John McDonnell, Labour’s new Shadow Chancellor has been giving hints of what is to be in his conference speech on Monday.
Apparently he is to go all George Osborne on us and tell the conference that Britain must always live within its means. That supposedly means support of George Osborne’s fiscal charter to deliver a surplus in 2019-20.
And yet, in the same interview, he reveals that his stance is rather different from that outlined in the fiscal charter. It is dressed up as a detail of “how” deficit reduction is achieved, but it’s rather more substantial than that. The McDonnell approach involves only balancing the current budget, not total borrowing. That means that Government revenues must be enough to pay for current spending – day-to-day spending on public services and welfare – but borrowing for investment in infrastructure, for example, is fine.
There is nothing especially wrong with borrowing for investment – in fact, allowing some flexibility to do just that is a good idea, providing the money is well spent. But it is a rather different position from George Osborne’s. And it makes a material difference of around £40 billion a year by 2019-20 on the OBR’s latest forecasts. More than enough to cancel the current Government’s planned welfare cuts of £12 billion. And enough to allow a real terms increase on spending for public services. Tax rises wouldn’t be needed.
It’s a similar position to that taken by Ed Balls in the run-up to the 2015 election. But there is an important distinction. Today, in 2015, we’re still running a deficit. In 2020, if all goes to plan, there will a surplus – both on McDonnell’s measure, and on Osborne’s more stretching one.
If John McDonnell is still the Shadow Chancellor taking Labour into the 2020 election, he won’t have to tie himself in knots explaining exactly which deficit target he’s aiming for and how he’s going to get there. The hard work will have been done. There might even be room for spending commitments to be made, paid for by the large surplus that will have built up. Even George Osborne has pencilled in a mini spending splurge in 2020, allowing spending to go up in real terms.
If all doesn’t go to plan, economic growth will be the reason. In the forecasts, growth in tax receipts makes a large contribution to closing the deficit over the coming years as incomes increase. But if economic growth disappoints, George Osborne is giving himself the flexibility to suspend deficit reduction targets anyway.
All this means that John McDonnell hasn’t really gone all austerity-economics on us. A commitment to balance the current budget is a pretty costless one. How it is supposed to square with his plan to support Osborne’s fiscal charter is rather trickier.