Labour needs to shout about its economic record

With just five months to go to the election there is an extraordinary omission from Labour's presentation of its electoral agenda, which is extremely difficult to understand. It is this: why, when the incessant Tory barrage is that Labour profligacy messed up the economy by overspending, doesn't Labour repudiate this damaging charge by pointing to the record which shows nothing of the kind? It matters a lot because the Tory corollary immediately follows: would you want to hand back the keys to the party that caused all the problems in the first place?

The record shows that in Labour's 11 years before the financial crash in 2008 the biggest deficit was 3.3 per cent of GDP, whereas the preceding Thatcher-Major governments racked up bigger deficits than this in 10 of their 18 years. Why doesn't Labour shout this from the rooftops?

When I raised this matter at Prime Minister's Questions, David Cameron evaded the question by referring to the large rise in the deficit after the crash, which was caused by having to deal with the recklessness of the banks—a bailout he supported. This suggests that the Tories have no response to my question; so why doesn't Labour ask it?

One explanation is that Labour was ensconced in a leadership election for five months after the 2010 election, during which time the Tory narrative had taken hold. But this doesn't wash. Labour still had four and a half years to refute this canard, more than enough to change minds. Another view is that polling shows that voters still retain doubts about Labour's reliability in handling the nation's finances. But that is because Labour has never effectively contested this assumption.

The Tories ran up a housing boom in the late-80s which led to budget deficits of 7 per cent in 1992 and 7.2 per cent in 1993. Nothing like that ever happened under the Blair-Brown governments. So why doesn't Labour say as much?

This matters for another important reason. Given that the bankers produced the horrendous financial breakdown which nearly tanked the global economy, how should it have been handled? Alastair Darling as Labour Chancellor brought in two expansionary budgets in 2009-10 to counter the monetary collapse, and this cut the deficit from its peak of £157bn to £118bn, a reduction of nearly £40bn within two years. George Osborne's austerity budgets then kicked in and the rate of reduction in the deficit halved over the next three years. By the current year Osborne had predicted that the deficit would be down to £40bn. It is actually about £100bn. So what does the record show is the best way to cut the deficit—by stimulating the economy to produce real jobs and boost incomes, or by chopping expenditure and delivering the biggest fall in average real incomes since Victorian times?

This year however takes the argument further still. Though we're only half-way through the current fiscal year, the figures suggest that the deficit, so far from falling, is set to rise this year. There is nothing surprising about this. If austerity budgets have drained demand out of the economy—with household incomes falling, business investment flat, the import-export gap a growing disaster area, and government expenditure firmly pointing south—the government's tax take (its income) will inevitably fall. That then pushes up the deficit. So what is the rationale for continuing with austerity when the consequences of austerity itself are actually increasing, not reducing, the deficit? This question needs to be pushed relentlessly.

This is not a one-off glitch. Economic growth has slowed from 0.9 per cent in the second quarter of this year to 0.7 per cent in the third. Household incomes are falling and indeed the 1.6 per cent real terms fall in the last year is the largest since records were kept; the government's tax take is likely to drop still further in future years. The only way George Osborne can then start to get the deficit down is by deep cuts in public expenditure and benefits, more severe even than those of his first five years, perhaps by even double the £25bn annual cuts he's already announced. This would only worsen the problem of making even deeper inroads into the government's tax income. The government is ending up eating its own tail.

This is a very powerful case for Labour to launch against any further public spending cuts. The deficit can be reduced faster and more efficiently though public investment in house-building, infrastructure, restoring public services and green investment. This would kickstart genuinely sustainable growth, which Osborne's recovery isn't, and deliver real jobs and raise household incomes. It could be funded with no increase in public borrowing either by instructing the publicly-owned banks RBS and Lloyds to prioritise lending to British industry rather than financial speculation overseas, or by a modest further tranche of quantitative easing targeted directly on key industrial projects, or by taxing the 0.01 per cent ultra-rich including the thousand richest persons in Britain who according to the Sunday Times Rich List have doubled their collective wealth since the crash from £250bn to over £500bn.

Further deep spending cuts through to 2020 are a massive voter turn-off. Shifting the emphasis away from austerity towards investment, jobs and growth would offer the biggest antidote to the insecurity and sense of abandonment on which Ukip in England and the SNP in Scotland currently feed. It could be the biggest game-changer before the election.