Ed Balls, August 26:
‘There is an alternative’: I am very grateful to Bloomberg for giving me the opportunity to come here this morning to respond to the bullish speech given from this same platform by George Osborne 10 days ago. That speech is the clearest articulation of the Cameron-Clegg Coalition strategy for this parliament. In it, their Chancellor repeated his claim that fiscal retrenchment through immediate and deep public spending cuts to reduce the fiscal deficit would build financial market confidence in the UK economy, keep interest rates low and secure economic recovery by boosting private investment. And the Chancellor once again declared that his was the only possible credible course....
This is a risky and dangerous time for the world economy. History teaches us that economic recovery following a large-scale financial crisis can be slow and stuttering. In the US, the debate is not about fiscal tightening but whether further stimulus is needed.... Here in Britain we have seen, in recent days, MPC member Martin Weale warn of the risk of a double-dip recession as a result of the current fiscal tightening. But whether our economy continues to recover or slips back into sustained slow growth – even recession again – is not just a concern for Treasury ministers and financial analysts. Whether our leaders make the right calls now on growth and jobs, the deficit, public spending and welfare reform will determine the future of our country for the next decade or more and shape the kind of society we want to be.
I do believe we face a choice as a country – on the economy and the future of our public services and the welfare state. And today I want to respond to what I believe was a fundamentally flawed speech ten days ago: - wrong in its analysis of the past; - reckless in its diagnosis of the current situation; and - dangerous in its prescription for the future.
This week’s IFS analysis of the June Budget has confirmed what we already knew – that the Coalition’s economic and fiscal strategy is deeply unfair. In this speech I will argue that it is also unnecessary, unsafe for our economy and unsafe for our public services too....
We do need a credible and medium-term plan to reduce the deficit and to reduce our level of national debt – a pre-announced plan for reducing the deficit based on a careful balance between employment, spending and taxation – but only once growth is fully secured and over a markedly longer period than the government is currently planning.... [B]y ripping away the foundations of growth and jobs in Britain – David Cameron, Nick Clegg and George Osborne are not only leaving us badly-exposed to the new economic storm that is coming, but are undermining the very goals of market stability and deficit reduction which their policies are designed to achieve. Far from learning from our history it is my fear that the new Coalition government is set to repeat the mistakes of history – and that George Osborne’s declaration of ‘cautious optimism’ on this platform a fortnight ago may go down in history alongside Norman Lamont singing in his bath.
But it is not too late to change course....
First, let me say why I think it is so important for me – and indeed every other candidate who seeks to lead the Opposition – to stand up now and challenge the current consensus that – however painful – there is no alternative to the Coalition’s austerity and cuts. Because as someone who was at the heart of the decision on whether Britain should join the Euro, it seems incredible to me that such fundamental and far-reaching economic decisions are being taken by the coalition government with so little debate and – let us be clear – with no mandate from the British people for their rise in VAT or immediate and deep spending cuts. Yes, there is plenty of discussion up and down the country about where the axe should fall on public services – as my opposite number Michael Gove has discovered. There are intense disputes, not least within the Conservative Party, about whether welfare reform can deliver the impact and savings claimed by Iain Duncan Smith. And there are very important arguments taking place about the universality of benefits, and the age at which pension-related entitlements should kick in.
These are all important debates. But the fundamental questions we face now – Is it right to be cutting billions of pounds from public services and taking billions of pounds out of family budgets this financial year and next? what will that do to jobs and growth? and ultimately, what will that mean for the deficit? – are almost ignored.
Yes, there are some important warning voices – Anatole Kaletsky, Paul Krugman, Lord Skidelsky, David Blanchflower to name a few – who have written powerful critiques on the comment pages of the broadsheets. But for the most part, the political and media consensus has dictated that the deficit is the only issue that matters in economic policy, that the measures set out in the Budget to reduce it are unavoidable, and that there is no alternative to the timetable the Budget set out....
So the first lesson I draw from history is to be wary of any British economic policy-maker or media commentator who tells you that there is no alternative or that something has to be done because the markets demand it. Adopting the consensus view may be the easy and safe thing to do, but it does not make you right and, in the long-term, it does not make you credible. We must never be afraid to stand outside the consensus – and challenge the view of the Chancellor, the Treasury, even the Bank of England Governor – if we believe them to be wrong.
But there is a second lesson too – which is also very pertinent at the present time for the Labour opposition and those of us who aspire to be the next Labour leader: it’s not enough to be right if you don’t win the argument. For – as Keynes found in 1925 and 1931 and Alan Walters found in 1990 – being right in the long run and well-judged by history is no great comfort.... [T]o sit back and wait for the pain to be felt is a huge trap for Labour... it is time for Labour to take on and win the argument with David Cameron, Nick Clegg, George Osborne and others who share their views.... [W]e cannot start waging the argument for a credible alternative path for growth, jobs, continued recovery and the eventual reduction of the deficit without first setting out why we believe the new government has got it so fundamentally wrong....
So let me turn to George Osborne’s speech and his triumphant espousal of the current consensus....
So first, is the current economic situation all Labour’s fault, the consequence irresponsible levels of public spending and borrowing in the early part of the last decade?... [I]t is a question of fact that we entered this financial crisis with low inflation, low interest rates, low unemployment and the lowest net debt of any large G7 country – and the second highest levels of foreign investment too.... [O]ur low debt position, our low inflation and low interest rates meant that we were the only government in post-war British history which – faced with recession and deflation – had both the will and the means to fight it through a classic Keynesian response... the effects of our actions are clear to see from the data on jobs, growth and the public finances from the first half of this year, before George Osborne’s ‘Emergency Budget’....
But rather than continue with a strategy that was working, George Osborne is doing the exact opposite. As the second storm looms on the horizon, everything he is doing is designed to suck money out of the economy and cut public investment, while his tax rises and benefit cuts will directly hit household finances at the worst possible time.... George Osborne was fond of saying – wrongly – that the Labour government had failed to fix the roof while the sun was shining. What he is now doing is the equivalent of ripping out the foundations of the house just as the hurricane is about to hit....
So what of George Osborne’s second contention – strongly supported by Nick Clegg – that the demand from the international money markets for fiscal consolidation is so strong that Britain and other countries must cut the deficit to avoid a ‘Greek-style’ financial crisis?... I do not have to tell this audience that what matters for credibility is not how tough politicians talk, but if their plans work and can be delivered..... Britain faces no difficulty servicing its debts as recent debt auctions have demonstrated – and the term structure of our debt is long thanks to the brilliant work of the Debt Management Agency. As US economist Brad DeLong said last month:
History teaches us that when none of the three clear and present dangers that justify retrenchment and austerity – interest-rate crowding-out, rising inflationary pressures on consumer prices, national overleverage via borrowing in foreign currencies – are present, you should not retrench.”
And yet in recent months, as Britain has followed the rest of Europe down a reckless commitment to immediate deficit reduction, we are now seeing very real worry in financial markets as fears of stagnation or even a double-dip recession grow....
Which brings us to the issue of George Osborne’s cautious optimism.... I would like him to point to the precedent from British economic history which says that, with slowing growth in our main trading partners and companies de-leveraging, it is possible for public sector retrenchment to stimulate private sector growth and job creation. The 1930s and 1980s proved the opposite.... For all George Osborne’s talk of ‘deficit-deniers’ – where is the real denial in British politics at the moment?... Against all the evidence, both contemporary and historical, he argues the private sector will somehow rush to fill the void left by government and consumer spending, and become the driver of jobs and growth.
This is ‘growth-denial’ on a grand scale.
It has about as much economic credibility as a Pyramid Scheme....
Then – having blamed the Labour government for his cuts plan, and insisted the markets are guiding his hand – George Osborne went on to make a further bold claim.... The Chancellor says that there is no alternative.... George Osborne includes in his charge Alistair Darling and David Miliband, who have suggested the lesser plan of halving the deficit over four years. I told Gordon Brown and Alistair Darling in 2009 that – whatever the media clamour at the time – even trying to halve the deficit in four years was a mistake. The pace was too severe to be credible or sustainable. As both history and market realities teach us, the danger of too rapid deficit reduction is that it proves counter-productive....
But whatever our competing visions for the economy, growth and deficit reduction, there is also a wider and more fundamental issue at stake which could be easily forgotten or postponed as we focus on how best to protect the current status quo in terms of growth, jobs and living standards.
It is the fairness of our society....
David Cameron has a narrow view of the role of the state – that it stifles society and economic progress. I have a wider view of the role of state – a coming together of communities through democracy to support people, to intervene where markets fail, to promote economic prosperity and opportunity.
He has a narrow view of justice – you keep what you own and whatever you earn in a free market free for all. My vision of a just society is a wider view of social justice that goes beyond equal opportunities, makes the positive case for fair chances, recognises that widely unequal societies are unfair and divisive and relies on active government and a modern welfare state to deliver fair chances for all.
Far from thinking that electoral success is based on the shedding or hiding of values, I believe we now need to champion those values and the importance of a fairer Britain – to show we are on peoples’ side after all.
Labour’s next leader needs a much stronger, clearer vision of the fairer Britain we will fight for – very different from the unfairness and unemployment the Coalition’s savage and immediate cuts will cause...
