Osborne’s Surplus: the Key to Labour’s Victory?

By Peter Kennedy/ @kennedy121


The 2015 general election marked a catastrophic dual defeat for the Labour Party: An abject failure to challenge the Conservative Party’s economic narrative and in turn, the worst electoral showing by the Labour Party in a generation.

In the Labour leadership’s attempt to hitch its wagon to the perceived ‘common sense’ of what constituted economic competency after 2010, the party undermined its own ability to challenge the widely held belief that it, not the global financial sector, had brought the economy to its knees. Austerity continues to be viewed by much of the electorate as an unpleasant necessity, rather than a devastatingly misplaced ideological campaign. For this reason and others, Labour were punished at the polls a second time as they continued to be blamed for coalition spending cuts (shockingly only 30% of those polled blamed cuts on the government implementing them). Not only is austerity deemed a necessity, but anti-austerity policies have proved unpopular in polling undertaken by Jon Cruddas.

That’s the bad news. The good news is that by 2020 the scene will have changed. Whether or not the electorate still accepts the Conservative narrative blaming Labour for the country’s economic woes, 2008 will have become political ancient history in the minds of most and Labour will be attacking a clear, decade-long Tory record (with no coalition partners to take the flak next time out).

It is my contention that Labour not only stands to gain from Conservative failures (setbacks and errors being an inevitable feature of holding office) come 2020, but perhaps even what the Tories believe will be a key success. If George Osborne achieves his aim of a surplus by 2020, the electoral opportunities for Labour may be surprisingly fruitful.

How to ‘spend’ a Surplus

It is a sad fact that electorates across the industrialised world, influenced by concerted political and media campaigns, have come to view government deficit spending as entirely negative, all of the time. The lack of economic understanding amongst the general public and the way the media and politicians cynically exploit this lack of understanding to advance their own political agendas must be acknowledged by the Labour Party and the wider Left if it is to be overcome politically. Facing the reality that it will be near impossible to challenge this hegemonic view of the economy for at least several years to come, it is worth asking how Labour can use the prevailing narrative and logic to its own advantage. After many years of telling the British public the country needs to ‘save’ money to fix the economy, Labour should start making a case as to how these ‘savings’ can be best spent to make our country fit for the 21st century.

To date, Osborne has failed almost every economic test he set himself following the 2010 general election. The UK’s deficit has increased, the country has lost its triple A rating and now has a debt-to-GDP ratio of 82.8% as opposed to 65.9% in May 2010. Frustratingly for those opposed to the government’s policies, these facts do not seem to have dented the Chancellor’s economic credibility amongst the wider public, most likely due to strong GDP growth relative to many major Eurozone economies and fairly buoyant employment figures (much of which can be explained by stagnant or falling real wages, greater labour market flexibility, benefit changes making it harder to get job seekers’ allowance and mass ‘under-employment’).

The chancellor has set himself the benchmark of entering the 2020 election with the British economy enjoying a surplus (a target which is looking increasingly precarious). It is assumed that if he achieves or comes close to his target, it will be a major political accomplishment and massively undermine not only the Opposition, but his opponents in the Tory leadership race. However, it is arguable that Osborne’s own success will offer fertile ground on which Labour can make an assault on the government’s ideological-based economic policy programme.

On securing a surplus, the narrative of a spending programme targeting a permanently smaller state and less welfare spending will be undermined. Labour will be able to argue that after a decade of hard graft and sacrifice, the British people can and must be able to enjoy the fruits of their labour.


A National Investment Bank – All Thanks to George

In the context of a decade of austerity, Labour should spend the months and years in the lead up to the 2020 election espousing and publicly debating novel ways in which the economic surplus can be transformed into a ‘Peoples’ Surplus’. Dynamic ways of channelling the surplus should be directed by a British Investment Bank (separate from a reformed Bank of England, which would perhaps oversee a form of People’s Quantitative Easing) borrowing in financial markets with implicit UK treasury guarantees and therefore borrowing at extremely low interest rates. UK government bond yields currently stand at less than 1% for 5 years and 1.5% for 10 years with borrowing for 44 years at 1%. The government should be using historically low interest rates to raise the capital for the investment bank (perhaps £50bn over the course of a parliament). The equivalent bank in Germany, the KfW (originally Kreditanstalt für Wiederaufbau) has €21.6 billion in equity capital and total capital including debt of €73.4 billion, which is in turn supporting €489 billion in assets (lending to projects). The British Investment Bank would be able to borrow on financial markets itself, using the government-funded capital and under current rules, its finances would not impact on the government balance sheet at all.

The British Investment Bank should be comprised of a rotating board of directors (serving set terms) comprised of academics, business-people, members of the public and politicians operating on a non-party political basis. The modus operandi of the bank should be to drive growth, investment and employment in environmentally neutral ways. Therefore, the cross-party, non-ideological make-up of the board will offer the opportunity for political consensus-making around a progressive agenda. Instead of offering a negative vision of the (very real and economically crippling) effects of ten years of austerity, Labour should use Osborne’s surplus as an opportunity to outline how it will create a more just, dynamic and technologically capable nation. This could include financing green energy production, a new generation of high quality council housing, investment in small businesses and digital start-ups.

Tory and media fearmongering that Labour’s bold economic programme would ‘squander’ the nation’s surplus can be countered by asking why so many have been asked to sacrifice so much for so long if to not see any real benefit in their lives. In this way, Osborne’s ideological preference for austerity and a diminished state can be brought into plain sight. All that ‘saving’ (employing the economically illiterate, but politically successful rhetoric the Chancellor so enjoys) can be argued as having been for nothing if not acting as a catalyst for a brighter future only Labour would be willing to offer with an exciting plan for a robust 21st century economy.

Although this article has an eye on possible strategy in the lead-up to the 2020 election, the hard work starts now. It is crucial Labour wins back economic credibility without retreating into the party’s traditional comfort zones (the NHS being the key example from the 2015 campaign), which would most likely lead to further defeat.

John McDonnell has made a start on this by bringing together ‘rock-star’ economists like Mariana Mazzucato, Joseph Stiglitz and Thomas Piketty to sit on an advisory committee and encouraging economic debate on a nation-wide tour. The announcement of a ‘fiscal credibility rule’ by the Shadow Chancellor should also be welcomed as a means by which the party can win back sorely needed economic credibility. This politically astute move subverts Osborne’s fiscal charter passed in autumn 2015 and commits Labour to eradicating the deficit on ‘day-to-day’ spending (to be overseen by the Office for Budget Responsibility reporting directly to parliament as opposed to the Treasury), whilst allowing as much borrowing as the government deems necessary for investment.

If a bold, credible and exciting vision can be developed by the Labour leadership, supported by the parliamentary party and wider membership, it will be a much easier sell than further austerity when the previous arguments for austerity (primarily the deficit) no longer exist come 2020.

Following the Second World War, the world was shocked when Labour defeated the Conservative Party led by Winston Churchill, the man who had brought Britain military victory in the 1945 election and enjoyed a personal approval rating of 83% in May 1945. The British saw in Labour a party best placed to secure the peace and build the society they expected following years of gruelling sacrifice. The Conservative Party and its allied forces in the media and right-leaning think tanks have ruthlessly exploited a very real deficit in the general public’s understanding of macro-economics. The 2015 general election highlighted how, without a robust and perhaps even aggressive counter-narrative, it will be very difficult to beat such a politically astute Tory machine. If Labour move beyond attacking every new form of austerity and turn to providing a true intellectual challenge and bold alternative in the build-up to 2020, George Osborne may find his economic victory paves the way for Labour’s political one.

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