The End of the UK’s Political Consensus

It was an extraordinary few days in Brighton where the UK’s Labour Party held their annual conference. Labour’s detractors will focus on the squabbling over the UK’s nuclear deterrent on the final day when the real headlines should have been on the Labour Party’s unanimous rejection of austerity. The era of political consensus between both Labour and the Conservative Party are well and truly over. The lines are drawn in the sand, and the speech by John McDonnell clearly outlined the challenges Labour face in changing the narrative surrounding the UK economy and austerity economics.

John McDonnell’s Speech

John McDonnell’s speech was, by far, the most surprising of the entire conference. Before he stood up political commentators from all sides braced themselves for some left-wing ‘lunacy’ economics. They were left disappointed.

“Let me explain the significance of what we are doing today. We are embarking on the immense task of changing the economic discourse in this country. Step by step: First we are throwing off that ridiculous charge that we are deficit deniers. Second we are saying tackling the deficit is important but we are rejecting austerity as the means to do it. Third we are setting out an alternative based upon dynamically growing our economy, ending the tax cuts for the rich and addressing the scourge of tax evasion and avoidance. Fourth having cleared that debris from our path we are opening up a national discussion on the reality of the roles of deficits, surpluses, long-term investment, debt and monetary policy. Fifth we will develop a coherent, concrete alternative that grows a green, sustainable, prosperous economy for all”.

John McDonnell took George Osborne straight on to quash the idea that Labour were ‘deficit deniers’, something Ed Miliband and Ed Balls got lambasted on during the general election campaign. He plans to tackle the deficit a different way.

Tackling tax avoidance

Cuts to corporate welfare

Cuts to tax breaks for buy-to-let landlords

Cuts to the tax credit bill by introducing a living wage

Cuts to the housing benefit bill by constructing hundreds of thousands of affordable homes

It all sounded good. Tackling the deficit in this regard sounds like ‘pie in the sky’ economics but John McDonnell was well aware that it is “The Economy Stupid” and without showing economic competence and an alternative to George Osborne’s austerity mantra, Labour will be doomed to another inevitable election defeat in 2020. The banking crisis cost Labour in 2010. Labour’s failure to provide a real economic alternative to the coalition government cost them in 2015.

What John McDonnell is proposing is radical.

Economic Advisory Council

“… our radicalism, it comes with a burden. We need to prove to the British people we can run the economy better than the rich elite that runs it now. That’s why today I have established an Economic Advisory Committee to advise us on the development and implementation of our economic strategy”.

This is a masterstroke. The inclusion of some of the world’s leading economic thinkers such as Joseph Stiglitz (Nobel Memorial Prize winner), Thomas Piketty, Professor Mariana Mazzucato, Simon Wren Lewis, Ann Pettifor and David Blanchflower (former member of the Bank of England Monetary Committee), will undoubtedly provide John McDonnell with some much needed credibility and nuance.

He will demand that the Office of Budget Responsibility and the Bank of England use their resources to test and re-test every policy and economic instrument to demonstrate that their policies ‘workable and affordable’. This is bold, brave and radical.

Reviewing the Treasury & Bank of England

“Institutional change has to reflect our policy change. I want us to stand back and review the major institutions that are charged with managing our economy to check that they are fit for purpose and how they can be made more effective”.

This proposal was jaw-dropping. John McDonnell has invited Lord Bob Kerslake, former head of the civil service, to bring together a team to review the operation of the Treasury. Root and branch reform of the Treasury as a whole may well be in the cards.

There is to be a debate on the mandate of the Bank of England. John McDonnell was quick to point of that it regularly fails to meet its inflation targets which needs to be addressed but yet he proposes to expand the mandate to include growth, employment and earnings. This would make it look more like the US Federal Reserve, which would it theory, open the door for his proposed ‘People’s QE’ which was absent from his speech.

The HMRC will also be reviewed. Having lost 40% of its workforce in the past ten years its role will be pivotal in John McDonnell’s crusade against tax avoidance. It will be fully resourced to maximise tax collection no doubt.

Growth & Investment

John McDonnell’s signature policy announcement is the creation of a national investment bank, which would provide long term finance for research and development, particularly in the technological sector. His objective here is to initiate what Mariana Mazzucato calls an ‘entrepreneurial state’, which sees the collaboration between the businesses, entrepreneurs and the workforce. A novel idea, but is something already used in Nordic and Baltic countries through the Nordic Investment Bank and is used to great success in Europe’s powerhouse… Germany, via the KFW Banking Group.

Are these ideas edible to the electorate? They will be if Labour can change the narrative and prove its economic competence and challenge George Osborne’s ‘long term economic plan’. We all expected a speech where John McDonnell, wrapped in a red a flag, would preach about the end of capitalism. Instead we got a cool, well delivered speech where McDonnell sounded more like a bank manager than a socialist firebrand with a real, competent economic alternative to austerity.

The limits of austerity are clear and will become clearer as this parliament progresses. The UK economy is out of kilter. Heavily reliant on rising house prices, growing personal debt, the largest trade deficit since records began and the small matter of the £1.5 trillion debt. Fertile ground for another downturn.

Meanwhile, public services are being slashed, fire sales of state assets are occurring and the most vulnerable in society are being cruelly targeted through welfare reforms. The bedroom tax, the independent living fund, housing benefit and most recently cuts to tax credits are indicative of the extremes of austerity.

The real question remains, will the masses rally around such an economic alternative? We underestimated Jeremy Corbyn, we may well underestimate John McDonnell.

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