Dismissing Jeremy Corbyn’s economic proposals has become a media sport, but given that the Tories have their alligiances, maybe we should pay attention
According to the mainstream media, Jeremy Corbyn’s victory has already confirmed Labour’s defeat in 2020 as it is a blatant rejection of ‘economic credibility’. Yet is this the case? Since the financial crisis of 2008 the Tories have led the debate on economics and their success in the 2015 election appears to be an acceptance of austerity. Yet are the Tories synonymous with economic competence? Are people really willing to endure austerity? In this post I wish to explore a little of Britain’s economic history and the truth behind Corbyn’s economic policy or ‘Corbynomics’.
The truth behind Labour’s spending
Since the financial crisis, the majority of people have accepted that the Tories are better at managing the economy; tackling the government’s deficit; and helping people get onto the housing ladder. This is because of the Tory argument that Labour had overspent in the run-up to the financial crisis. This is illustrated through an ICM poll taken after a Question Time debate in which Ed Miliband stated that Labour did not overspend. Due to his defence of Labour’s spending policy, opinion polls reflected negatively on him; Cameron gained 44 per cent whilst Miliband gained only 38 per cent. This raises the important question: Did Labour overspend?
Firstly, it is important to recognise that the financial crisis was not caused by Labour overspending but rather because of the lack of banking regulations. This view is supported by several leading economists such as William Keegan and Sir Nicholas Macpherson, Permanent Secretary to the Treasury, who has admitted that it was ‘a banking crisis pure and simple’. In fuller words he states:
As you can see the criticism that Labour’s reckless spending is to blame for the economic crisis, simply does not hold up.
Secondly, the Conservatives’ attack on Labour’s spending is hypocritical as prior to the financial crash the Tories had committed to matching Labour’s spending.
Yet, after the financial crash the Tories completely reversed this policy and blamed the collapse not on the banking regulations but rather on Labour’s reckless spending. What is remarkable about this is the fact that this line actually stuck! People no longer credited Labour with economic credibility and instead turned towards the Conservatives ignoring the fact that they were committed to the same spending plan.
Lastly, Labour’s spending had actually worked in improving not only our infrastructure but our economy! According to the LSE’s definitive survey of the Blair/Brown years, ‘There is clear evidence that public spending worked’. Labour had inherited ‘a large deficit and high public sector debt’ yet until 2007 Labour was able to reduce national debt to levels lower than when it had entered into office. Spending was primarily dedicated to improving services – hiring doctors and nurses, more and better qualified teachers, rebuilding leaking schools and aged hospitals, free nurseries and 3,500 Sure Start centres. Due to this spending there was a marked improvement in these services. This can especially be seen through education, where the numbers of those with five good GCSEs rose from 45 per cent to 76 per cent. This helped to narrow the gap between social classes. Yet, despite this marked success the Tories were able to blame Labour for the financial crisis and gain office in 2010.
Osborneomics and the failure of austerity
The 2010 election allowed the Tories into office and allowed them to implement a policy of austerity. Increasingly, the public began to adopt the view that the way we run our economy is similar to that of a household, ‘we must spend within our limits’. Yet, Yanis Varoufakis, former Finance Minister of Greece, dismantles this approach by stating that one cannot view our economy in the same way that we view a household. ‘When you cut down on your household expenditures, your income is not cut […] If a country as a whole went on a major saving spree then its total income will come down’. He further continues this argument by stating that: ‘Austerity is being used as a cover story for class war against the poor’. If we examine Osborne’s current policy we can see that this is the case. Tax credits are being cut whilst corporation tax is being lowered; tuition grants are replaced with loans whilst the inheritance threshold is lowered; and now there are proposals to cut junior doctors’ pay by 30 per cent and increase their working hours whilst the top rate of tax is reduced. Needless to say, it is clear that these policies help the rich, disadvantage the poor, and reinforce a social hierarchy.
Despite this, there are those that will argue that these costs are necessary for economic growth. Yet the claims of economic success made by the Conservatives are indeed questionable. Professor Simon Wren-Lewis of Oxford University states:
This is illustrated by the graph below which shows the GDP per head through economic recoveries from the 1830s to today.
Furthermore it is important to state:
- Osborne has increased our national debt more than Labour had over 13 years.
- Between the 1st of April 2014 to the 31st of March 2015 1,084,604 people were reliant upon food banks.
- Britain’s productivity level, as measured by output per hour from UK workers in 2014, fell to 20 percentage points below the average of other leading industrialised nations.
Thus in light of these facts, one must question whether Osborne’s policy really works.
Red Ed’s defeat! The policy of Austerity-Lite
This leads me neatly to discuss Ed Miliband and how his policies were portrayed by the Conservatives as too radically left. In truth this was certainly not the case as what he proposed was essentially a lighter version of austerity.
In fact Ed Miliband had agreed to a ‘budget responsibility lock’ which committed him to cutting the deficit every year and ensured he will not make spending promises which could only be afforded by borrowing. Yet at the same time, he promised to raise the minimum wage, boost childcare, freeze gas and electricity bills until 2017, and a slew of other promises. The issue came with the rejection of the Institute of Fiscal Studies report which warned that debt will increase under Labour and gave the idea that he would raise taxes. This cast doubts over his economic credibility as voters felt that his promises were a lie.
Yet, whilst economic credibility appeared to be an issue for Labour the biggest issue was personality. Most Labour voters felt that it was Ed Miliband himself rather than the policies that let them down. In actuality, many of the policies he proposed the Conservatives took and ran with.
- Osborne didn’t abolish non-dom status but ensured an increase in the tax they pay on their worldwide income, and insisted they pay income on UK property.
- Osborne is also committed to spending £83.3 billion more as part of departmental spending by the end of Parliament, which is more than he indicated in his March Budget.
- Osborne has also imposed a special tax on businesses to fund 3 million apprenticeships.
These ideas are all great but they derive from Labour’s proposals which were said to be too radical. Clearly, the issue was less about policy and more about image. This is where the Tories thrived and their attack ads succeeded in depicting Labour as incompetent, especially in the pockets of the SNP, or as chaotic. This smear campaign, used to defame Ed Miliband, is now being applied to criticise Jeremy Corbyn and to great effect. Much like Ed Miliband, Jeremy Corbyn is being depicted as a threat to our unity and security.
Corbynomics: Too radical to be credible?
The term ‘security’ has been thrown around on multiple occasions to discredit Corbyn and present him as a dangerous option for Prime Minister. Yet is this the case? Just how radical is Corbynomics? And is it workable?
It is important to note that these are still early days and thus it is difficult to pin down what Corbynomics exactly is. Certainly, much is still in their air and will likely change over the five years leading up to the next election, however, some ideas have already been propelled forwards. The main ideas I will focus on are: ending austerity, tackling tax evasion and avoidance, People’s Quantitative Easing, and lastly, renationalising certain key industries.
National Investment Bank
Many economists maintain that austerity has acted as a straitjacket preventing economic growth. As illustrated above, Britain’s productivity is poor and is the 7th lowest amongst the 26 countries tracked by Eurostat, and it is lower now than during the financial crisis. Corbyn’s solution to make up the lack in productivity is to establish a ‘national investment bank’ that would invest in infrastructure and hopefully boost productivity.
The Economist is rightly sceptical of how Corbyn would fund this. They illustrate that he will not be able to gain the £93 billion a year through cutting ‘reliefs and subsidies on offer to the corporate sector’, nor will he be able to gain £120 billion by clamping down on tax evasion. Yet, I would not be so quick to dismiss this idea. Smart spending can increase productivity and improve the economy as it had done under the Blair years. This is backed by the Institute for Public Policy Research which argued for a British Investment Bank (BIB) back in September 2012. They draw various case studies such as the Kreditanstalt für Wiederaufbau (KfW), The US Small Business Administration (SBA), and Brazilian Development Bank. In short, their report illustrates that a BIB could provide the investment desperately needed for infrastructure. Osborne has tried to stimulate growth through the British Business Bank but as the New Statesman explains, this is too modest to make a significant difference and a fully-fledged BIB is needed.
People’s Quantitative Easing
The ‘People’s Quantitative Easing proposal’ is also intriguing and is designed to work in conjunction with a National Investment Bank. Critics such as Robert Peston and the Economist, maintain that such a policy could lead to hyperinflation like that of Germany in 1923 and Zimbabwe. On the other hand, supporters such as Michael Meacher and David Blanchflower state that PQE could provide stimulation in the economy which is desperately needed. PQE in theory works in the same manner as QE which was implemented by the Bank of England in 2009. Essentially when interest rates are low, the Bank of England creates money to buy bonds and stimulate growth through more businesses and people borrowing, and by spending more. When done in 2009 the Bank of England bought £375 billion of assets with the intention of channelling those billions into the economy. This led to growth in the UK’s annual economic output by between 1.5 – 2 per cent.
Corbyn’s proposal states that instead of giving to the finance sector, as was done before, these investments will be made into infrastructure, thereby improving productivity. In fact this should be far more effective, as rather than it trickling down from above, money is injected directly into infrastructure projects which people can feel the effects of.
There are two core arguments for implementing PQE. The first states that the share of private investment in GDP is still below its pre-crash level of around 11 per cent. This suggests that investors lack confidence in growth which could lead to stagnation. The second argument states that, a state-led investment programme offers a way to rebalance the British economy away from private speculative activity. In either case whilst Quantative Easing can produce economic growth it must be controlled and requires a considerable degree of skill. It has its risks but makes sense in theory. Ardent supporters of PQE would still have it to ‘kick-start’ the economy.
With regards to tax evasion the Economist is sceptical of Corbyn’s plans, stating that the £120 billion figure drawn from Tax Research UK is dubious and that the HMRC estimate was only £34 billion. Clearly there is a great disparity between these figures; however, I would hesitate before accepting the Economist’s stance that little more can be done and that tax evasion is only £34 billion.
It is important to note that the Tax Research Report defines the tax gap as comprised of three factors: tax debt, tax avoidance, and tax evasion. The report points to the trend of HMRC to simply write off huge amounts of tax debt as irrecoverable or just abandoning it. Furthermore, whilst tax evasion has gone down, this is largely due to the drop in the level of corporation tax: there is less tax to pay and thus less tax to avoid.
The Economist is right in stating that the report is vague on how we can tackle the tax gap and of course we cannot stop tax evasion fully. Nevertheless, that does not mean nothing should be done or that we cannot gain more. Whilst the Conservatives talk a great deal about cracking down on tax evasion, this is not the reality. There is an eerie connection between the Conservatives and the wealthy elite, which cannot be ignored. This may be seen through Cameron’s membership in the Bullingdon Club, through his policies of lowering corporation tax and expanding the House of Lords, and even his appointed Business Advisory Group which includes the heads of multinational corporations that are infamous for their tax evasion. With this in mind, I find it difficult to accept that the tax gap is as low as it can be and that the Conservatives are making a concerted effort to tackle this issue.
Lastly, one of Corbyn’s most popular economic policies is renationalising key industries such as the railway. This may be seen through YouGov’s polling data:
The case for renationalising industries such as the railways may be evidenced by the success of the publically run East Coast mainline, which is claimed to have been the cheapest franchise to run for the past five years, producing greater returns for the taxpayers and not the shareholders. The main criticism of this plan to renationalise key industries is the cost. Yet, it is worth noting that Corbyn’s plans propose a long and calculated payment scheme which would make the process more affordable.
And so …
Corbyn’s policy is a radical divorce from the current policy of austerity. Rather than cutting he says we need to spend more and stimulate the economy. I reject the notion that these plans are economically incoherent and also the fiction that Labour has a legacy of poor economic planning. Here are a few statistics that add support to this:
- Of their 12 years, Conservative or Conservative-led governments have had NO year in which the overall budget deficit was less than 3 per cent of GDP [0 per cent].
- Of their 13 years, Labour governments had 9 in which the overall deficit was under 3 per cent of GDP [69 per cent].
- Of their 13 financial years, Labour governments had 5 in which there was no current budget deficit as a percentage of GDP [39 per cent].
- Of their 12 years, Conservative or Conservative-led governments have had NO year in which there was not a current budget deficit [0 per cent].
- Of their 12 years, Conservative or Conservative-led governments have had 11 in which the current budget deficit was higher than 2 per cent of GDP [92 per cent].
- Of their 13 years, Labour governments had just 3 in which the current budget deficit was higher than 2 per cent of GDP, including the last two financial crisis years [15 per cent].
- From 1997/8 to 2007/8, the average current budget deficit under the Labour Government was just 0.1 per cent of GDP per year.
Whilst it is understandable to be sceptical of the plans proposed by Corbyn (which may of course change over the next five years), that does not qualify an acceptance of Tory rhetoric. It is clear that Osborne’s policy is run in the interests of the wealthy rather than the country as a whole. In order for us to grow as a country we need an economic policy that promotes equality, that improves our infrastructure, that cuts down on the tax gap and one that improves productivity. Corbyn’s policy certainly has some holes in it but it is still 2015 and nothing he has said is unworkable. I am confident that his proposals can be adjusted to address criticisms, but more importantly that they will pose a viable alternative to the harsh austerity programme of the Conservatives.