New Statesman & Society, leader, 20 August 1993
Gordon Brown’s speech this week, as he launched the Labour Party conference economic policy document, was the clearest indication yet that Labour has decided that its top political priority is to shed its image as a “tax and spend” party.
“Labour is not against wealth, nor will we seek to penalise it,” said Brown. “Not only do we not tax for its own sake, we only tax if it increases the opportunities for individuals or for the community as a whole.
“On spending, we recognise that public services exist for one purpose – to enhance people’s opportunities and prosperity. Wherever spending has become divorced from this purpose, it is wasteful and inefficient and we should cut it or eliminate it.”
Brown’s speech was short on detail and, typically, very careful. He did not promise that a Labour government would not put up taxes; he did not even say that Labour would not increase direct taxes. As far as public spending commitments are concerned, “there are none”: Labour will not decide how much it wants to spend on what until the Commission on Social Justice, the non-party body set up by John Smith last year, has published its conclusions and the party has reviewed them.
Nevertheless, two things are pretty clear. First, Labour will not be fighting the next general election on anything like last year’s shadow budget, with its promises of increases in pensions and child benefits paid for by the abolition of the ceiling on National Insurance contributions and a 50p top rate of tax on earnings above £30,000 a year.
If Labour does go for tax increases, they will generally not be income tax increases; to the extent that they are, they will apply only to the very rich. And, insofar as the tax and welfare systems are used for redistribution, it will be justified less in terms of achieving greater equality of outcomes than of encouraging greater equality of opportunity.
Second, Labour will not be fighting the next election on anything like the platform for Keynesian reflation advanced by Bryan Gould, Peter Main and others on the soft left of the party. For Brown and the Labour leadership, public spending is not a good thing that encourages the growth of demand in the economy: it has to be kept firmly under control and cut where possible.
If Brown’s speech left any room for doubt on this point, there is none in the document that it launched. Its familiar analysis of the failure of Britain to invest in industry and training and equally familiar proposals for “supply-side” measures to rectify this failure are accompanied by a straightforward rejection of the idea that Keynesian demand management is the key to turning round the British economy: “Now that we live in an increasingly global economy, care must be taken to ensure that an injection of resources does not simply lead to more imports – and therefore more output in competitor countries – but increases in output and jobs here.
“The key stimulus to investment is, of course, the prospect of growing demand. To pretend that supply-side measures alone are sufficient to secure the level of investment that Britain needs is to neglect this basic fact. But to pretend that the management of demand alone can sustain high levels of employment over the long term is to misunderstand the current predicament of the British economy, which has an ever worsening deficit despite the longest recession since the war. Without creating extra capacity, expanding demand will in due course bring an even worse balance of payments and increasing inflation.”
Needless to say, the Labour left is less than pleased at what it sees as Brown’s kow-towing to the Tories on tax and macroeconomic policy – and they could turn out to be right.
But much of Brown’s “new approach” makes sense. On tax, it would be madness for Labour to risk losing another election by promising increased taxes on middle incomes. Even if the possibility is discounted that, by the time of the next election, economic recovery might just have given the Tories enough room to cut income tax, there are plenty of ways of raising indirect taxes, if needs be, without making the tax system more regressive.
More importantly, on macroeconomics, Brown is quite right to dismiss the possibility that plucky little Britain could go it alone with some version of the one-nation Keynesianism that underpinned the Alternative Economic Strategy of the early 1980s. The globalisation and increased mobility of capital really do make it impossible for a medium-sized nation-state, even one without a massive balance of payments deficit, significantly to boost demand without dire consequences. The last time it was tried, in France in the early eighties, it failed ignominiously – and there is every reason to believe that Britain in the late nineties would fare even worse.
The problem is that, as things stand, this leaves Labour with nothing more than its supply-side measures to distinguish itself from the government, and training and tax breaks for investment do not add up to an election-winning macroeconomic policy package, however often the mantra is repeated and however important the skills base and the tax regime are for attracting capital and jobs to Britain.
Just about the only way out is for Labour to go beyond the limits of the nation-state and to look to the European Community as the agent of an alternative macroeconomics that goes beyond the supply-side. Yet the EC merits only the briefest of mentions in Labour’s Economic Approach, and then only as a possible forum for co-operation among nation-states. Brown still has his work cut out if he is to offer a convincing alternative.