with a deficit make up the shortfall by selling bonds to bankers and financial traders. The government promises to buy them back in the future. Until then it pays interest.
In times of crisis, when governments most need to sell bonds, investors don’t trust them to pay them back—so they demand more interest.
Governments face pressure to impose austerity and prove they can pay their debts.
This is blackmail by the bankers—and it suits those politicians who want an excuse to slash public services and welfare.
Most governments run a deficit much of the time. Britain only had a surplus in seven of the 40 years since 1975. Britain’s debt was much higher after the Second World War than it is now. That was only fully paid back in 2006.
The government hadn’t cut spending to deal with it.
The deficit only became a problem when the government’s debt shot up after the financial crash of 2008. It spent £850 billion bailing out the banks.
That crisis had nothing to do with too much public spending. And the day after it there weren’t suddenly fewer resources in the world, or fewer workers who can turn them into useful goods and services.
So McDonnell is right to refuse to sign up to austerity.
He wants to get rid of the deficit by cutting subsidies to landlords and big businesses, clamping down on tax avoidance and investing to create jobs.
It’s hugely encouraging to hear a shadow chancellor talk about making the rich pay.
But Labour is also trying to prove it is “responsible” enough to manage the system, and that’s where its new left wing leadership has come unstuck.
The crash was caused by capitalism’s long term crisis of profitability. Capitalists invest in new technology to get ahead of their rivals. But since all profits come from exploiting workers, this pulls their profit rate down.
So bosses try and boost profitability again by sqeezing workers. This can mean cutting wages, or sacking some workers to squeeze more out of the rest.
So for the bosses, the only responsible thing is to attack workers through austerity.
The pressure to eliminate the deficit is their weapon for enforcing those attacks.
It is not a problem workers need to solve.