UK deficit target scrapped

Labour signals free movement effectively over

George Osborne today signalled he will miss the self-imposed target of eradicating the UK’s budget deficit by 2020. “We’ve got to be realistic,” he said.

No shit Sherlock! You tank the economy by calling a Brexit referendum, then refusing to plan for a negative outcome — what do you expect?

If, as projected, the UK goes into a minus-1% GDP recession in 2017 then, even if this is just a short term hit, there’s no chance of meeting the target required by Osborne’s self-imposed austerity plan. (There was slim chance anyway as it relied on growth figures fuelled by 1.1m EU migrants by 2020).

But Osborne is still relying on the Bank of England to do enough monetary stimulus to save the economy, while allowing the Treasury to cut spending and boost taxes in order to balance the books more slowly.

Let me address here all of the remaining contenders in the Tory leadership race: here is your chance to actually do something for the “one nation” you claim to represent. Scrap austerity.

The real danger is not just the short term 2017 recession, with falling real incomes as inflation kicks in. The danger is that Brexit permanently impairs the UK’s ability to grow, leaving our debt rising towards 100% of GDP and no way out of it.

If you do austerity in a recession, it makes the recession worse. Osborne did that from 2010 to 2012 before the IMF and Vince Cable persuaded him to use targeted monetary policy — plus partially reversing infrastructure spending cuts — to turn things round.

The sensible thing today would be to unleash massive, extra, targeted quantitative easing, this time focused on boosting investment into infrastructure — or so called “people’s QE”.

But alongside that, any government is going to have to do fiscal stimulus. That means cutting taxes — especially business taxes to stimulate inward investment and offset the Brexit effect — and a hike in public spending. And that means the debt and deficit will rise. With global bond yields low, that’s not the most urgent problem.

It won’t be Osborne who has to do these things, but the incoming Tory chancellor has to break with the orthodoxy Osborne followed at the Treasury. We need short term fiscal stimulus now — starting with a government liquidity fund for businesses and organisations to dip into as their trade and cashflow is disrupted by Brexit uncertainty.

If the next Tory chancellor does that, Labour should be generally supportive. Obviously Labour and the other progressive parties should scrutinise and criticise the detail and the execution. But overall we need something akin to an adrenaline shot in both arms — fiscal and monetary.

I’ve argued consistently that the next shot from the Bank of England needs to be QE targeted at boosting investment, not consumer demand.

If we face 2% inflation in the next year, because of rising import prices and our appalling current account deficit, then dropping £10k into everybody’s bank account will not help. Dropping the equivalent into a national investment fund, plus around £70bn to buy up the student loan book, would be a start.

It’s becoming clearer that Britain’s major EU rivals intend to fleece us during the Brexit process. Their negotiating position is to impose free movement as the price for access to the EEA, or (as with France) to allow continued free movement in return for ending the City’s “passport” to the EU.

Basically if we get any leeway at all in negotiations to stay in the EEA, it will be only to lose one of the “four freedoms”.

Today John McDonnell made a significant statement about this (not that you’d notice because the lobby journalists are too involved in promoting the Blairite coup to realise).

McDonnell included the City passport arrangement in five “red lines” he spelled out for Labour in the Brexit negotiations. The others were: remain in the EIB, keep access to the single market, keep employment rights and guarantee the rights of existing EU migrants.

McDonnell did not include keeping free movement of workers as a red line.

What this means is: under Corbyn, Labour will not see free movement as a red line in the Brexit negotiations.

Let’s see what Corbyn’s rivals have to say, if indeed they have any political programme at all short of sabotaging their own party.