John McDonnell has promised that the deficit can be cut without austerity or spending cuts that are loaded on middle-income earners and the poor.

In his first conference speech as shadow chancellor, McDonnell won a warm reception when he said austerity was a political choice and not a necessity. He insisted Labour’s plan to “balance the books will be aggressive”, and appeared to indicate the bulk of the funds will come from higher growth, ending corporate tax evasion and reducing corporate welfare.

Promising an adult debate rather than silly slogans that demeaned the complexity of the issues, McDonnell said he would commit Labour to increasing taxes if necessary, but his aides said he did not advocate a rise in the 50p rate of income tax.

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Labour broadly accepts it largely lost the general election due to fears about its economic competence, but the party is divided over whether the defeat was made more severe by failing to be clear on how to cut the deficit, or instead because it appeared to be advocating “austerity lite” and so failed to differentiate itself from the Tories.

McDonnell made clear he believes the public can be persuaded Conservative-imposed austerity is not economically necessary. “We are embarking on the immense task of changing the economic discourse in this country. We are throwing off that ridiculous charge that we are deficit deniers,” he said.

“We are saying, tackling the deficit is important but we are rejecting austerity as the means to do it. 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.”



He admitted it was an immense task, but said he was sure “the British people are fed up of being patronised and talked down to by politicians with little more than silly slogans and misleading analogies”.

Urging those Labour MPs who had refused to serve under Jeremy Corbyn to come back, he said they would have the opportunity to debate.

He said the party would only back a financial transaction tax on the City if it was adopted by other countries. This stance will be a relief to the Labour candidate for the London mayoralty next year, Sadiq Khan, who is trying to reassure the City of London and businesses that Labour would not be a threat.



With the election still more than four years away, McDonnell announced a series of reviews into economic policy, and the key British economic institutions, including a review of the treasury by Bob Kerslake, the former head of the civil service. Lord Kerslake regularly disagreed with George Osborne and David Cameron during the coalition government, as well as having disagreements with the cabinet secretary, Sir Jeremy Heywood.



He also announced a review of the Bank of England mandate, saying it could be broadened to include a wider economic duty to secure growth, as opposed to just controlling inflation. He also promised a review into the culture and practices of the HMRC, including its approach to firms that fail to pay tax. A similar review was announced by Ed Miliband before the election. Corbyn, in his election campaign, claimed there was a tax gap of more than £120bn, but McDonnell has now reduced that figure by as much as £100bn.

McDonnell, who had said before his speech that it would be dull and “as exciting as a bank manager’s address”, opened by saying it was not a rant, but contained serious messages about the need to create an entrepreneurial state, reject austerity politics and break with neoliberalism.



He also vowed to cut the billions in tax breaks given to buy-to-let landlords. Referring to a clampdown on corporate tax avoidance to narrow the deficit, he said: “We will force people like Starbucks, Vodafone, Amazon and Google and all the others to pay their fair share of taxes.”



His remarks angered Vodafone, which issued a statement saying “It is disappointing that this has been raised again. There was no truth in the allegations in the past and there are none now. As we have made clear on numerous occasions, Vodafone has always paid its taxes and for the last financial year (2014/15) we paid around £360m in direct taxes in the UK.”

Paul Johnson, the director of the Institute for Fiscal Studies, said McDonnell’s claim that vast sums could be raised by tackling tax evasion should be taken with a pinch of salt.

In his key message, McDonnell said: “Let me tell you also, there will be cuts to tackle the deficit but our cuts will not be the number of police officers on our streets or nurses in our hospitals or teachers in our classrooms.”



Setting out his plans for tax rises, he said: “Where money needs to be raised it will be raised from fairer, more progressive taxation. We will be lifting the burden from middle- and low-income earners paying for a crisis they did not cause.

“If we inherit a deficit in 2020, fiscal policy will be used to pay down the debt and lower the deficit but at a speed that does not put into jeopardy sustainable economic growth.

“We need to prove to the British people we can run the economy better than the rich elite that runs it now.”

But McDonnell insisted he remained committed to anti-austerity politics, saying “austerity is also not just a word for the 100,000 children in homeless families who tonight will be going to bed not in a home of their own but in a bed and breakfast or temporary accommodation”.





On a people’s quantitative easing, an issue raised by Corbyn in his election campaign, McDonnell said little but promised: “We’ll use active monetary policy to stimulate demand where necessary.”

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He then set out plans for an active industrial strategy led by the Department for Business, Innovation and Skills, saying it would “require patient, long-term finance for investment in research from an effectively resourced and empowered national investment bank”.

McDonnell defended plans to bring the railways back into public ownership, saying: “It seems the state nationalising our assets is OK with the Tories as long as it’s the Chinese state or, in the case of our railways, the Dutch or French.”



The response of the business sector to McDonnell’s speech was lukewarm. John Cridland, the CBI director general, said: “The shadow chancellor was strong on intent but has not yet provided great detail on how he intends to deliver his plans. The overall impression of this speech was of rather more intervention in the world of business and the economy.

“What’s clear to us is that you can’t be pro-growth and pro-jobs without being pro-business. And a thriving private sector is essential for raising living standards and paying for high-quality public service.”

John Longworth, the director general of the British Chambers of Commerce, said: “There is a difference between an entrepreneurial state – one that supports growth and innovation – and a big state, reaching into and directing every facet of business and national life.

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“As it develops its economic policies, the leadership of the Labour party must not confuse supporting growth with state control over the economy.”







