It seems some people are upset that Labour has announced it does not intend to increase public spending, if elected into office after next year’s general election.
This is a perfectly reasonable reaction, depending on the amount of information available to the person holding that opinion.
In other words, if you don’t know why Labour has made this decision, it is perfectly reasonable to assume that the former Party of The Left has turned Tory-lite.
That’s why we’re hearing that Labour will simply continue Tory policies; that the main three parties are “all in it together” (to overuse a hackneyed and devalued phrase).
But evidence is available to suggest that this is a big mistake.
To finance extra spending, Labour would have to borrow more money – but this would push up interest rates and create a potential disaster for people with mortgages and loans to pay off.
According to Modern Monetary Theory – an economic method that seems to have earned credence with all the main parties – government borrowing is not undertaken to finance its spending, but to maintain a target interest rate.
In times of recession, businesses borrow more and households find it hard to save money for a rainy day (as the saying goes). We have spent most of the last decade either in recession or in the slowest recovery in British history and the private sector simply doesn’t have the spare cash to pay higher interest demanded on loans in the wake of higher government borrowing.
Labour wants to safeguard those businesses; Labour wants to safeguard your homes.
The alternative would cost any government much more in the long run.
It’s as simple as that.
So Labour has set a spending target that is the same as the Conservatives’, ensuring that interest rates can be kept under control.
This doesn’t mean it will continue with Conservative-led spending plans. That would be a betrayal of Labour’s core voters.
Instead, it seems more likely that Labour will seek to stimulate the economy by taking funding away from wasteful areas – this blog would certainly wish to see less public money given to private contractors who pocket half of it as profit – and investing it in economic growth.
With more money flowing through the system and coming back to the Treasury in taxation, it will then become easier to relax restrictions on interest rates, which will help the government with its debt issue (this has to do with the way governments borrow money, issuing bonds at fixed rates of interest, and is a story for another day).
If Labour’s plan works, it will mean humiliation for the Conservatives and the Liberal Democrats, as Labour will have spent exactly the same amount doing it as those other parties have been spending for the previous five years – to little effect.
Do not misunderstand; it is perfectly possible that Labour’s spending plans could be entirely wrong-headed! Labour spent most of the last 20 years experimenting disastrously with neoliberal thinking that, continued and concentrated by the Coalition government, has led us to the current pretty pass.
In this case, it seems the Devil really is in the detail.
But the overarching strategy is sound and Labour should not be criticised for it.
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