For those expecting a leaky raft of uncosted populist promises, Jeremy Corbyn’s economic programme is shockingly reasonable in tone. It begins by praising wealth creation, and revolves round a commitment to attack the UK budget deficit more effectively than the Conservatives. The veteran “leftist” promises to close the current deficit if George Osborne has not done so by 2020, and not to re-open it.
Corbyn’s main premise, that “faster growth and higher wages must be key to bringing down the deficit”, is hardly controversial. It is only because the UK economy has returned to growth – faster than that of any other big industrial country last year – that most voters (outside Scotland) had the confidence to elect a party planning more welfare cuts for those out of, or in low-paid, work.
Until growth resumed in 2013, deficit reduction had relied largely on cuts in public investment – an unsustainable approach because it endangers longer-term expansion. The Conservatives have themselves endorsed a substantial rise in minimum wages, recognising this will counter the use of tax credits as a subsidy to lower-paying employers.
Careful emphasis on the current deficit hides the guilty secret of Corbyn’s plan. He is happy for deficits to continue on the capital budget – the money set aside for capital expenditure – enabling a future Labour government to borrow more for public investment. Anglo-Saxon economies have long been unique in lumping public capital and current spending together, so that re-stocking the Department of Transport’s canteen is the same kind of “expense” as building a new railway. Corbyn’s plan relies on ending this accounting separation, for which private businesses would be ridiculed but Whitehall has a perennial affection.
The projects that fall to the public sector, because private firms can’t raise the funds or take the risk, are also those that are most likely to go off course and over-budget. So UK governments have stuck to an accounting convention which leaves most investment to private initiative, and calls on private-sector discipline for the few projects that the state still undertakes.
Economists have repeatedly found that the returns to public investment actually match or exceed those of most private projects, and that it makes sense for the Treasury to undertake them because its borrowing costs are lower than even the most creditworthy corporation.
But at the most recent election, Labour was no keener than the coalition parties to argue that governments should still borrow for investment. That’s why Corbyn’s stance so upsets the three rival candidates.
There is also much evidence to support Corbyn’s claims that the UK has suffered the longest fall in real wages for more than a century, “disastrous” investment; and productivity performance, a widening external payments deficit, and a spread of low-paid and insecure jobs; which means that per capita GDP is still no higher than in 2008.
His observations on the extent to which the government could close the deficit by curbing the avoidance of taxes, without having to raise them, are endorsed by the accounting expert behind the widely respected Tax Research UK.
For all this conformity with economic data (and with the opinions of many far-from-left-wing economists), Corbyn’s prescriptions will be dismissed as unaffordable and irresponsible. Critics will say, with some reason, that the electorate has heard it all before – in the Alternative Economic Strategy (AES), which the Labour left devised to restore growth after the worldwide slump of the early 1970s. Most voters dismissed the AES as a Bennite fantasy and reached instead for the free-market remedy proposed by Margaret Thatcher’s Conservatives.
A key architect of the AES, Wynne Godley, correctly foresaw the collapse in investment and exports that would result from the Thatcherite programme and was similarly prescient about the global crisis that would eventually result from over-reliance on deregulated markets. But because Labour was in power in 2008, it will forever be accused of causing the global crash, however unjust that accusation seems to those who crunch the GDP and fiscal-deficit numbers.
Two years ago, UK commentators expressed surprise that the way the budget deficit rose as the economy began to grow again. They tended to overlook the equally plausible view that growth had returned because the government relaxed its deficit targets, a backdoor reversion to Plan B.
Ed Balls, though an accomplished economist and journalist, never succeeded in explaining how immediate deficit reduction might defeat itself by causing double-dip recession. Even the IMF’s warning that premature efforts to borrow less could be self-defeating due to slower growth was unable to dissuade the Treasury from its squeeze on all public spending, or the public from supporting it.
Since he can hardly cite such authorities as allies, Corbyn’s “The Economy in 2020” is destined to be dismissed as a burst of moral outrage that would bust the economy. And if – as he suggests – the present recovery is so unbalanced as to be hitting current account and inflation problems by 2020, the low interest rates and recovering profits that could now make it workable will have gone by the time he could launch it.