News from the New Party

Memories of '76

Those with long memories will recall Denis Healey's budgets during the Labour government in the 1970s, his famous call to "tax the rich until the pips squeak", the desperate approach to the IMF in 1976 and the trade union disputes culminating in the 'Winter of Discontent' in 1978-9.  What is perhaps forgotten is that Healey - after the crisis of 1976 - implemented real spending cuts and started the long haul back to sound finance.  The wage controls of 1976-9 may have appeared harsh but they were part of a package of measures to get public finances and inflation back under control.

The prime minister at the time, James Callaghan, famously told his party conference in 1976 that the party was over: "We used to think that you could spend your way our of a recession by cutting taxes and boosting government spending.  I tell you in all candour that the option no longer exists, and that in so far as it ever did exist, it only worked on each occasion by injecting a bigger dose of inflation into the economy followed by a higher level of unemployment as the next step."

For all the problems of the Labour government of 1974-9, Callaghan and Healey deserve credit for coming to terms with the economic crisis faced by the country at the time and taking action to deal with it.  But it was limited.  The government continued to pour public money into failing industries - remember British Leyland? - and it had no clear strategy to deal with trade unions who were undermining the efforts to fight inflation.  Those issues were left to Margaret Thatcher's government, which came to power in 1979.

The current recession is not like that of the 1970s, although two factors seem eerily familiar today - the property and stock market bubble of the early 1970s (the 'Barber boom' resulting from Anthony Barber's "dash for growth") and the steep rise in oil prices that preceded the recession.  But this time the fundamentals are different and are arguably much more severe.  It is especially severe for the UK, dependent as we are on the financial sector for much of our prosperity.

We all understand that the present crisis is global in nature but the current Labour government has presided over twin asset and credit bubbles that were always going to be unsustainable and has allowed public spending and borrowing to escalate in years when we should have been running a surplus.  That the Conservatives weakly promised to match Labour's spending plans along the way is a sad reflection of how corrupted our politics has become by the lure of the public spending trough.

But the question now is not just what has happened in the past but where we go from here.  With net public sector borrowing forecast to be an unbelievable 12% of GDP we are certainly in trouble.  The cost of servicing the debt - already equivalent to the defence budget - will rise as interest rates go up.  If the UK loses its AAA credit rating, as happened to Ireland just a few weeks ago, the costs of financing borrowing could rise still further.  The whole plan for getting public finances back on track depends upon a fairly rapid resumption of growth back to the previous trend rate which, as many have noted, is optimistic to say the least.

There are now planned spending cuts in some areas but they are for another day, as always.  It is true that real cuts would be difficult right now but ministers have discovered a fantasy version of Keynesian economics that seems somehow cost-free.  Keynes never envisaged spending during a recession as some magic formula for growth which could simply be plucked out of the air when needed; rather, he saw the need to manage public finances appropriately over the whole economic cycle so that during times of recession governments could invest in necessary infrastructure.

We have to accept that there will be casualties in a recession and while government can help to provide a safety net it cannot insure against all eventualities.  One lesson from the 1980s was that once we allowed failing industries to close, investment started to flow to new areas of growth.  One sure way to prevent new investment is to signal a return to a punitive tax regime, thus Alistair Darling's political stunt of introducing a new 50% top rate of tax is entirely counter-productive in terms of getting the economy into a healthy position again.  The real tax rises for most people - in national insurance and excise duties, for example - have received less attention.

Mr Darling's budget yesterday announced £6,000 of additional debt for every taxpayer in this year alone.  A similar amount will be added next year, and much the same again the year after that (especially if growth is not what is expected).  While households across the country are cutting back spending and trying to repay credit card debts, the government debt which we all have to pay is escalating out of control.  Even if there is a return to growth next year, which is questionable, we will be repaying this for many years to come.

Our analysis of Britain's economy over recent years has always been that the housing market boom, the massive rise in household credit and the public spending boom were all unsustainable and would result in severe problems down the line.  Unfortunately events have shown that analysis to be true.  Let's not be fooled by the Conservatives' recent conversion to fiscal responsibility: all of our mainstream parties and most of the media signed up to the fantasy economics of Gordon Brown.  The party is now well and truly over.  We should never forget how we got into this mess and those politicians complicit in our current crisis should be consigned to the electoral scrapheap of history.