November 1, 2010

The mistake of the century

In Brendan Barber’s words, Britain has been experiencing a ‘phoney war’—living in anticipation of what the cuts might mean, without experiencing their reality.[1] Although high-profile academic economists, from Robert Skidelsky to Paul Krugman and Joe Stiglitz, have warned about the consequences of Osborne’s reckless gamble, it is only now that the results of the spending review have become official that one can begin to appreciate the irreversible nature of the deed.[2] It was David Blanchflower who put it most succinctly in The Guardian on 18 October: ‘The austerity package is likely to turn out to be the greatest macro-economic mistake in a century.’[3]

George Osborne has pursued his goal of emasculating the welfare state with unswerving determination and ruthlessness. What is more, according to a recent YouGov poll, nearly half the electorate believe that the last Labour government was responsible for Britain’s current economic plights—less than one-fifth blame the Coalition.[4]  Cameron et al have endlessly chanted the mantra of Labour’s irresponsible spending as the cause of the crisis, which flies in the face of everything we know about the origins of the banking fiasco, the OECD-wide recession following the credit crunch and the collapse of Britain’s fiscal balance which until 2008 had been reasonable.

The Coalition’s message may be totally at odds with most economists’ take on the need to react to an economic slump by stimulating aggregate demand, but Osborne has capitalised on the widespread belief that when times are bad, everybody—starting with Government—must tighten their belt. The Tories have put right-wing LibDems like Nick Clegg and Danny Alexander in key positions, marginalised Vince Cable and kept out the rest. It has been an object lesson in the realpolitik of the Thatcherite legacy.

There is a real sense in which Labour share the blame for all this. For a decade Brown boasted of his ‘fiscal prudence’, attempting to offset what New Labour perceived as the damaging legacy of its tax-and-spend image. The Brown-Darling response to the credit crunch was as Friedmanite as it was Keynesian, while the economic downturn which followed produced a puny stimulus package.[5]  Early in 2010, Alistair Darling caved into the IFS-led chorus of deficit cutters and proposed cuts ‘deeper than Thatcher’.[6]

Nor does the change in leadership appear to have radicalised Labour. Ed Milliband, sensitive to the accusation that he was elected by the ‘union bosses’, was visibly absent from the TUC rally against the cuts on 19 October. Alan Johnson, the new shadow chancellor, has little bark and no credible bite, while within the shadow cabinet the row continues over the proportion of spending cuts and tax rises in Labour’s own deficit reduction plan.[7]

In truth, the economic crisis presented both Labour and the Tories with an opportunity for radical change—an opportunity which Labour squandered and which the Tories were quick to capitalise on.
If Labour really had been a party of the left, it would have taken the bailed-out banking sector into genuine public ownership, re-introduced mutualisation, thoroughly reformed the tax system using the proceeds for public-led investment in sustainable growth and jobs, and reversed the creeping privatisation of public services. In Brussels, Britain would have called for an EU-wide stimulus package and backed improved economic governance and better financial regulation.

The single-mindedness with which the Tories have capitalised on the crisis to drive through draconian measures stands in stark contrast to Labour’s inability to seize the moment. In a decade’s time, history may judge Osborne’s cuts with the same disdain as it does the poll tax and similar Thatcherite policies. But by then it will be too late—Slasher Osborne will have killed the welfare state in Britain.

It goes without saying that there’s a wider lesson for the rest of Europe to draw about what’s happening in Britain.
[1] See
[2] See; also see
[3] See
[4] See
[5] See
[6] See Larry Elliot, ‘Alistair Darling: we will cut deeper than Margaret Thatcher’, Guardian, 2010;
[7] See