#GE2017: How radical are Labour’s economic policies?

As part of our coverage of the UK General Election 2017, rs21 is publishing articles relating to Corbyn’s 10 Labour pledges and manifesto. We are asking how the Labour manifesto would affect the working class and those fighting for justice in various organisations and campaigns.

In the second in this series, rs21 member Joe Sabatini considers Labour’s economic pledges, especially Pledge 8 to ‘Cut Inequality in Income and Wealth’, in light of the economic plans outlined in the Labour manifesto.

 

John McDonnell, Shadow Chancellor of the Exchequer, addresses protesters in the Grow Heathrow campaign. Photo credit: Transition Heathrow.

Labour’s pledges and manifesto for the 2017 election provide inspiration and a coherent programme of policies for a left government. The manifesto sets out what could be the basis for left political demands regardless of the outcome on 8th June.  It is in the spirit of enthusiastic endorsement that this critically friendly commentary is written.

The overall economic vision

Overall the manifesto provides us a vision for how to move leftwards and re-balance the total share of wealth that goes to workers and communities as against the top five percent of the population.

This goes against the neoliberalism that has dominated economic thinking and state policy across the developed and developing world since the 1980s. There are four features of neoliberalism that the manifesto challenges – first, that unregulated markets provide the best framework for producing wealth; second, that the state has no role in owning the means of production or directing what products should be made within any given country; third, that the economic role of the state is limited to managing inflation, ensuring a robust legal system exists to enforce private property rights, to reduce taxes for the wealthy and to minimise the role of politicians while strengthening the central bank; and fourth, to let the market determine the rate of unemployment and double down hard on people claiming benefits.

The net result of a neoliberal policy mix wherever it has been implemented has been to increase inequality and unemployment and to transfer a large share of the total national wealth from the workers to the capitalist class. This transfer in power has been secured by bitter industrial disputes in which capitalists have been victorious, allowing them to impose a low-wage economy on workers.

Until the banking crash of 2008, this model was unchallenged within mainstream parties in the UK. Since, it has formed the basis of the policies of austerity, which has sought to reduce public debt by cutting public services, benefits and increasing the total tax share of people on low and middle incomes. Austerity has only exacerbated the trends that were evident since the 1980s and has given rise to a widespread discontent with market economics.

The Labour manifesto poses the question of tax by pledging only to increase income tax and National Insurance on those earning above £80,000 a year (approximately five percent of the population). This is the first time in a generation that the question of who should pay for our services has been posed along clear class lines. Furthermore, the manifesto commits to levying any firms that pay their most senior employees more than 20 times the lowest paid.

On nationalisation, the manifesto makes no bones about the costs of privatisation to the end consumer (i.e. all of us). There is a commitment to introducing measures that would enable new publicly owned local and regional entities to enter the energy markets, while seeking to take Royal Mail and water back into public ownership. Most importantly, the manifesto pledges the gradual return of rail to the public. This latter has important ramifications when considering the wider infrastructure proposals set out in the manifesto.

The limitations of the manifesto are those we would expect to find facing any reformist government operating in the capitalist system today. With the internationialisation of production, the deregulation of global markets, and floating exchange rates, any one state operating alone has far less scope to redirect wealth from capital to labour than during the period of the great post-war boom. Put simply, the state has a restricted scope to control the power of markets to take money in and out of a country, and market forces can attack a nation’s currency by selling off its stocks of currency if they do not like what is happening politically. We saw something of this following the Brexit referendum, when markets sold off their stocks of pound sterling and bought dollars – which meant that every £1 exchanged bought less in dollars, euros and yen that it had before the referendum. The economic impact of this is that it can make it more expensive for the country whose currency is weakened to import goods from abroad. In the case of the UK, whose neoliberal model has resulted in a collapse of manufacturing and reliance on imports from China, Germany and Japan, this means that most of what we consume will become more expensive.

These pressures can be seen in the modesty of the manifesto – it offers no promise to reverse the full privatisation programme, return to fixed currencies or impose strict capital controls on wealth coming into and out of the country, and suggests very limited measures to control financial transactions, let alone taking direct control of larger portions of the economy. Given the low level of class struggle within the UK, Europe and the US, this is probably a sober and accurate statement of what a left programme can achieve today. It places a marker in the sand, a minimum socialist programme for the 21st century.

The National Infrastructure Fund

The centrepiece of the plans is the creation of a National Infrastructure Fund. The purpose of NIF will be to direct investment in every part of the country towards transport, communications and energy projects (though the bulk of this is likely to be nuclear, though, as we shall see below, there are openings for genuine renewables). The NIF will deploy £250bn raised through borrowing making use of a new network of regional banks.

To enable this a number of changes will be introduced:

  • Local authorities will have greater powers to establish energy companies (who could push for renewables), and will have a greater ability to use procurement to shrink pay gaps in firms it contracts with and tackle social inequalities.
  • Strategically important industries will have a national council which will look at the long-term opportunities and pressures on the industry and be able to set priorities for investment.

From a Marxist perspective, the impact of the NIF will depend upon the balance of class forces under a Labour government. If independent worker activity such as strikes and occupations remain at their low level, then the bargaining power of corporations will predominate, enabling them to hitch the NIF to their accumulation strategies. We can see this already with the commitments to HS2 and the building of new nuclear power plants.

On the other hand, if workers gain in confidence and take the initiative, then we are likely to see investment flowing not to where the profits are highest or more predictable, but to where there are local needs, resulting in better job prospects and working conditions. For example, the proposals to electrify all branch railway lines would greatly improve the speed of trains across the branch network, which would mainly benefit local communities, but from the viewpoint of major contractors and consortia of investors it is less attractive than something on the scale of HS2. If we look at what would best address the infrastructure challenges most people face and the potential negative impacts on the environment, the former is a better choice than the latter – but probably less profitable for investors.

Another example would be sustainable energy projects, since nuclear is far more attractive to big investors than setting up lots of co-operatives to retrofit millions of houses with solar panels, or local authority-run windfarms that would return zero profit. Only by putting significant pressure on the NIF from below could we ensure that funding is channelled into the more ecofriendly option.

Profitability and Productivity

The manifesto is firmly a left-Keynesian document in that aims to use the government to redirect wealth towards a mixture of increased public services and infrastructure development. The aim is to shrink the wealth gap between the many and the few and to put every part of the country on a sustainable economic footing rather than relying on markets.

Under neoliberal policies, Britain has been attractive to investors because the taxes are low for investors, and the total costs of employing workers are relatively low compared to key competitors such as Germany. Labour has responded to this with promises to increase costs of labour by strengthening collective bargaining, and by increases to Britain’s corporation tax, which are among the lowest in the developed world.

On the face of it, this is anathema to any would-be investor, and the Tories stress this point. Yet, as a rejoinder, the left-Keynesian argues that investment in infrastructure will make the country attractive, as it will increase skills as well as upgrading technology, communications and transport, boosting overall productivity (so that for each £1 invested, more product is made available to sell at the end of the day).

The main problem with the left-Keynesian view is that it does not fully grasp how this would play out if profitability is low – as it has been since the Great Recession of 2008. For the capitalist, there is a risk that rises in productivity may not be able to keep pace with a shrinking gap between the costs of production and the amount that can be recouped through sales. In other words, profit margins could still shrink despite gains in productivity.

A future Labour government could potentially be faced with a polarised situation where companies threaten to pull out investment, markets attack the currency or raise the interest at which the government can borrow (more on this below), while workers simultaneously push for higher wages, go on strike or put pressure on the government for greater investment in the public sector. This could lead to the government being caught between two class forces, and as Marx stated: in a situation where two parties claim equal rights, only force will decide the outcome.

Under such circumstances, if Labour wavered in its commitment to workers, we could be faced with a failure of its economic policies, resulting in workers still being poorly paid, low skilled, and the state more in debt than ever to the money markets, or under increased pressure to sell off any assets it has acquired. Or it could lead to a failure in being able to establish the infrastructure of regional banking and energy production as envisaged. It could even result in U-turns such as having to re-privatise the Royal Mail to raise cash to pay off public debts.

On the other hand, if the government holds firm and supports the initiative of workers, we are likely to see a swifter transition to forms of ownership based on co-operatives and state ownership, where the profit motive is potentially removed (co-operatives can make a surplus return on investment, but this does not have to be the prime reason for operating as it is in a privately owned firm). In practical terms this would mean that any entity which can cover its costs could operate with higher productivity despite increased costs of production. If completely successful, this could lay the foundations for fully automated luxury communism, with greater automation of work and increased redirection of human labour towards creative and strategic activity – i.e. thinking about how and why we do what we do, and being engaged more in the political processes that shape our economy than being ground down by technologically unnecessary labour.

While this sketches out some potential scenarios based on the implementation of the NIF, we also need to consider the implications for public finances, which takes us to Labour’s proposals on tax and government borrowing.

Taxation

Under Labour’s plans, 95 per cent of taxpayers will be guaranteed no increase in their income tax contributions, and everyone will be protected from any increase in personal National Insurance contributions and VAT. Only the top 5 per cent of earners will be asked to contribute more in tax to help fund our public services.

Taxation is the most direct way in which a government can finance its day-to-day and long-term expenditure. By seeking to increase public spending while restricting tax rises to the top five percent, Labour is committing to a policy that challenges the neoliberal consensus, in that it implies that, in a capitalist society, public expenditure should be derived from capital rather than labour. Put simply, under neoliberalism the tax share being paid out of workers’ wages has increased relative to that which has come from the capitalist class, and Labour under Corbyn wishes to shift that burden back onto capital. The policies they will introduce to achieve this will be to raise income tax on incomes above £80,000, to increase corporation tax and to strengthen the role of HM Revenue and Customs to crack down on tax avoidance and evasion.

The Right are crying that this will result in capital flight – where owners of wealth set up in other countries where the rate of taxation suits them. The problem with this view is that corporation tax is already higher in most other major economies, so there is a limited room for capital flight against this measure. The second point is that by taxing incomes, the government will benefit from an immediate increase in revenue, as they will be tapping the PAYE accounts of the top five percent.

Resisting neoliberal policy decisions can result in capital flight. Photo credit: Capital Airlines.

Again, it is unlikely that capitalists will want to take the risk of full-scale capital flight when the UK still remains the world’s sixth largest national economy with a market of 60 million people. Unlike Greece, where capital flight was tested to destructive effect, the measures proposed by Labour are not so radical that the net benefit to capital would outweigh its losses. Yet in a situation where there is class polarisation, this assumption could be severely tested.

In this sense, Brexit could play a bigger part in determining capital flight over the next few years, unless horror at any left-wing government is such as to trump economic logic altogether (or the workers gain such confidence that there is a race between capital flight and nationalisation).

On the flipside, Labour’s policy of targeting the top five percent remains vulnerable in that it focuses on the redistribution of wealth rather than its production. The overall economy will remain largely in the hands of private corporations whose income is based on selling commodities on the market, and raising cash through shares and borrowing from banks.

Any capacity to tax the richest will therefore be dependent on the overall profitability of the private sector and whether the capitalist economy does not deteriorate. If faced with another crash, the government could be faced with major reductions in tax revenue. This would pose the question for them of whether to take over the means of production directly – i.e. via nationalisation – or to borrow.

Fiscal Credibility Rule and Government Debt

Our Fiscal Credibility Rule is based on the simple principle that government should not be borrowing for day-to-day spending, but that future growth depends on investment.

Government debt is the alternative way of raising money for state expenditure. This usually takes the form of government bonds, where the government seeks to raise money directly from the money markets (e.g. hedge funds and corporations) and banks with the promise to pay back the full amount plus interest at a stipulated future date. If the government, for example, were to raise £1bn today on a ten-year bond, it would mean that in ten years they would have to pay that amount back to the investors who bought bonds, plus the going rate of interest on the day the bond was raised.[1]

The less that the government can raise in taxation, the more it has to choose between relying on borrowing or cutting expenditure. In periods of acute crisis, the government will borrow heavily as they did in 2009 to bail out the banks and to cover for the sudden drop in taxation as the recession took hold.

In 2010, the Tories presented this necessity as a failure of economic policy, and since then the whole terrain of discussion has shifted towards the logic of austerity – that debt reduction should be the first priority of economic policy.

This logic is reflected in Labour’s Fiscal Credibility Rule. The rule in effect prevents the government from raising bonds to cover the day to day expenses of public services. For example, all wages that go to pay nurses, teachers, fire fighters etc. will have to come from the taxation measures described above. It also means that if there is not enough taxation raised to cover above 1 percent pay rises for public sector workers, then they cannot borrow long term to cover them.

It may be that public sector workers could face a scenario where the only way to honour pay rises above 1 percent is through the government breaking its fiscal rule. When coupled with the scenario of greater class polarisation, the Fiscal Rule is likely to become a bone of contention between the demands of capital and labour on the government.

Concluding remarks

Today we are faced with a paradoxical situation. Class struggle is low, the share of wealth going to capital shows little sign of flagging, and yet the impact this has had on standards of living across the developed world is playing out in a full-blown crisis of neoliberal governance. Parties pushing policies that are aimed at promoting free trade, capital flows and deregulated markets are suffering in the polls (especially for social democratic parties that pursue these policies). Macron’s victory in France should not be seen as a counter-example, because his policies could barely muster 30 percent of the vote, even when French people were given a choice between neoliberalism and the hard-authoritarian right.

In terms of the UK election, the economic promises set out in Labour’s manifesto grasp both ends of the paradox. They create a space in which it would be easier for workers to take back control over the wealth in society. Rather than seeing this as the automatic result of applying left-Keynesian policies, we should rather see the policies being put forward as providing a better set of conditions for workers to do this themselves and to push back against capital, further accelerating the reforms laid out in the manifesto.

If such a scenario transpires, this could result in significant and long-term transformations. It could also assist in developing an economy that fulfils the current technological potential for automation and low carbon energy production without the devastating consequences of joblessness, debt and insecure employment.

Given the current poor state of class struggle combined with generalised discontent with the standard of living, it is difficult to see how such a polarisation could take place without the intervention of a left government applying left-Keynesian measures. To this extent, although it is possible to critique the Labour manifesto from the left, we must also acknowledge that a Labour victory is – right now – our best chance to build an economy that is fit for the many and not the few.

Click here to read the first of our articles in this series, Unite activist Ian Allinson on whether Labour can deliver security at work.

 

Notes

[1] Currently in Britain a 10-year bond yield, or amount of interest needing to be paid, is 1.05%. https://www.bloomberg.com/markets/rates-bonds/government-bonds/uk

 

There is one comment

  1. Brian Parkin

    This is a welcome and constructive start in the examination of Labour’s economic strategy and its more obvious short-comings. But firstly, I think it is a mistake to regard this as a programme from a ‘left’ Keynsian school of thought. Obviously, after some 40 years of (variants) of neoliberalism, any left-reformist programme is going to be at best, cautious. And bearing in mind the undoubted sincerity in Labour’s programme in its attempt to right some very grave social wrong’s, it is probably correct to assume that what the Corbyn team are presenting are the most radical we could hope for from a prospective left-reformist government. But some obvious points:
    1). Regarding the management (and ownership) of the utilities and public transport, the absence of any kind of democratically driven regulatory frameworks is a glaring omission. The idea that consumers and passengers could have statutory and controlling functions in regulating highly unpopular services would be a sure-fire way to ensure a prima face case for wholesale nationalisation as each company demonstrably failed its service and franchise test. This could provide a popular (and vengeful) mood for the reappropriation of public assets.
    2). The idea of a National Infrastructure Fund is a rather weaker version of economic Bennism in that without the above, it will ensure public funding to private interests with the state bearing all of the risk; a model in which nuclear power will be allowed to dodge further any economic (or environmental) regulation or scrutiny.
    3). The mention of capital flight is correct but massively underscored. The idea that a freely floating £ sterling as the currency of an economy bucking the neoliberal market orthodoxies and escaping the wrath of the money markets within days is cloud-cuckoo.
    4). So is the absence of any of the mention of the above- as well as reference to any counter-measures that would be needed.
    5). Which then raises the issue of bonds referred to in raising the capital for infrastructure investment- given that the hostility of the money markets will be mirrored by the big credit rating agencies- who will junk the UK at the drop of a hat. however much bigger than Greece, the UK will not be immune from such treatment- and if anything, as the 5th or 6th largest economy in the OECD, the UK represents a much bigger danger to the prevailing world economic order.
    6). Declared adherence to the (Labour) ‘golden’ Fiscal Credibility Rule will continue to see wages in the public sector locked into, at best, below the RPI rate of inflation- with a commensurate degree of frayed working class disappointment- if not disaffection.
    Clearly, I would welcome a Labour victory on June 9th- but only insofar as it might raise both working class expectations- and combativity for the struggle ahead. But well done Joe and let the debate commece.

    Liked by 2 people

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