Treasury

The Government is Showing Its Economic Hand – and the Left Will Need a Smart Response

by James Meadway

@meadwaj
4 June 2020
  • Estimated read time: 4 mins

A newly-installed chancellor of the exchequer promising ‘massive’ infrastructure investment, and a ‘green industrial revolution’. His prime minister telling parliament the “green recovery will be essential to this country’s success in the next few years”. Promises of more than 2m green jobs, of ‘reskilling’ those in declining industries for new, clean work insulating homes or building wind turbines. Whispers of the part-nationalisation of major firms, and a windfall tax on profiteers.

Welcome to Boris Johnson’s administration, June 2020. From before the election, the signs were all there that this would not be a Conservative administration of the kind we have been used to in the past. The Tories’ manifesto promised an end to further spending cuts (made good, in part, by then chancellor Sajid Javid just ahead of the election), £100bn of investment across the country, and Johnson himself was already talking up his green credentials. All of this, to be clear, is in direct response – right down to stealing the rhetoric – to Labour’s programme under Jeremy Corbyn.

The dire circumstances of the pandemic have put rocket boosters on all this talk. With Sajid Javid summarily dispatched in February for failing to bend to Number 10’s demands for spending – incidentally and instantly positioning him as champion of the Tories’ free market true believers – Rishi Sunak had already indicated that he was going to splash a bit of the cash around. Once the lockdown was in place, and after lobbying from the TUC, the introduction of the furlough payments alongside other support meant this Conservative chancellor was overseeing the biggest economic intervention by any government in Britain’s peacetime history. The largesse has made Sunak popular with the wider public, and the furlough scheme in particular stands out as one of the very few relative successes in the catastrophe that the Johnson government has made of the Covid-19 pandemic.

Of course, there should be some suspicion about noisy claims from Tories about wanting to spend in advance of them actually spending. We should always insist on seeing the colour of their money, green or otherwise.

But given the circumstances of the pandemic which has, amongst other impacts, accelerated the expansion of the state in economic life; given the Tories’ keenly-felt political need to spend some money to keep hold of new Conservative voters in old Labour seats; and given the nonexistent cost of government spending (with interest rates for government borrowing currently their lowest in human history), there are few reasons to think the Conservatives will not get at least some distance into their newly-found Keynesianism.

The reality of ultra-low interest rates has been accepted in government. The leaked Treasury document a few weeks ago, setting out ways to cut spending or raise taxes, was treated in some quarters as evidence of a dastardly austerity plan when it was just a list of possible options. The government could, if it wanted to, implement some of those options. But they are, at present, only options – and an options paper, even if written at ministerial request, is not a guarantee of action.

Of far more interest in the Telegraph report on the Treasury leak was the aside that Rishi Sunak himself had accepted the inevitability of a higher level of government debt in the future. All other reports from the Treasury suggest that its mandarins now expect a permanently higher debt-to-GDP ratio as a result of the crisis. It would therefore be a mistake for Labour and the left to base its strategy on the assumption that there will be an immediate rush to austerity.

If anyone is still in austerity autopilot, it’s time to snap out of it. Will there still be cuts? Yes, but now more carefully calibrated to political requirements: witness the stripping of London’s transport budget, followed by the attack ads from the Tory mayoral candidate blaming Labour’s mayoral incumbent Sadiq Khan for the cuts. Austerity can be a political weapon and this government, as we have seen, will utilise it. Increased spending overall can hide huge specific attacks. But austerity is unlikely, for now, to inform the entire economic programme. Austerity is likely to shift from a general economic offensive to a specific, politically-calibrated attack. And that means the rhetoric of opposing cuts alone won’t be enough for those on the left.

Nor, for that matter, will be the claim that only the left is addressing the civilisation-wide issue of climate change. The Tories now have their own version of how to take the challenge on. It means leaving the net zero commitment in place, but letting markets largely determine how to get there. Johnson himself has been reportedly very swayed by the experience of the last ten years. Over the last decade, Britain has seen (weak) economic growth, but a dramatic decline in carbon emissions. This hasn’t been driven by government policy: if anything, it has been the opposite, as Conservative chancellors have consistently cut funding for renewables and low-carbon schemes. We’re simply living through the side-effect of the steady phasing out of coal power in the UK, which is not enough to put the country on track to meet its commitments to carbon reduction, but still leaves Britain as the country with the largest reduction in CO2 emissions of anywhere in the world.

The result is the increasing popularity of what the Conservative Environmental Network calls a ‘pro-market’ alternative green plan in deliberate opposition to the state-led Green New Deal. This is where the smarter Tories are ending up, sensing that the arguments over the next few years are going to turn around the civilisation-level questions of how we deal not only with reducing climate impacts, but adapting to a changing planet.

There’ll be a market opportunity in the midst of all this: when backbench Tory MPs float the idea of a ‘green enterprise zones’, you can get a whiff of where this is heading: low tax, no unions, zero-rights manufacturing zones in the new ‘free ports’ churning out renewable energy products for export. Not just Shenzhen-on-Teesside, but Shenzhen-on-Teesside with wind farms. And there’s growing elite support for an environmentally-focused economic revival: 200 chief executives of British firms have written to Johnson, insisting on the need for a “clean, just recovery”.

There are barriers to this. One is lobbying by existing high-carbon industries. Motor industry lobbyists are already pushing for a £1.5bn revival of the 2008 ‘cash for clunkers’ car scrappage scheme, which saw car-owners hand in their old vehicles in return for big price cuts on the new. The industry wants enough funding to put 600,000 new vehicles on the roads, with few strings attached. Airlines are also pushing for bailouts without conditions.

The structure of British capitalism won’t change overnight, but Tory-led governments have restructured it before: in the 1930s and again in the 1980s, most obviously. Don’t think they won’t do it again, and do it in ways that will challenge the left’s comfort zones.

James Meadway is an economist and a Novara Media columnist.

Published 4 June 2020

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