Labour MP Jon Trickett urges the Rachel Reeves to change course
Jon Trickett is the Labour MP for Hemsworth
For the second time in my lifetime, a Labour Chancellor from my home city of Leeds is in charge of the nation’s finances. I’ve known both well. The first was Denis Healey. His decision to turn to the IMF in 1976 and impose spending cuts was a turning point in British history — one that helped pave the way for Thatcherism. Rachel Reeves, the first woman to hold the post, now stands at a comparable crossroads.
I was the Leader of Leeds when Denis was made a freeman of the City. When I said to him that the cuts were wrong and that as a young activist I had opposed him, he admitted to the error. He said that the Treasury had got its sums wrong at the crucial historical moment when he dashed across the Atlantic to meet the IMF. He also wrote about the mistake with typical honesty.
A similar pattern has emerged again. In becoming Chancellor as the first woman to hold the post, Rachel Reeves has shown she has great personal resilience. It isn’t too late for her to avoid Healey’s fate. But she will need to break with her current policies which will have created even more poverty than even the Tories left behind.
The government has said that it will single-mindedly pursue an economic strategy of growth. This is a noble objective. But it is one that requires more, not less, public investment.
But there are also powerful and often unaccountable forces which are working against expansion. A triumvirate of institutions, together with the finance capitalists in the City of London, are focussed on wrong headed fiscal orthodoxy, and exert downward pressure on our country’s economic prospects. The record of the Bank of England, the OBR and the Treasury is abysmal. They tend to serve the City of London’s interests which in turn has a baleful influence on the rest of the economy.
It is time they were confronted and tamed.
The first is the Bank of England. The governor and his advisory committee have determined to set out on a course of ‘fiscal tightening’. We don’t need to focus on the details here. But there are three counter-expansionary effects of this policy. The first is that they are taking money out of the economy. And the second is that interest rates are inevitably higher than they need to be. The third is that many economists now believe the Governor’s policies mean that the Chancellor has to repay £100 billion to the Bank from taxpayer income; money which otherwise could be used to expand the public services or to stimulate growth.
The governor heads the Bank which is not accountable to anyone. He must know that his actions are constraining growth and run contrary to the Chancellor’s stated policy objective but he and his advisors continue blithely on.
The second institution is the Office for Budget Responsibility (OBR). They too are unaccountable. Their predictions are treated as if they arrived on tablets of stone from on high. Yet they are almost inevitably wrong in their forecasts. Just as the Treasury made serious errors in Healey’s time. “These forecasts” they recently wrote “ invariably turn out to be wrong” (my emphasis).
The OBR forecasts tend to direct the Treasury to fiscal tightening. This is because, as the New Economics Foundation recently noted, they don’t have a statistically accurate analysis of the economic impact of public spending or of the negative effect of public expenditure cuts. They underestimate the so-called multiplier effect and this tends to lead to false predictions of public debt.
Although they deny it, the third problematic institution at the Treasury is at the core of a rigid economic and financial orthodoxy. Its tight control of the government’s tax, spend and economic policy that result from this orthodoxy is the central reason for successive government failures, and lies at the core of so much economic damage. Taking money out of the economy through fiscal tightening, public sector cuts and low investment has led to a negative doom-loop in the economy, hindering growth.
Why does this group of institutions fail so often? It’s true that they are led by economists who emerged from University departments which had been captured by an economic orthodoxy based on neoliberal theories. The Chancellor herself emerged from the same world.
But underlying all this is the Finance sector and the City of London. In 2022, the UK financial system had assets of around £27 trillion. This figure dwarves the total annual output of the whole country which in 2022 stood at £2.5 trillion. The finance sector craves economic stability: a controlled value of sterling, low interest rates, tight fiscal controls. Without this stability the value of their assets may fall dramatically. The Treasury, The Bank and the OBR are its obedient servants.
How then are we to understand the Chancellor’s actions following the OBR report? She says that she seeks economic growth. But she is at the mercy of financial orthodoxy based on institutional conservatism and her own self-imposed rules. The truth is that the economic outlook is bleak. The Chancellor’s fiscal squeeze mirrors the Governor’s monetary squeeze. Both work against growth by taking money out of the economy.
In the case of the billions which she is cutting in welfare benefits to the poorest, it is clearly immoral and cuts against the British attachment to fairness. Nor is it recognisably Labour. But equally important is that it is economically inappropriate. It is self-evident that the poorest have the highest tendency to spend all their weekly income, which in turn helps to create economic activity. If you need to create growth and to raise money the most efficient way would be to tax the wealthiest and not to cut the spending by the poorest.
The spring statement marks a historic turning point perhaps even greater than the Denis Healey budget. It’s time that dissenting voices were heard. I look forward to joining with others to resist this latest cruel twist of the austerity knife.
Image credit: Rachel Hurley / DESNZ – Creative Commons
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