Those of us who have opposed George Osborne’s austerity policies throughout can take some comfort from two successive events on either side of the Atlantic. The first was the resounding victory of Trudeau the younger’s Liberal party in Canada on an unashamedly Keynesian, anti-austerity electoral platform. The second has been the way that the chancellor (indeed chancer) of the exchequer received his come-uppance from the House of Lords over his dishonourable programme of drastic reductions in tax credits.
First, some background. Hardly anybody can be found these days who will say that they ever thought the Labour party stood a chance of winning under Ed Miliband. Yet David Cameron was sufficiently concerned to call a referendum on our membership of the European Union in order to ward off a threat from Ukip that might well have let Miliband in.
It is a direct result of Cameron’s panic about Ukip that he is now wasting everyone’s time preparing for a diversionary British referendum. This is at a time when the European Union is facing an existential crisis over the migration issue and the appalling reaction of extreme rightwing – indeed neo-fascist – movements in several European countries: not least, alas, in Germany, whose leaders since the war have worked so hard to avoid any recrudescence of the 1930s.
Cameron is asking Angela Merkel for help out of his self-inflicted jam; he ought to be helping her in a migration crisis that threatens dire things – and not just for her reputation.
Warding off Ukip was vital for the Tories, as was the low turnout among the disaffected young. This disaffection was manifested in the election of the anti-austerity Jeremy Corbyn as successor to Miliband. There is, of course, intense speculation about how long Corbyn can stay in place, but his anti-austerity policy has struck a chord, as has shadow chancellor John McDonnell now that he has escaped from the unnecessary bonds of George Osborne’s fiscal charter.
Although the government has an unassailable majority in the House of Commons, and the chancellor will no doubt force a heavily revised plan through, it is an interesting moment. Having got away with blue murder with his propaganda that the increase in the budget deficit was caused by the Labour government’s public spending – of which he had previously approved – and not by the banking crisis, Osborne has finally discovered that, nauseatingly arrogant though he is, even he cannot walk on water. His reputation for political acumen has been seriously damaged, and it could not have happened to a nicer chancer.
The point is that both the austerity policy, and the form it has taken, are the result of political choice. Choosing to impose deflationary measures on an already depressed economy that was just beginning to recover was cavalier, to say the least. And placing some four-fifths of the burden of the austerity programme on public spending cuts was very political indeed.
But though this prime minister may talk about “one nation”, and they both go on about helping “hard-working families” and the “working poor”, penalising them is a funny way of doing it. John Le Carré was right, several years ago, to call this “planned penury”. And Ed Balls was also right to predict, way back in August 2010, that the 2010 budget would have countervailing effects on the recovery Osborne inherited.
Before the election Cameron unashamedly promised £8bn of tax cuts while his chancellor was preparing for £12bn of reductions in the welfare budget. Osborne is aiming for a budget surplus not only on day-to-day and year-to-year spending, but also on current and capital (infrastructure!) spending combined. He wants a lower top rate of tax on the backs of people who are struggling.
But economists of many persuasions are now pointing out that inequality is having a serious impact on what they call aggregate demand – ie total spending in the economy – and, ultimately, economic growth.
In his book Capitalism, the Financial Times writer John Plender makes an important point, drawing on an observation by the economist Brian Reading. They note that in the 18th century there was an early version of “trickle-down” theory, which Ronald Reagan and Mrs Thatcher invoked to justify the redistribution of income in favour of the rich. As Plender writes of the original theory: “It suffered from the flaw that in a society marked by an uneven distribution of income favouring a numerically small elite, the rich had plenty of spending power to satisfy their desires but not enough buying power to dynamise the economy to its full potential to raise real incomes.”
This is what so may “advanced” economies are experiencing now. As this year’s United Nations Trade and Development Report points out, the share in total income of the richest households has strongly increased in developed countries, “and these households tend to spend less and save more of their incomes than other households”. The situation calls for a rethinking of economic policy here, in continental Europe, and in the US. Let us hope Justin Trudeau and the Canadian Liberals will show the way. I can hear my old friend the late JK Galbraith – another enlightened Canadian – applauding from the grave.
