Nothing to do with the economy

Ross McKibbin

‘Business now has certainty,’ the chancellor said at the end of his statement on the Comprehensive Spending Review; but that is the one thing business doesn’t have. Much of the government’s budget strategy is dependent on consequences which might be favourable, on premises which are almost certainly wrong, on sheer fantasy, and on that will-o’-the-wisp, ‘confidence’. It is pretty clear that those on benefits of whatever kind will suffer, however the cuts are interpreted. Anyone disabled, or partly disabled and on employment support, or dependent on housing benefit, or in need of social housing, or reliant on local authority care – indeed anyone on a low income – will lose. And women will lose more than men. They are more likely to be made redundant by local government and the cuts in child tax credit are more likely to keep them out of work. The ‘pupil premium’ promoted by the Lib Dems – a kind of long-term bursary designed to assist children from poorer households in their education – might help, but because the Labour government’s school rebuilding programme has been abandoned, many of the schools those with the premium can go to will probably fall down. In any case it turns out that the premium is not new money but will come from the existing education budget. Some people won’t be affected: those among the old, for example, who are not dependent on local government care and whose benefits will continue to escape means testing, and the well-to-do who make little use of local government provision anyway.

As for the rich, there has been no serious attempt to drag any of them into the circle of suffering – the bankers least of all. Their good fortune is the inevitable result of the decision to fund the deficit primarily from cuts in expenditure rather than from taxation, and the belief, in the face of all recent evidence, that the future of the economy depends on them. In so far as the spending proposals are ‘fair’ and the ‘rich’ are affected, this is largely due to the efforts of the previous government, whose 50 per cent tax on incomes of over £150,000 a year the coalition had no option but to accept. That the poor do comparatively badly and the rich do comparatively well is not a surprise. Budget cuts that fall disproportionately on welfare programmes must be unfair.

However, the rhetoric of fairness, indispensable to the Lib Dems, has imposed constraints on the government which many Tories dislike. It has at least to look as if we are all in it together even though we aren’t. The decision to means test child benefit is definitely disliked (though many of those on around £40,000 a year will probably take salary cuts to preserve it) and the right wing of the Conservative Party must be dismayed that expenditure on the police and the UK Border Agency was not wholly protected, but since the chief constables and the Daily Mail are unlikely to take this lying down the cuts probably won’t be quite as severe as we have been told. As for the defence ‘review’ it is hard to know what to say. It is true, as Cameron argues, that the coalition inherited a hopeless mess from Labour. But he has made it worse for the same old reason: no British government will admit that playing a grand role in world affairs is way beyond our resources or our needs.

To the historian, especially of the 1931 crisis, the whole thing is sadly familiar. There is the same paralysis on the part of the Labour Party (which might now wonder whether a four-month leadership election was really a good thing) and everywhere the same ramped-up rhetoric: the country is on the edge, going bankrupt, capital will flee, and it is all Labour’s fault. And this time, as in 1931, there is much that is spurious. The country is not on the verge of bankruptcy. There is no evidence that the bond market was reacting against British debt, despite the best efforts of the Conservative Party to encourage it to do so. Our fiscal position was never like that of Greece, which had cooked the books and was struggling to cope with short-term government debt, though Osborne et al insisted it was. Why was it necessary to take such drastic action at all? Our debt ratio was much higher after the Second World War and neither Attlee nor Churchill felt any obligation to do what Cameron, Clegg and Osborne have done. Even Darling’s proposed schedule of deficit reduction seems excessively prudent. A less political chancellor might simply have allowed economic recovery (i.e. increased tax returns to the Treasury), modest reductions in new spending and inflation to deal with the debt.

There is a large element of play-acting in this spending review. If the situation is as serious as the government insists, it could have charged the banks much more than the petty sum that’s proposed. If the dead weight of interest payments is as Osborne has described it, the government could introduce a capital levy, a kind of one-off wealth tax designed to be gathered in non-recurrent fiscal crises from the banks and those with the ‘broadest shoulders’ more generally. (Lloyd George’s coalition government thought of doing something similar after the First World War.) In that way fairness could be achieved and a good part of the debt paid off in one go. Even to describe such a levy, however, is to know why this government would never even contemplate it. Not merely because it would outrage its principal supporters but because the crisis is not as serious as it pretends.

Then there is our old friend ‘crowding out’: allowing high levels of government borrowing to ‘crowd out’ private investment by forcing up interest rates beyond levels the private sector can afford. It was a popular notion in the interwar years and has been retrieved and dusted down by those who defend the spending review, but it too surely is play-acting. There was little enough evidence of it in the interwar years; today there is none. With short-term interest rates almost at nil and long-term rates low, it can’t be argued that private borrowers are being ‘crowded out’. If they are not borrowing for investment it is because they reckon current levels of aggregate demand don’t justify it. Similarly the government’s argument that the private sector can comfortably employ those made workless by the cuts – the government itself estimates that 500,000 local government employees will be dismissed – can only be defended by the credulous, and Cameron’s speech to the CBI conference on the subject hardly ever rose above the absurd. It is, of course, possible that in ways we can’t foresee the private sector will be able to employ the new workless, but there is no serious evidence that it can or will. The whole effect of the cuts must be deflationary; they can be nothing else. The loss of income of those who will lose their jobs in the public sector is bad enough, but there will also be secondary unemployment in the private sector as a result of firms having contracts cancelled – from Rolls-Royce to a small builder employed by local government. (Although BAE Systems seems to have unbreakable contracts for its aircraft carriers, which now do useful service as Keynesian public works – as the Labour government probably intended.)

Those 35 business leaders who were induced to support the cuts in full measure live in a different world from the rest of us, a world where the words ‘deflation’, ‘loss’ and ‘bankruptcy’ do not exist. (Why the retailers in that list – Marks & Spencer among them – support cuts that will withdraw demand from the economy for the next four years is almost inexplicable.) Instead of listening to these grandees, the government might take note of Argos’s latest results – a 23 per cent fall in profits for the last half – and of the nervous comments from Home Retail (its owner) demanding that cuts, however necessary, be more carefully introduced. To insist that those on benefits must fill the jobs freely available ‘out there’ is self-deception. There are few jobs ‘out there’. And there will be even fewer now.

I doubt that the cuts have very much to do with the economy: if they did they would have been more plausible and less risky. It is very unlikely that Osborne, if asked, could give any economic rationale for them. Nor could the Conservative MPs who cheered and waved their order papers when he had finished telling them that everything was going to be made significantly worse. The importance of the cuts is not economic but political and ideological. First, they restore an apparently coherent, specifically Conservative and politically useful identity to the Conservative Party, distinguishing it from Labour. For the last 20 years or so the Tories have not had such an identity. They tried a traditional law-and-order Toryism for a few years, but the electorate found it unattractive. Then under Cameron they committed themselves to a form of New Labourism, a commitment that ended willy-nilly with the financial crisis. And, unlike Brown, who did eventually devise a fairly ordered response to that crisis, the Conservatives were all at sea. Neither Cameron nor Osborne came out of it with an enhanced reputation. But the ‘deficit’ gave them an opportunity; and the bigger the cuts the bigger the opportunity.

The cuts have to be big in order to confirm the Conservative explanation of what happened. That they saved the country from the brink, from disaster, from national bankruptcy – in other words from Labour’s incompetence and profligacy – is a line the Conservatives use well and often. And it is an explanation which historically the electorate has found acceptable. The notion that the state should conduct its own finances in the manner of a prudent household has always been thought plain common sense by many voters (though no one in the Treasury would agree), even if in the last 20 years the electorate has conducted its affairs anything but prudently. Thus from the point of view of a rather rudderless Tory Party the very hugeness of the cuts is an advantage: they magnify the crisis and Labour’s recklessness in causing it. Further, they restore a sense of authority to the Conservative Party and to its interpretation of British politics and society, something it has lacked for a long time. That the cuts are promoted by a coalition government including the soft-hearted Lib Dems is an added advantage. It shrouds the Thatcherism of the exercise in a cloak of fairness.

Second, the crisis allowed the Conservatives to transform a crisis of the banks into a crisis of the welfare state. This, they hope, will enable them to restructure government and ‘shrink’ the state and its welfare systems once and for all, something they have been trying to do for the last 30 years. As the state moves out the Big Society moves in. But welfare states are hard to reshape, as Thatcher found. Over time they acquire powerful vested and electoral interests which are not easy to brush aside. Already the support for the drastic changes to housing benefit is beginning to crumble as backbench MPs and the mayor of London discover what the effect might be: ‘Kosovo-style’ cleansing, in Boris Johnson’s words. Politically, it is hard to cut welfare benefits significantly and it would be surprising if the cuts turn out to be as severe as advertised. In practice it is also very difficult for the voluntary sector to fill the state’s shoes: it has neither the expertise nor the funding. For the state is not like a household. It has a long life, whereas the life of a household is strictly finite, and it can command resources the family can’t. It can, for instance, raise more money simply by requiring us to pay more tax. And it can borrow on the kind of security none of us possesses. Under the coalition the welfare state will certainly be mean; whether it will be fundamentally different is not so certain.

It would be a mistake to think that this is a well-considered assault on local government. Rather the cuts are an assault on the means by which local government can discharge its responsibilities; this has been achieved primarily by reducing funding, but also by capping the council tax. If local government dies – which many Tories no doubt would like – it will be of starvation rather than murder. Nonetheless, the cuts, together with the further weakening of the LEAs as a result of Michael Gove’s education ‘reforms’, conform to a pattern of persistent Conservative attacks on the scope and autonomy of local government. Where this attack differs from its predecessors is that the Tories’ partners in crime are the arch-defenders of local government and community politics, the Liberal Democrats. The attack might not fundamentally reshape local government, but it might fundamentally reshape the Lib Dems.

It is still too early to know whether going for the big hit will bring the Conservatives success. It is unquestionably a strategy that has worked politically in the past: the electorate seems to agree that there have to be cuts and is apparently willing to blame the Labour Party for them. And if it succeeds ideologically, if we agree with the Conservative explanation of what has happened, it will work electorally, even if there is no miraculous economic recovery. By capping the amount of housing benefit a family can receive at £21,000, the Tories have made use of the usual folk myths which hold that families on benefit are receiving fabulous sums and filling every room with plasma TVs – in the 1930s it was married women in furs alighting from limousines to collect the dole.

There are, however, two possible obstacles to success. The first is fairness. The government could simply have justified the cuts on grounds of necessity and relied on the fact that at any one time most people will be unaffected by them. But it has chosen to ground them in fairness, when it is clear to the majority that they are unfair, and by doing so has muddied the waters. The second is that while austerity and prudence are within the Conservative tradition, so too are bread and circuses. As the next election draws nearer, the temptation will be to abandon prudence and bring on the good times, especially as many Tories never really believed in prudence. But this muddies the waters further since it opens the Tories themselves to charges of profligacy. Which is exactly what happened to them under Thatcher and Major, and almost brought them to ruin.

For the Lib Dems the whole thing is much riskier. In their defence they can argue that they have had some influence on the government’s programme. The Tories were forced to give way on inheritance tax (it remains), and the ‘pupil premium’ has survived, as have some capital projects that the Lib Dems supported. ID cards went – though that was Tory policy anyway. It is probably thanks to the Lib Dems that the government is more civilised in manner than it might otherwise have been. But most of the compromises have been theirs. The volte face on tuition fees and government spending looks bad. They were mistaken in making a pledge to abolish university tuition fees – at some level the universities will have to be financed by fees. But the fact is they did. During the election campaign they (Vince Cable especially) strongly criticised the kinds of spending cut they now support. And they support them even though the only objective change in the country’s economic and financial circumstances since the election has been for the better. The Lib Dems gave way, too, on immigration policy, which is now designed to meet the electoral needs of the Conservative Party. Almost every time Clegg opens his mouth is a moment of embarrassment (does he seriously believe that the outcome of the cuts will be a ‘fairer and more liberal society’?); while Cable, having denounced the bankers at the Lib Dem conference, remains in a cabinet that intends to do nothing about them. Constitutional reform, which was Clegg’s specific responsibility, seems to have disappeared from sight. As for Lib Dems who hold predominantly working-class seats (what does Simon Hughes tell his Bermondsey constituents about their new housing problems?), their position is wretched.

How do the Lib Dems see it? Do the benefits to be gained from electoral reform outweigh the undesirable social and political consequences of the spending review? The alternative vote (AV) is not what they wanted, which was the single transferable vote in multi-member constituencies. But it is better than nothing and better than what we have. The commitment they got from the Conservatives, however, was not to introduce AV but to hold a referendum on it, which the Tories are by agreement free to oppose. Furthermore, if the electors are not required to give their first, second and so on preferences, AV as a reform is even weaker. (Though my guess is that most voters would give their preferences anyway.) What the Tories wanted, a redistribution of constituency boundaries and a reduction in constituency numbers, they get simply by legislation. So far they have had much the best of the bargain.

If the electors support AV at a referendum, the Lib Dems could argue that their (and our) sacrifices were worth it. If, which is equally likely, the electors reject AV, they will have little future as a wholly independent party. They will be committed to a five-year coalition with the Tories without having secured much of what they sought, and their electorate, most of which is left of centre, could easily disintegrate. (The polls suggest that the majority of Lib Dem voters who have so far disintegrated have disintegrated to Labour.) Furthermore, the spending cuts have so constrained the government that it will have little constructive to do over the next four years and the Lib Dems will have to sit by as it fills the time with legislation ideologically shaped by the Tory Party. In these circumstances, do the Lib Dems leave the coalition at the next election and fight the Conservatives in every constituency on their own programme (whatever that might be)? Or do they come to an electoral arrangement with the Tories as the right-wing Liberals did in the 1930s? The evidence so far, which is that Lib Dem ministers like office and all that goes with it, suggests that in the absence of AV they will come to some kind of arrangement with the Tories. They can do little else, and Clegg, who is closer to the Conservatives than was apparent even at the election, is unlikely to regret this.

Throughout all this the Labour Party has been, until very recently, off-stage. As a result it has made no response to the cuts except to say that they are too severe and would be less severe under Labour. In other conditions that would be a sensible argument. It commits Labour to nothing in particular but still aligns it with the interests of the ordinary voter. And of course it can argue that the financial crisis was international and more of America’s making than anyone else’s, but it can’t do so convincingly. The financial crisis was indeed international and indeed more of America’s making, but Labour not only looked the other way, it publicly encouraged the banks to behave as they did, while putting in place a feeble regulatory regime – regulation ‘with a light touch’. The first institution to go under anywhere was, after all, Northern Rock. Ed Balls has made a formidable case against the cuts, but no one on the Labour front bench, with the possible exception of Ed Miliband, can legitimately distance themselves from the policies of the last government. Still, Labour has the advantage of being the only anti-Conservative party and that clears the decks. There is no harm in Ed Miliband, who has made a good start as leader, repeating that the cuts are mostly fraudulent in origin and would have been less fraudulent under Labour. Above all, Labour should concentrate on the coalition’s Achilles’ heel, the Liberal Democrats, and on their Achilles’ heel – the widening gap between Lib Dem ministers and seemingly every other Lib Dem. It is not difficult to point out that Clegg and Cable have tied themselves to a Tory Party primarily interested in advancing an ideology with which most Lib Dems do not sympathise. Miliband could also declare himself strongly in favour of AV (which he is) and silence the cave dwellers in the Parliamentary Labour Party who aren’t. It would make the referendum campaign excruciating for the Lib Dems: being opposed by their coalition partners, who are almost unanimously against AV, and supported by their political opponents. Labour can also reasonably hope that the risks the coalition parties have taken are such that both of them will come a cropper – though it shouldn’t take this for granted.