Keir Starmer repeats, at every opportunity, that his main objective is to win the next general election. This is a welcome change of objective. In 2019 Starmer seemed determined to lose that general election. Labour lost the 2019 general election because they attempted to reverse the result of the 2016 Brexit referendum. Starmer was the main architect of that ‘Let’s Stop Brexit’ policy. On this matter Starmer is in complete denial. He pretends that the 2019 general election was lost because of an unrealistic manifesto which would have involved substantial state spending to reverse the results of 40 years of increasingly unregulated market activity. He insists that the manifesto on which Labour fights the next general election will be realistic. In this context, realistic means that close attention will be paid to the effect of government spending on the fiscal deficit and national debt. And there will be nothing in the manifesto that arouses concern in the English middle classes.
The next general election will be a battle between the levellers – with both political parties claiming they will be the most successful at levelling up British society. In which case, Starmer’s strategy of fiscal rectitude will most likely result in failure. Unless the Conservatives do something very silly. That is unlikely to happen under Boris Johnson. It might happen, if the Tories decide to get excited about the size of the national debt. Rishi Sunak is inclined that way, but Johnson knows the size of the national debt is not important for a currency creating state. Johnson cares not a whit for the working classes, but will insist that as much spending takes place as will guarantee that he retains most of the red wall seats that he won in 2019 with his ‘Get Brexit Done’ policy. Labour’s strategy should be to exploit this division in the Tories by advocating spending that favours working people without any reference to the national debt.
Biden in the US and the European Central Bank (ECB) in Europe are putting trillions into their respective countries. Both the US and the Eurozone appear to have finally grasped that, when the private sector is not spending enough to provide the level of demand that will allow full employment, then, the state must start spending. One suspects many Conservatives are also becoming aware of this truth – certainly those Conservative MPs in the 53 Red Wall seats.
In contrast, the new shadow chancellor, Rachel Reeves, has decided that a policy of fiscal rectitude will go down well with the voters. In her conference speech she raised Labour’s preoccupation with fiscal rectitude to a new level of absurdity when she announced that Labour would create an Office for Value for Money.
“… Labour will create a new, independent Office for Value for Money. It will be tasked with keeping a watchful eye on how public money is spent and equipped with meaningful powers so no government is allowed to mark its own homework…..I do not take lightly the responsibility to see that public money is spent wisely and our public finances kept under control.”
As private individuals, value for money is important. We are currency users and have only a limited amount of money. The UK state is not a currency user. It is a currency creating state. If it spends money buying products and services that are not fit for purpose or of no use to the society, it has wasted time and probably resources (think aircraft carriers instead of houses). But can one say it has wasted money when, as a currency creator, it has unlimited amounts of money? Saying it has wasted money suggests that there are now things that it will not be able to pay for because it now has less money. The fraudulent PPE sellers should be pursued, not because the state needs the money it paid them but because they should not be allowed to enjoy that money. The UK state never has less money. It always has an infinite amount of money.
One wonders what Reeves’ Office for Value for Money would have made of the following statement by Keynes in 1936:
“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines, and leave it to private enterprise to dig the notes up again there need be no more unemployment and the real income of the community would… become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, burying bottles filled with banknotes would be better than nothing.”
No doubt Reeves would have considered printing and burying bank notes a complete waste of money. Yet the greatest economist of the 20th century tells us that it will end unemployment! It is not an intuitive idea if you only see debt from the perspective of a currency user. But Reeves is a shadow chancellor. It is quite unacceptable that she does not grasp the distinction between a currency user and a currency creating state.
Reeves appears not to grasp this distinction as she spouts the kind of nonsense that we grew used to hearing from George Osborne. Osborne did not believe the nonsense he was talking, but found it a useful justification for implementing his political program which was to reduce the services that the state provided in health, education, housing, etc., and allow the private sector to provide them at great profit.
Reeves provides yet further evidence of her lack of understanding when she stated:
“Labour won’t be making promises we can’t keep or commitments we can’t pay for. That is why we would put in place fiscal rules that will bind the next Labour government to ensure we always spend wisely and keep debt under control, so that we have the means to transform schools, hospitals and communities, and pay for investment in the new industries and jobs that our country desperately needs.”
A currency creating state can always pay for its commitments. Whether it can keep its commitments will depend on whether the resource are there to be purchased. Continuing to pay the £20 Universal Credit uplift would be a simple matter. It has no resource implications. This is not always the case. Take for instance the question of house building. Conference passed a motion calling for 150,000 homes a year to be built. This might cost some £40 billion per year. So Labour could just disburse some £60 million to each constituency and tell them to start building. Cash is not a constraint.
But in this case resources most certainly are a constraint. The UK does not have the skilled workers to immediately start building 150,000 houses per annum. It would first have to invest in training up workers with the skills needed for housebuilding – bricklayers, plumbers, electricians, roofers etc., before it could ramp up to that level of house building without creating wage inflationary pressures. These are the kind of issues that a prospective Labour government should be thinking about – how they will ensure the existence of the resources that will allow them to build 150,000 homes per year and not how they will pay for them.
Regretfully, Reeves’s speech to conference showed no understanding of the importance of resource constraints and focused instead on completely false financial constraints. Having loudly proclaimed her commitment to controlling national debt, Reeve then blandly announced that Labour would spend some £28 billion a year in fighting climate change. There was no explanation of how that could be done without raising national debt to which she had loudly proclaimed her opposition.
The next general election will be a battle between the Ievellers – with both political parties claiming they will be the most successful at levelling up British society. Starmer and Reeves’s strategy of fiscal rectitude will be used by Johnson to his own advantage. He will present himself as the politician who sees the welfare of the people as more important than the size of the national debt. An important section of the Conservative Party, led by Sunak and Javid, will oppose Johnson’s indifference to the national debt.
Sunak has already laid down the gauntlet to Johnson in his 2021 conference speech.
“I’m a pragmatist, I care about what works, not about the purity of any dogma. I believe in fiscal responsibility. Just borrowing more money and stacking up bills that future generations have to pay is not just economically irresponsible — it is immoral. Because, because, because, it’s not the state’s money, it’s your money. ”
Reeves’s fixation with fiscal rectitude means it will be easier for Sunak to re-introduce his austerity economics. Instead, Labour should exploit the division between Sunak and Johnson to the full, by always demanding spending that is of value to the society without any reference to the size of national debt. The party that convinces the voters in those red wall seats that it is serious about levelling up, is the party that will win the next general election. To date, Labour fails dismally on that measure.