“Does Labour need its own tea party?” asks the title of a post by Luke Bozier. I was hoping this would be an argument for some leftists to make extremist arguments, with the intention of shifting the Overton window leftwards.
I was disappointed. Instead, Luke says:
We must begin to admit that we were fiscally irresponsible for years, in order to gain the trust of the public again, at least on the economy.
Not only is it important in order to win elections - fiscal responsibility is the right thing to do.
Now, I’m no fan of Gordon Brown. But if there’s one thing he shouldn’t apologize for, it’s “fiscal irresponsibility.” My chart shows the story*. It shows that the public sector’s financial balance is very largely the mirror image of the corporate sector’s one. This shouldn’t be surprising, because for every borrower there must be a lender, and so across all sectors of the economy (which includes foreigners) net borrowing must be zero. The fiscal deficits of the mid-00s were, then, counterparts of a corporate surplus.
And - I would add - the result of them. Companies’ reluctance to invest meant there was a tendency towards weak economic activity generally, which in turn added to government borrowing.
I say that the causality runs from the corporate surplus to government deficit, rather than vice versa, for two reasons.
First, the 00s were, generally, a time of low and falling real government bond yields. This is the exact opposite of what would have happened if high government borrowing had crowded out corporate spending. It is, though, consistent with a lack of demand to borrow - a lack of investment.
Secondly, the weakness of capital spending was not a UK phenomenon but a global one; back in 2005 Ben Bernanke was worrying that “many advanced economies…face an apparent dearth of domestic investment opportunities.”
Faced with firms’ reluctance to invest, budget deficits were pretty much inevitable. Had Labour tried to be “fiscally responsible” and cut spending or raised taxes, we’d have just had higher unemployment.
Labour, then, shouldn’t apologize for the budget deficits.
Yes, it spent badly. And yes, you could argue that it might have been better to have a mix of tighter fiscal policy and looser monetary policy - though as this would have exacerbated the housing bubble, this is arguable. But the deficits were the least of Labour’s sins.
This said, I’ve nothing against telling lies for political purposes. But I’m not sure a false apology would promote Labour objectives. In the debased world we live in, “fiscal responsibility” does not mean higher taxes on the rich or a clampdown on the corporate welfare state created by slack procurement policies and addle-brained public-private partnerships. Instead, it means cuts in jobs and benefits. “Fiscal responsibility“ then, has the precise opposite to what I’d hoped Luke’s post would be about - it serves to shift the Overton window rightwards.
* This should be familiar to regular readers. But as Luke doesn’t address it, it’s clearly not familiar enough.