Sado-Austerity v. Moderate Social Democracy

Glen Newey

This election was made, as Proudhon said of the 1848 revolution, without an idea, beyond that of bunkering the Tories in power and shielding them against blowback from Brexit. Their strategy assumed that people had made up their minds about the party leaders’ competence, and that voters were fixated on Brexit, so cluelessness elsewhere wouldn’t matter (though the government seems clueless about Brexit, too). Hence the uncosted Conservative manifesto.

The Institute for Fiscal Studies has road-tested the numbers in the Tory and Labour manifestos. As befits its neutrality, the IFS wishes a plague on both their houses, though as it suggests, the Tories don't have much of a house to wish a plague on. In their case, the IFS is largely forced back onto making projections from current policy.

Some of the IFS data makes interesting reading. Labour’s spending plans leave Britain in the lower-middle range of developed economies as regards the ratio of public spending to GDP, well below such collectivist dystopias as Iceland, France, Singapore, New Zealand and Germany. Labour would add £81 billion or 3.5 per cent of GDP to public spending by 2021-22. It aims to eliminate the deficit on non-capital spending within five years. The Conservatives are promising a balanced budget 'by the middle of the next decade'; on the IFS projections they, like Labour, still run a deficit by the early 2020s.

They came to power in 2010 promising to wipe out the deficit by 2015, and to have the debt falling as a share of GDP; it's still increasing despite seven years of sado-austerity. Much of the warrant for austerity when Cameron was in power lay in work by the economists Carmen Reinhart and Kenneth Rogoff, which suggested that growth is choked off when the debt-GDP ratio exceeds 90 per cent. That chimed with the Cameroons' ideological mission to shrink the state. Subsequent work discredited Reinhart and Rogoff's thesis; they had understated growth at debt levels over 90 per cent. But austerity marches on despite the collapse of its intellectual props and the Conservatives' repeated failure to meet their promises on pegging back the debt. Their manifesto now specifies no debt target at all.

The IFS thinks that Labour's extra £25 billion a year on infrastructure investment can be realised without breaching its debt target. It doubts, however, that Labour’s planned tax rises for the rich will realise the £49 million its manifesto claims, because of avoidance.

The elephant that doesn't bark in both manifestos is Brexit, whose effect on national income is imponderable. An LSE report last year on the macroeconomic impact of Brexit found that it would lead to lower GDP figures than if the country remained in the EU, but not to zero or negative growth.

Labour plans to push up net public sector investment from 2 per cent to about 3 per cent of GDP. This compares with an average of 4 per cent between 1945 and 1979. The main aim of investment in human and other capital is improving productivity – a notorious weakness of the UK economy, owing not, as in right-wing myth, to British workers’ indolence, but the negative correlation between productivity and long hours (UK workers average around 300 hours per year more than German ones). Investment in productivity promotes growth.

Unlike Labour, who propose higher tax rates for the highest earners, the Tories remain strong in their defence of those just about managing on a few million a year. David Metter, the CEO of the private finance firm Skanska Innisfree, took home not much more than £8 million in 2010; his firm is the major creditor for a £7 billion PFI contract, to be paid off by 2049, for building at Bart's and the Royal London hospitals. The NHS funding hole is largely the product of the ruinously expensive PFI – which, in fairness, is mostly the product of the Blair and Brown years. Its estimated contribution to the debt (currently about £1.8 trillion) is around £250 billion.

Notwithstanding Lynton Crosby's inane 'magic money tree' attack line (trotted out by Theresa May and Amber Rudd in the last week) and commentary in the right-wing press, Labour is offering a studiously moderate social democratic programme.


  • 7 June 2017 at 9:28am
    frmurphy98 says:
    Never mentioned by a media anxious to scoff at Labour's "magic money tree" is how the Tories somehow magic up some £93 billion of taxpayer dough every year to provide state subsidies to giant corporations.

  • 7 June 2017 at 4:19pm
    streetsj says:
    That Guardian report was possibly the most financially illiterate thing I've ever read. £44bn was from capital allowances - do they not understand anything about business investment and accounting?

    Glen continues with the theme of attacking the government both for not spending enough (austerity) and spending too much (not getting the deficit down). Increasing taxation rarely yields what you want both because of its negative drag effects on growth and investment and because the higher the rate the more the incentive to find a way not to pay it.

    The "right wing myth of British worker indolence" is a silly caricature. Most analysis on the productivity "puzzle" seems to centre on lack of investment. Personally I think it is more likely to be down to business-mix (productivity improvement is very hard in service industries - or at least it has been; the new era of AI may change all that) and definition of terms (it is notoriously hard comparing statistics between countries).

    The Conservative party has run a truly appalling campaign and while initially critical of May's decision not to expose herself too much, it is now entirely understandable. My guess is that the Conservatives will get precisely what they want with big gains outside London and Corbyn firmly entrenched as leader of Labour. So it is hard to criticise the campaign on grounds of efficacy (assuming my forecast is right) but it has been deeply dispiriting on every other level especially as it was the Tories who called the election. And while it is poor to produce an uncosted manifesto it seemed as though most criticism of it was that they weren't promising to spend enough. Which comes back to my starting point.

    • 7 June 2017 at 9:32pm
      semitone says: @ streetsj
      Oh dear.
      "Glen continues with the theme of attacking the government both for not spending enough (austerity) and spending too much (not getting the deficit down)."

      I didn't read that as an attack on the Government for spending too much. The point was that spending less doesn't necessarily reduce the deficit, especially if what you cut was likely to boost productivity. It's so obvious I can't really be bothered explaining it, but I do applaud the rest of your post: I just love it when someone writes below the line that "most analysis says x but I think it's more likely to be y".

    • 8 June 2017 at 9:14am
      tenyards says: @ streetsj
      In the late 70s and 80s I had a job that gave me privileged access over extended periods to hundreds of different companies within the UK.
      One of the most remarkable insights it offered was the extent to which companies resembled their crude national stereotypes. The Germans were well planned and productive, the French were arrogant, the Italians paternalistic, the Americans over-rated and the British, with one or two honourable exceptions, an on-going demonstration of the consequences of the British class system.

  • 8 June 2017 at 12:13am
    Graucho says:
    The magic money tree is called the treasury and it exists. There is a world of difference between debt in your own currency which is money we owe ourselves and a currency controlled by someone else, which is toxic as many Eurozone countries have discovered the hard way. The issue with one's own currency is what do you spend it on ? If you spend it stuff that is really needed, like more housing being built in the UK for example the nation becomes more prosperous and better off. If you spend it on stuff that isn't needed you get inflation since the paper is never turned into anything of value.