The British Labour Party is likely on the course for a landslide victory in the upcoming general elections, however, that speaks more about how self-destructive the Conservatives have been over the last decade than the ability of the Labour Party to revive an economy plagued by austerity, poor infrastructure and health care services, and the lowest growth among the G7 nations.
Britain’s Shocking Economic Malaise
In 2010, as the British economy was recovering from the 2007-09 Financial Crisis, the Tory government turned to Neoliberal economics in the hope to spur growth. The consequence was that the government embarked on a program of fiscal austerity characterised by a desire for budget surpluses and a cut in public spending. The program was guided by the flawed Ricardian Equivalence theory that suggests any increase in government spending will lead the private sector to believe that taxes will rise in the future, which would compel the latter to cut consumption and investment in the present. A cut in government spending, however, would give the opposite signal. What the Tories failed to realise though, is that Riccardo was writing in the 19th Century, and they were now operating in a post-Bretton Woods monetarily sovereign economy, but more on that later.
The consequences of austerity continue to manifest in the ugliest of ways almost every day now for Britain. Recently, a study found that British children who grew up during the years of austerity are shorter than their peers in Bulgaria, Montenegro and Lithuania. The experts have pinned the blame on a poor national diet and cuts to the NHS are to be blamed.
Austerity has not just led to malnourishment though. It has also created an underwhelming transport system, led to longer NHS wait lists, pay cuts for teachers, and an inability to provide heating in classrooms.
Austerity has also put the UK on the path to the lowest growth in the G7 economies, along with underfunded counties, unheated care homes and schools.
At least it will help plug the fictional fiscal holes the Office of Budget Responsibility continues to forecast.
Callaghan & the IMF Loan
While the Tory party has its fair share of blame for the state of regress that the British economy is in, Labour has a history of implementing poor economic policy and misunderstanding the fiscal capabilities of the British government.
In 1976, Labour Chancellor Healey sought to “reassure the markets” about the ability of the British government to service its debts in the face of a prospective “gilt strike” from investors. To do so, Labour proposed a freeze on public expenditure and cuts in the following two fiscal years. The move, inspired by lobbying from monetarists, was a turning point in history as it marked the period when the British Left abandoned the policy objectives of full employment and welfare state to self-defined (and self-destructive) spending constraints.
The British government could have avoided the cuts and the IMF loan it then took as the pound plummeted had it resorted to capital controls.
It instead chose to abandon Keynesianism and turn to neoliberalism.
Labour Forgets Britain Is Monetarily Sovereign
A lot has not changed since 1976 it seems. The Labour Party is still prioritising “fiscal responsibility” and appeasing the Markets over solving the problems common citizens face – NHS collapse, poor public services and education. The Labour Shadow Chancellor, Rachel Reeves recently committed to match all new spending with taxes, as she hopes to restore government “credibility”.
What she and the Labour Party ignore is that Britain is a monetarily sovereign government, that can pay all its liabilities as they fall due and does not need revenue from taxes or bond issuance to spend.
The bonds issued by the British government are merely tools to convert the excess reserves that the government creates in the banking sector as a consequence of its spending. The British government, if it wanted, could repay all its bonds tomorrow.
The only consequence would be that the excess reserves created would lead to a fall in the interbank lending rate set by the Bank of England.
The Labour Party needs to realise that the only constraint to its spending is the availability of real resources. That is, if its spending creates demand in excess of what the real resources can produce, then it risks inflation. Such an inflationary episode can occur regardless of the fiscal position of the British government, and there is no magic number or balanced budget that Reeves advocates for that is ideal for the economy.
The focus of the British government should instead be on the shortfall in real things- NHS, public services, lack of preparedness for climate change- that risks material danger, not some government budget deficits that carry no inherent danger.
Instead of solving these real problems, however, Labour has been busy treading the dangerous path set by the Tories.
Teacher Salaries
In a recent report, the British government claimed that:-
“Teaching should be recognised as the important, highly qualified and essential profession that it is, and teachers’ pay should reflect that.”
However, the Conservative government recently rejected the School Teachers’ Review Body’s (STRB)recommendation of a 6.5% increase in teacher salaries.
Labour, which claims to be the party of workers, followed suit, stating that their fiscal rules were “non-negotiable” and that they would also reject the STRB’s proposal.
The Labour Party probably believes such a hardline stance will help it restore itself as the party of “fiscal responsibility”. That tag will come at the cost of the welfare of the vast majority of Britain, and in this case, its teachers.
If that was not enough, Labour continued to tread this ridiculous path with its climate goals.
Green Prosperity Plan
The Labour Party recently announced that it plans to delay its flagship 28 billion ‘Green Prosperity Plan’. As the world flirts with a climate disaster, the UK, a G7 nation that one would expect to be at the forefront of a green transition, is instead busy balancing budgets and debating over non-issues such as the size of the deficit.
It does not matter how the bond markets appraise the government’s plans, all that matters is if the government can enact such plans without triggering inflation. In this matter, the British government can simply follow the path of the Japanese government and the Bank of Japan to keep borrowing costs low even as debts and deficits rise.
Office of Value of Money
The United Kingdom already has an Office of Budget Responsibility (OBR). You can refer to this article to see why such an office has no place in a monetarily sovereign economy.
If the OBR was not enough to forecast fictional fiscal holes, the Office of the Value of Money proposed by the Labour Party represents an equivalent erroneous understanding of the capacity of the British government and is just a tool to continue to appease the elites in financial markets.
Conclusion
The state of the economic and societal malaise in Britain is a far cry from its potential – and the state of any other developed nation – and both sides of the political spectrum seem unable to meet the challenge.
Britain was handed a golden chance by the Brexit vote to reimagine its economy. Labour, now has been handed a chance by the controversial and self-defeating Conservative party to reinvigorate an economy plagued by 14 years of austerity. Instead, it is choosing to stick to the fiscal rules that made it unelectable in the first place and will likely once again disillusion its voter base.
Unless Labour rethinks its priorities and abolishes its instinct of caving to financial markets, high inflation, low growth, underfunded counties, unheated classrooms, poor healthcare and a climate disaster awaits Britain.
Casting a vote at the next election merely seems like a formality to confirm who will oversee this impending collapse.
Written by – Rohan Dubey
Edited by – Mahi Bhandari
*This article was written on 6th July 2023