Crossing the Rubicon: why we can't recreate the modest economic gains of New Labour

The British economy has changed, and we shouldn't let ourselves be misguided by nostalgia for bygone models of prosperity.

Peter Kennedy
15 September 2016
 Philip Toscano / PA Archive/Press Association Images

Protesters at the G8 summit call for economic justice. Picture by: Philip Toscano / PA Archive/Press Association Images. All rights reserved.As the second Labour party leadership contest in twelve months draws to a close, polls suggest Jeremy Corbyn is set to comfortably beat his opponent Owen Smith and secure a second mandate. It has become startlingly clear that the centre & right wings of the party are lacking any kind of economic strategy beyond Owen Smith’s campaign sloganeering, their shared loathing of Jeremy Corbyn conveniently obfuscating the fact. Are they anti-austerity? If so, how do they wrest ‘economic credibility’ from the Tories? If the party is not avowedly anti-austerity, would a post-Corbyn leader return to the electorally disastrous political triangulation of Ed Miliband’s tenure?

The harking back to the economic achievements of New Labour belies a disturbing lack of acceptance of the greatly changed economic environment in which the next Labour prime minister will operate. The gains made during the New Labour years relied on a grossly under-regulated finance sector, healthy global growth, reliance on cheap credit to prop up stagnant wages, a low government debt overhang and the net contribution to government coffers made by millions of new EU migrants. It is highly unlikely any of these factors will pertain under a future Labour government.

Since the second world war, the Labour party, like its social democratic sister parties across Europe, has tied its fate to that of capital. Where Labour has made gains, it has relied on a healthy capitalism - and in the case of New Labour, the expectation of future growth via free and easy credit. As Stuart Hall notes,

Labour leaders of the post-war era believed the social democratic bandwagon could be hitched to the star of a reformed capitalism: and that the latter would prove capable of infinite expansion so that all the political constituencies could be ‘paid off’ at once: the TUC and the CBI, labour and capital, public housing and the private landlord, the miners and the Bank of England’.

Yet we are now in an economic environment in which OECD growth is set to be relatively low in historical terms for the next five decades and up to half of all jobs are predicted to be automated by 2034. This unwinding of growth and work means Labour faces an existential challenge to its ability to provide an alternative to the Tories within the neoliberal straightjacket. Achievements such as the real terms doubling of health care spending under New Labour are now highly improbable without the massive structural changes to British capitalism advocated by Jeremy Corbyn and John McDonnell.

Is Owen Smith willing to fight the intellectual and ideological battle required of such a change? Smith claims not to be a Blairite, and deplores use of the term as a political slur. With this in mind, it may seem churlish to highlight Smith’s 2006 interview in which he refers to Tony Blair as a socialist and the fact he agreed with Blair on everything except the Iraq War. Yet such statements are instructive, if merely as a means to follow Smith’s apparent change in mindset over the past decade.

Would he describe himself as a socialist?“I am a democratic socialist, yes.”And Mr Blair, is he a socialist?“Yes.”…Trying not to sound like a New Labour clone, Mr Smith dips his toe in a puddle of controversy. “The invasion of Iraq was a mistake,” he offers. “The world would have been a safer place if we hadn’t done it.”Any other areas of difference with Mr Blair?“No, I don’t think so.” — The Telegraph

In this case, 'Blairite' is not a slur, just an accurate description of Smith's near-total agreement with the former prime minister in 2006. Smith may no longer give Blair such policy carte blance, but if we take him on his record prior to this summer, he appears in favour of piecemeal reform over more meaningful socio-economic change. Such reforms under the previous Labour administration relied upon very different economic circumstances, whilst a platform which did little to challenge to the prevailing economic orthodoxy was decisively crushed at the 2015 general election.

Lessons not learnt

The economic conditions an Owen Smith premiership would confront are drastically different from those which Tony Blair faced in 1997. The New Labour government was not concerned with challenging the role and power of the market over the lives of ordinary people. When not actively opening up services such as healthcare and education to market discipline, the previous Labour administration was content with ameliorating the most dysfunctional aspects of the neoliberal economic model.

The funding for this programme was in part based on a Faustian pact with the City of London. Peter Mandelson’s relaxed approach to the rich and booming inequality signified a non-aggression pact with finance capital. Labour were to be trusted with the levers of power after seventeen years in the cold, as long as The City continued to enjoy its pre-eminence over the economy and ‘light touch’ regulation.

What seems lost on the current party hierarchy, especially those on the centre and right of the PLP, is how far material conditions have changed since the 2008 economic downturn. The idea the sort of investment made under New Labour in public services including the NHS is possible today without a major restructuring of the British economy is worrying to those of us who see the long-term perils of mildly reformist timidity.

The costs of the crash

Throughout the New Labour years the UK developed an extremely unbalanced economy reliant on credit, a household savings ratio close to 0%, sky-rocketing asset prices (most notably, housing) and high spending. These factors were compounded by a huge growth in the service sector, sharp decline in manufacturing and a large current account deficit, which continues to this day. The recession saw a sharp rebalancing. Fearing another collapse, more people decided to save what they could rather than take on new debt to spend. But, this dramatic fall in consumer spending was at a cost of a deep recession. (A reminder that unbalanced economies can be difficult to rebalance). If elected in 2020 or beforehand, a Labour prime minister would enter power during the worst crisis in living standards for generations. UK workers are second only to Greeks in terms of the fall in real wages experienced (10.5%) since 2007.

The post-financial crisis years have witnessed a collapse in real wages

UK business investment as a percentage of GDP has been in decline since the early years of New Labour, with a small reversal in fortunes wiped out by the 2008 economic crash. British companies are now hoarding a cash surplus of around 6% of GDP. Business investment as a share of GDP is now the lowest among large industrialised countries and an area of great concern to John McDonnell. Owen Smith has announced plans for a £200bn government investment bank, but has said nothing about the private sector’s investment strike (compounded by Brexit) and how he plans to reverse it.

UK public sector debt has sky-rocketed since the 2008 crash, despite five and a half years of stringent austerity measures. Smith and his supporters may point to the low poll ratings Jeremy Corbyn and John McDonnell receive on economic trust, but any Labour leader will have to confront the fact that as recently as Autumn 2015 austerity continued to garner widespread (if slowly unwinding) public support. The Corbyn-McDonnell approach is to chip away at the ideological basis of this consensus, a consensus built on widespread economic illiteracy, cynically exploited by the previous Tory leadership.

This stands in stark contrast to the position of Ed Miliband and Ed Balls (and Owen Smith), who managed to trap themselves in the false logic of austerity, rather than offer a full-bodied intellectual and political challenge. The 2015 general election proved the electorate felt Labour were neither anti-austerity, nor committed to ‘bringing down the debt’. The two Ed’s managed to come across as no things to all men.

It is unclear whether the PLP, centre and right of the party have and will disavow the Miliband-Balls approach. If we take Owen Smith’s claim to be anti-austerity at face value, is his position shared by the wider PLP? If not, it remains to be seen how he will he argue the case for massive infrastructure spending, an end to austerity and the radical economic restructuring the British economy requires in the face of opposition from the majority of his parliamentary colleagues.

Brexit means Brexit

Whilst strong figures on a number of economic indices have emerged in the two months since the EU referendum vote, it’s unlikely we will witness the true economic ramifications of Brexit until the triggering of Article 50. It is now plain that members of the government most hostile to EU membership, including the Secretary of State for Brexit David Davis, are not willing to commit to single market membership, let alone freedom of movement for EU nationals.

The New Labour government was marked by a massive increase in the number of people moving to the UK from what were then new ascension states, especially A8 countries. The social impact of an open door policy to European migrants has been debated elsewhere, but the Brexit vote proved how the consensus for such a policy has dissipated. A large reduction in the number of EU migrants can be expected in coming years and it is highly questionable whether similar levels of net migration will be witnessed again.

A study undertaken by Professor Christian Dustmann of UCL found that between 2000 and 2011 EU migrants made a net contribution of £20bn to government finances. If Davis and his Euro-sceptic colleagues get their way and oversee a massive reduction in the number of EU nationals living in the UK, we can expect £20bn sucked out of the UK economy over the next decade at a very minimum. That’s before one mentions that the government is yet to underwrite the position of EU migrants already living in the UK, contributing as they are in both economic and non-economic ways.

The UCL study goes on to highlight the extraordinarily high education levels of new EU migrants:

Professor Christian Dustmann said the educational qualifications of new migrants to Britain, especially from western and southern Europe, was now extraordinarily high and higher than any other EU country. He said the UK would have had to spend £6.8bn on education to build up the same level of “human capital”. The study shows that not only are European migrants more highly educated than the UK-born workforce but they are less likely to be in receipt of state benefits — 43% less likely among migrants in the past decade — and more likely to be in employment. They are 7% less likely to live in social housing. — The Guardian

Aside from the economic impact of greater restrictions on EU migration, the Institute of Fiscal Studies has estimated a possible reduction in UK GDP to the tune of 4%, or £75bn. Sterling’s purchasing power has already dropped by over 20% since July 2015, which will be most obviously reflected in higher prices, exacerbated by a concomitant 50% rise in the cost of oil.

“So far, as with almost all economic data, only survey data for investment has been published for the period immediately after the vote. The actual effects of the vote will be felt over a much longer timescale. The Markit PMI survey shows the fall in demand for investment goods alongside demand for other goods. The Bank of England’s regional agents’ survey covers firms with 1.2 million workers and shows that half of them plan to cut recruitment following the vote. 60% plan to cut investment, and none plan to increase investment following the vote.” — Socialist Economic Bulletin

Despite the troubling economic consequences of Brexit, Owen Smith’s favouring the overturn of a democratic mandate and blocking the triggering of Article 50 is myopic at best, shockingly anti-democratic at worst. One can only imagine the electoral consequences for Labour in places like Teeside, which voted 70% in favour of Leave, if Smith were somehow able to rally a parliamentary coalition to dismiss a popular referendum. According to Theresa May, Brexit means Brexit; the Labour party had best prepare itself for a climate in which there are fewer EU migrants contributing to the welfare system, lower levels of trade, lower GDP, higher prices and generally less room for economic manoeuvre.

It is striking how little the anti-Corbyn factions of the Labour party (especially the PLP) have learnt from the global financial crisis and the party’s massive electoral failure little over a year ago. A return to the New Labour approach of redistributing some of the easy money trickling down through a healthy global economy and financial sector is no longer possible for the reasons explicated above.

Whilst it is clear that the majority of the PLP are against Corbyn, it remains to be seen what exactly they are in favour of. The most likely course one can envision if Corbyn is deposed is a retreat into the comfort zone of focus groups and the kind of political triangulation which has seen Labour shed 5 million votes since 1997. One suspects there is a feeling that with a slicker leader in place, Labour can retake a centre-ground masterfully occupied by the Tories.

If Owen Smith intends to follow a similar economic course to that outlined by John McDonnell, then his leadership campaign seems based less on policy differences and more an opportunistic exploitation of the PLPs disdain for the current leader. Considering the criticism heaped upon Jeremy Corbyn by those within his own party, it is more than a little unlikely that Smith would be given room to pursue similar policies if his sudden support for the current leadership’s economic strategy is in earnest.

There are no easy options open to Labour. The very least that can be said of the Corbyn-McDonnell leadership is their willingness to face the new circumstances head on. This stands in stark opposition to a nostalgic belief that the next Labour government can recapture the modest gains made by New Labour in greatly changed economic circumstances. If the majority of the PLP and anti-Corbyn factions are unable to confront said new reality, they are shirking their responsibilities to the communities most in need of a Labour government.

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