No general election would be complete without the Tories denouncing Labour for its irresponsible fiscal plans. The classic example was the 1992 campaign, when John Major’s team first warned against “Labour’s Tax Bombshell”, soon to be followed by “Labour’s Double Whammy—1. More Taxes, 2. Higher Prices.”
So it’s no surprise that the Tories last weekend produced a document called The Real Cost of a Labour Government estimating that if Jeremy Corbyn becomes prime minister, public spending will increase by £1 trillion over the next five years. Shadow chancellor John McDonnell was right to denounce this as a “ludicrous piece of Tory fake news”.
So far so predictable. What’s more interesting is that, whereas the attacks in 1992 forced Labour under Neil Kinnock onto the defensive, this time arguably it’s Labour that is making the weather on public spending.
Last Thursday McDonnell announced that a Labour government would increase its 2017 pledge to borrow £250 billion over ten years for a “national transformation fund” to £400 billion. Some £150 billion will go on a new social transformation fund for schools, hospitals, care homes and council houses and £250 billion on a green transformation fund dedicated to upgrading energy and transport networks to meet its target of a net zero-carbon economy by 2030.
McDonnell said this investment will aim to achieve an “an irreversible shift in the balance of power and wealth in favour of working people”—a phrase written by Tony Benn in Labour’s 1974 election manifesto at a highpoint of the power of the Labour left.
Tory chancellor Sajid Javid has denounced Labour’s policy as “fantasy economics”, but he too has revised the government’s fiscal rules to allow £22 billion net public sector investment a year. The Resolution Foundation thinktank estimates that both Labour and Tory spending plans would bring public expenditure to around the 42 percent share of national income that prevailed between 1966 and 1984, before the full triumph of neoliberalism.
Why has the mood music on public spending changed so dramatically? It’s too simple just to say it’s election time, when politicians promise the moon. One of the main purposes of neoliberalism was to discipline politicians.
Kinnock’s defeat in 1992 made Tony Blair and Gordon Brown renounce what they called “tax-and-spend policies”.
There are two deeper reasons for this shift. The first is widespread popular weariness with austerity. Boris Johnson and his political fixer Dominic Cummings know Corbyn successfully tapped this mood in 2017.
Apparently Cummings is angry with Javid because his new fiscal rules commit the government to balancing the budget within three years, which limits the Tories’ ability to cut taxes or increase spending.
Secondly, the bigger picture is that the major economies are stagnating. Despite all the efforts of central banks to raise them, interest rates are stuck at the rock bottom levels they were cut to after the financial crash a decade ago.
This means that borrowing to finance public sector investment is cheap and can help stimulate economic growth. Even the high priests of austerity in the eurozone are under pressure to borrow and spend more—for example, to upgrade Germany’s crumbling infrastructure. From this perspective what McDonnell is proposing looks like common sense, not fantasy.
This doesn’t mean it would all be plain sailing if Labour does form the next government. As Javid’s resistance to the pressure from 10 Downing Street to open the spending taps shows, a significant section of the ruling class remains wedded to the old neoliberal orthodoxy.
This is true at the international level as well. The ratings agency Moody’s and the big bond dealer Pimco both made warning noises last week about Britain’s financial position.
If Labour does win the election, these noises will near crescendo. The Tories always get more leeway than Labour from the financial markets. The Economist magazine is already warning big business not to welcome a Labour government just because it would stop a hard Brexit.
In office, Corbyn and McDonnell will need more than common sense to navigate the storm awaiting them.