Labour’s economic outlook was key to their defeat

Susan Pashkoff

One of the significant reasons why Labour was roundly defeated in the general election on May 7 was the weakness of their arguments about the economy. Rather than putting forward a coherent economic alternative to the misery that was being meted out by the Coalition government, they tail-ended that reactionary government’s key economic positions.

They had five years to put forwards a coherent criticism of Tory austerity policies and all they did was articulate “austerity-lite”. They never challenged the nonsensical idea of needing a balanced budget or the cuts to the public sector and the welfare state. They would continue those policies; there would be no reverse of austerity, but they would make the cuts in a nicer way than the Tories!

One of the significant errors that the Labour leadership made was accepting the narrative of the need to reduce the budget deficit. In the context of an economy coming out of a crisis, government spending – including investment in the economy, maintaining the strength of the public sector itself (both for job creation and provision of services) and sustaining the incomes of the majority – is actually pragmatic economic policy. As John T Harvey, Professor of Economics at Texas Christian University has repeatedly argued, a public sector deficit means a private sector surplus. Reducing the deficit means decreasing the private sector’s wealth; this is basic national accounting. [1]

From a post-Keynesian perspective, there is an interrelationship between the two; what is provided by the public sector debt doesn’t have to be covered by the private sector; as such, investment by the state can help the private sector recover, the private sector can use money to invest where they want.

What helps them make that decision is where they expect to see potential future effective demand and profitability. [2] But if the incomes (wages and benefits) of the majority are cut those cuts will impact upon potential effective demand and profitability of those companies who produce mainly for the domestic market. This will therefore reduce the possibility of economic recovery and future economic growth.

Marxists however understand that the private sector will only provide goods and services which are profitable. They do not produce use-values needed by the population to be a service to society but rather to make a profit. If something is not profitable, it simply won’t be produced.

So, cutting the budget deficit and shifting the provision of goods and services to the private sector means ( in circumstances where the private sector actually takes up provision of these services – which won’t always happen) that things that used to be provided free at the point of contact will then require sufficient income to purchase them.

This means that they will only be available to those with higher incomes and that removes these services and goods from the reach of the majority whose incomes have fallen. Those in the public sector have had their wages frozen in the attempt to decrease the budget deficit, benefits have been reduced for everyone (it is not only the poorest that get benefits) and for the working poor their incomes are simply insufficient to purchase those goods and services.

But did Labour say that there was no need to reduce the debt to get out of the economic crisis? No. Did they say that their priorities were to ensure the needs of the majority of the population were met and that preserving the public sector and the welfare state was essential? No.

Even if they believed in deficit reduction for some incomprehensible reason, why did they not say suggest increasing taxation for the wealth rather than impoverishing the majority? This would actually be better for the economy as a whole.

And if they really think the budget deficit is such a problem, they could have called for the scrapping of Trident which would save £34 billion. [3]


The term “austerity” is a rather loaded one; it implies that everyone needs to make sacrifices for the good of the whole. However, austerity does not affect everyone equally and was never meant to do so. Its whole purpose is to lower wages in order to raise profits in a stagnant economy or one that is coming out of a crash; the idea is that if the economy is not growing, the way to make it recover is to bolster profits of the few at the expense of the incomes of the many (part of the nonsense that says Britain is uncompetitive due to high wages). So, it is those dependent upon benefits, the working poor, state sector workers, disabled people and women who have borne the brunt of the cuts.

The pro-austerity argument relies upon a view of the economy that believes economic growth is driven by profits. From this perspective, that implicitly assumes that all profits are re-invested, high profits means high investment and hence economic growth. Unfortunately, reality differs from mainstream economic theory.

Capitalists invest if they believe they can make a profit by selling their goods; this, of course, depends upon whether or not they expect to sell these goods at all. Failing this, they will put their money into short-term speculative investment in financial markets or speculate in housing.

So if you are a producer of goods for domestic consumption and wage incomes are falling you do not increase output and hire more workers. Neoliberals are incredibly fascinated with export-led growth because if domestic wage incomes are cut, then the answer, they argue, is to export. But if everyone is cutting wage incomes and exporting goods and services, then who will purchase them and where? Unless there is increased government expenditure (that is what keeps the military industrial complex in the US going) and they are cutting that left, right and centre, then where will these goods and services get sold to ensure the realisation of profits?

Did Labour argue that increased wage incomes will increase economic growth and bring about an economic recovery in which all could benefit? Did they argue to strengthen unions so they could fight for improved conditions of work? No!

Did they argue for the elimination of zero hour contracts? No, they only said they would improve the conditions under which they were offered. Similarly they argued for an increase in the minimum wage to a level that would be reached anyhow if there was inflation. Given a deflationary situation, increasing public sector employment and increasing wage incomes would help the economy as a whole.

Instead of calling for social housing, they babbled about “affordable” housing leaving housing in the hands of speculators; their 3 year rent cap is insufficient. Incomes are falling and they are still talking about private affordable housing (affordable for who?), rents are eating up working people’s incomes and buy to let is concentrating housing in the hands of unscrupulous, greedy, and incompetent landlords. Selling off remaining housing association homes will cause even greater shortages of social housing and will lead to greater concentration of homes in the hands of landlords, destroy public housing and to add insult to injury, housing benefits are being paid to these landlords whom are making a mint out of rising rents

People in Britain have listened to 5 years of right-wing media spin about how austerity is necessary and that Labour almost destroyed the economy, we have had 5 years of lies from the Tories about economic priorities.

Did Labour counter these lies and say that austerity was the wrong policy and explain why? No, they promised to continue it and the inane policy of deficit reduction.

Did Labour cause the economic crisis?

Labour had five years to counter the Tory lies that their party was responsible for the world economic crisis. To argue that Labour was responsible for a world economic crisis is inane. Gordon Brown and company absurdly argued that they beat boom and bust, but that did not cause the economic crisis.

The idea that the country was broke when the Tories took over is simply nonsensical. Britain has a sovereign currency after all. Unlike Greece and the other countries in the Eurozone, Britain can simply print money and that is what they did, that is what quantitative easing is all about (along with buying up the bad debts of the financial sector).

How can a country with a sovereign currency be broke? It is an oxymoron. To argue this demonstrates a complete lack of understanding of basic economics. Currency is no longer tied to a gold standard; Bretton Woods was abrogated by Nixon in 1971 which means that money supply is not constrained by the relationship between gold and the US dollar. [4] It was abandoned because it was not sustainable; however, the lack of capital controls (which is part of this the abandonment of Bretton Woods and which are written into the EU and most international treaties) has also produced serious problems.

This is obvious in terms of taxation [5], as getting corporate tax revenue is increasingly difficult in the absence of international cooperation. Once capital has full mobility, it can easily change its home location to avoid taxation, and of course, there is no responsibility to invest in the economies in which it originated. That is what free mobility of capital means.

What caused the economic crisis was deregulation of the financial sector in the US and the UK, the substitution of easy (but expensive) credit to create massive personal debt in place of decent incomes to stimulate effective demand, and deregulated hedge funds were the main factors.

Labour in Britain had some responsibility for this – but this, of course, was not what the Tories, ably abetted by their friend’s in the media, was attacking them for. We also need to look at US government economic policy who introduced these things under Bill Clinton.

It would not have been hard to argue these points on economic grounds, how could their policies alone create a world-wide capitalist economic crisis? What stopped them doing so was their political commitment to deregulation – to the basic tenets of neoliberalism.

This meant that their wage policies were insufficient, their employment policies were insufficient and they were planning continued cuts. You cannot oppose neoliberal austerity arguments with “austerity-lite” and pretend that you are putting forward an alternative economic policy.

In this area as in so many others the failure of Labour to put forward a radical political alternative underlines the need for an alternative like Left Unity – a political party to the left of Labour with a genuine economic alternative – and one with green and purple jobs at its heart. [6]

[1} See for example, and, both of which easily counter the Tory narrative on deficit reduction

[2] Effective demand is demand backed by income and the willingness to buy.

[3] For the costs of Trident replacement, see


[5] See, e.g., beggar thy neighbour taxation policies where corporate taxes are lowered to lure capital investment away from other countries. This is something which Ireland (among others) has practiced. This causes other countries to lower their corporate taxation rate which decreases revenue for governments while benefitting corporations. There is also the issue of getting corporate taxes themselves due to the ease of changing home headquarters, various taxation laws where profit income is paid in different countries enabling tax avoidance.

[6] Purple jobs are jobs in the care sector which should be provided so that people, overwhelmingly women, don’t have to provide unpaid care to family members; be they children or adults requiring care and support

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