Flawed political economics are behind the calls for fiscal conservatism

Article previously published here by Class Online, and reproduced by kind permission,

Notwithstanding the social democratic motivation of the writers of the recent essay Moving Labour ‘into the black’, there is a fundamental political economic flaw in their representation of the situation Labour are expected to inherit in 2015.

Their arguments were put forward in their initial leaflet and are starkly illustrated here:

“And third, confronting the reality of limited resources reveals priorities as the true currency of politics. In the coming years, the central distinctions will be about what the political parties choose to spend scarce funds on as much as the total they plan to spend.”

There is a confusion implicit in this description. Clearly in any economy there are going to be limited real resources. The capacity of a national economy in any time period is limited by the productivity of the physical capital and labour available. But in ‘In the Black Labour’ this real constraint is confused with a suggested financial constraint.

It is important to separate the real constraint and the financial constraint. This is particularly the case when we are considering the UK, a monetary sovereign country. The UK issues its own currency and denominates its government bonds in that currency, sterling, and has a flexible exchange rate. This sovereignty means that the UK can never become “bankrupt”, as wrongly suggested by George Osborne. It also means that other myths such as “the national credit card has been maxed out” and “we are mortgaging our grand-children’s future” are also false.

The intelligent implication of the current and medium-term position of the UK is that fiscal stimulation, via, for instance, a VAT cut and increased public expenditure, current as well as capital, are required, until we reach the real constraint of the full employment of resources.

The so-called financial constraint, whether invoked by George Osborne or by Black Labour, is a self-imposed political constraint.

Clearly there may be a constraint emerging in terms of the preferences of the private sector to hold government bonds, at a given price. This will mean a reduction in the price of these bonds and hence an increase in bond rates. However, government bonds increase the wealth of the private sector via a new savings instrument with guaranteed interest income for the pension funds and others who operate in the bond market.

For the current Coalition government an underlying objective is to reduce the size of the state, motivated by a neo-liberal agenda which sees the market as the sole efficient mechanism for providing goods and services. One need not ascribe a similar motive to the authors of Moving Labour ‘into the black‘, but some of the references to the implied failings of an over-large state certainly give a measure of comfort to this view.

Suggestions from their initial paper that the ‘fiscal’ position of the UK in 2015

“may mean very constrained funding for healthcare, pensions and welfare for the foreseeable future. It’s tough, but the alternative is ducking the genuine decisions nearly every government of an advanced economy currently faces.”

is misleading for a number of reasons:

The issue of pensions is a political decision about income redistribution involving transfers from one set of taxpayers to another, given the total size of the economy and the tax revenue available for re-distribution.
The issue of the health service is a political decision on whether the state provision of heath care (and social care) which is free at the point of delivery is preferable to commercial provision.
Welfare funding is a mixture of areas of provision which is best remedied by having economic policies which deliver full employment and therefore reduce welfare expenditure.

‘Fiscal conservatism’ was not the policy chosen by the Labour government in 1945 when there was a massive post-War level of public debt and the damaged economy needed to grow in both a sustainable and equitable manner. Fiscal conservatism, as advocated by Black Labour, is not the policy which the Labour party needs to advocate for the British economy or to present to the people in 2015.