Sunday, 20 March 2016

What on earth is happening to John McDonnell?

Politics is dizzying sometimes. Let's leave aside for a moment the Great Implosion of Chancellor George Osborne's latest Budget, which would be darkly funny if it were not so serious. We'll get to that. Let's look across the aisle to those who are opposing him. No sooner have you got used to the fact that a man who cites Lenin and Trotsky as his greatest inspirations is actually the Shadow Chancellor - is actually the Shadow Chancellor! - than he surprises you with a load of counter-intuitive statements. John McDonnell's speech on Labour's 'new' fiscal rules (above) looks, on the surface, like just such a moment: the exact second when the penny dropped, with Labour MPs no less than everyone else, that their new masters were rather like the old ones. Only with berets and megaphones.

This because Mr McDonnell's speech, on the surface, appeared to say that Labour was moving back to Gordon Brown's policies, of only borrowing to spend on capital infrastructure projects, and even to the Coalition's budget target of achieving the current spending balance involved in such a pledge over the Parliament. One was tempted to ask: what on earth was all the fuss about? All that stuff about 'austerity lite', 'Red Tories', 'taking the party back to its roots', even 'principle before power'? All just junked - for what? To convince swing voters and the City? We genuinely and deeply doubt that they will be impressed by Mr McDonnell, whatever he says, but it's incumbent on us to take a proper look at all this. Because, beneath the surface, there may well be interesting things going on here.

Start with this: some of the other parts of Labour's rules announced by Mr McDonnell are far superior to the 'fiscal mandate' that the present Chancellor, George Osborne, has set himself. Mr Osborne has boxed himself into reducing the deficit's share of GDP every single year, as well as running an absolute surplus (including capital) by 2019/20. Sorry, but these are utterly inflexible and unrealistic rules that don't bear any relation to the facts as they are. The United Kingdom is an open, liberal, service-orientated economy that is highly susceptible to changes in the world economy. Lay down rules as rigid as this, and eventually you're going to get a shock when things change very quickly. Then you'll have to break all your rules, gradually degrading the good name of HM Treasury and Her Majesty's Government as you do so. 

Last week's Budget saw Chancellor Osborne many billions of pounds down even on where he was last November, having to make this up with some more tax rises and spending cuts. Many of the tax rises' yields looked optimistic indeed; the budgetary path went back to looking like a completely unrealistic hockey stick, akin to the rhetorical ingenuity the Treasury demonstrated before Autumn Statement windfalls seemed to solve a lot of their problems at the back end of 2015: the overall budget goes zooming on up into surplus at the end of the Parliament. It's not going to happen. It won't happen. He'll just defer the whole thing. Again. It's an example of where you get to if you write a load of rules that are just far, far too tight for reality. 

And that's where Labour come in, saying that the deficit doesn't have to fall every year, only by the end of the Parliament, and that the zero point isn't all spending, but day-to-day outlays. It's a sensible, pragmatic, workaday solution to many of our problems, and it's got a longstanding and impeccable Keynesian rationale behind it. As the world economy turns down, Mr Osborne is taking more demand out of the system. That never ends well. It unites Leader of the Opposition and Shadow Chancellor in a way that Ed Miliband and Ed Balls were never at one during the last Parliament. It will allow Labour in power (stop sniggering at the back there) to spend many billions more on investment, at a time of historically low interest rates, in a country that is crying out for better transport, more homes and new energy sources. It's a winner.

There is, alas, a flaw. And it's this: no-one will ever believe a single word Mr McDonnell ever says about policy. Not just because he is extremely selective in what he chooses to remember from history (a theme we will return to in subsequent blogs), though that's an important point. Nor is the main problem his absurd and bathetic wielding of the Little Red Book in the Chamber of the House of Commons, damaging as that was. That was just a symbol of his wider problem. But because it is now an ingrained and unimpeachable truth in the public imagination that Labour in power spent too much, borrowed too much and wasted too much. All quite untrue, of course: but any efforts to convince electors to the contrary were lost long ago, in the summer of 2010. There's no point raking back over the coals. 

Voters think, instinctively, that positives must beget positives: in this instance, that 'paying back the debt' must lead to growth. Not necessarily true when you're leaning into a macroeconomic headwind, but there you are. If they're to do anything about this, Labour probably has to wait until the Conservatives' own reputation for economic competence is shredded, as during the 1992 European Exchange Rate Mechanism debacle; just telling voters that they will spend and borrow more, however correct, is unlikely to get them very far. 

The interesting-but-academic underpinning of some of Mr McDonnell's more speculative punts makes this problem worse. The actual text of his speech is slightly opaque on many of the more interesting theoretical and administrative elements involved, but we've been briefed that he will declare himself free of these rules if the Bank of England declares that it would cut interest rates to deal with weak growth, but cannot go further given how low they are already. This instead of waiting for growth to fall below one per cent, as in Mr Osborne's plans. At the moment, Mr McDonnell's trigger for his rules' suspension would indeed likely come before Mr Osborne's, given how low rates are: but if rates do rise at some point in this Parliament and the next (some way away yet), he may find that his rule is much more 'iron' and restrictive than those adopted by the Conservatives. Not only that, but Labour's 2015 Manifesto, so derided by Mr McDonnell's Twitter army of clicktivists for its 'Tory' leanings, was much less disciplined about public spending, only announcing there would get to a surplus on the current budget 'as soon as possible'.

The doorstep-unfriendly ideas in the background are another drawback. One of Mr McDonnell's representatives on earth, the economics journalist Paul Mason, has long been a great defender of Labour's new radical leaders. In recent times some of his writings seem to have become fantastically detached from reality altogether. But in defence of this particular speech, and on a subject where he does wield some expertise, he has summoned up some frankly hard-to-credit (or understand) rhetoric about times when 'fiscal and monetary policy become fused'. Sorry, but I thought that the Treasury had always understood that the two bleed into one another, and there are piles of files in the National Archives going back to the first creation of national accounts in the 1940s, through the Radcliffe Commission on the Working of the Monetary System and then on to the secondary banking crisis of the 1970s that prove just that. Mason also argues that, if Labour's extra investment raises the country's measured growth rate via tweaks to our methodology, apparently through the Keynesian multiplier effect rather than just increased efficiency, that will give the Chancellor more to spend on the current side. True: but given the rather small amount of government infrastructure spending when measured against the whole economy, not to say its complex and slow-to-mobilise nature, we doubt that'll make much difference in the near term and before the end of a future 2020-25 Parliament.

Dear Corbynites: it seems that you've been had, and for little productive reason. Because Mr McDonnell has spent a lifetime saying one thing, and now he says quite another (with some fiddly economics ornaments attached). The government and the Chancellor are very unpopular: only 21% of voters think that Mr Osborne would make 'the best Chancellor'. The Budget numbers look even worse than that. But the number for Mr McDonnell? A pitiful 11%. Eleven. Per. Cent.

The reason that politicians now pre-announce rules and regulations is that not many people trust them. 'Fiscal locks', along with all the other tiresome language of precommitment, are designed to stop politicians reneging on their promises. The obfuscatory nature of the theories that Mr McDonnell evokes but does not name, the press conference questions that he invites but will not take, and the sheer fact that he is after all John McDonnell makes these new rules an exercise in futility. That's a pity, because there's something that's at one and the same time sensible and intriguing trying to get out here. It's failing.


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