Budget Resolutions and Economic Situation

Debate between Michael Meacher and Robert Flello

Tuesday 14th July 2015 Commons Chamber

[Mr Meacher]

I would like to ask the hon. Gentleman—although I am not inviting him to come back in—how he would explain the fact that in the latest quarter the growth rate was 0.4%, up from 0.3%. In the last three quarters it has gone down from 0.9% to 0.6%, and then to 0.3% or 0.4%. It was clearly a short-term growth surge, which is now fading.

We all regard productivity as crucial, but the UK’s investment as a percentage of GDP is now among the lowest in the world at barely 14%. By the time depreciation is netted off the growth figure, we are actually down at just 2.5%, which hardly even keeps up with our rising population.

Why does the OBR’s Budget report forecast a never-ending decline in Britain’s share of world exports, even compared with 2014, when this country experienced the biggest proportionate balance of payments current account decline since 1830? Why have the Government squeezed the economy so hard that they are now looking to a steep rise in household borrowing as the main source of future demand? Dangerously, the borrowing level already exceeds £2 trillion and may well be the source of the next economic crisis.

For all those reasons, the Chancellor’s boasts about the state of the economy do not bear even superficial scrutiny. Nor is his explanation of the cause of the economic crisis any more truthful. He continually lambasts the last Labour Government for overspending, but their economic record actually shows the opposite. The largest budget deficit under the Blair and Brown Governments in the 11 years from 1997 to 2008, before the crash, was 3.3% of GDP. The Thatcher and Major Governments ratcheted up budget deficits in excess of that in 10 of their 18 years. Who were the profligate ones? It was not Labour.

Then there is the question of which party has handled better the enormous rise in the deficit, caused by the bankers and the international recession. Again, it is valuable to look at the economic record. Alistair Darling, the last Labour Chancellor, gave the economy a big fiscal stimulus worth nearly 5% of GDP, allowing the automatic stabilisers to work and bringing forward public investment projects worth more than £30 billion.

[Robert Flello]

Would that be the same Alistair Darling who said that we should halve the deficit between 2010 and 2015, and who was lambasted by the Conservative party for proposing such a measure?

[Mr Meacher]

My hon. Friend makes a good point, and I will come on to comparing what the Government have achieved with what the Chancellor said in 2010.

Bearing in mind that it takes between 12 and 18 months for Budget measures to work their way through the economy fully, we should remember that Alistair Darling cut the deficit from its peak of £154 billion to just £114 billion by the fourth quarter of 2011—a cut of £40 billion in fewer than two years at a rate of £20 billion a year. The current Chancellor, however, through his successive austerity Budgets, slowed that deficit reduction to a trickle. Today it is still £90 billion, which represents a reduction of £24 billion in three years at a rate of £8 billion a year. If he wanted to reduce the deficit as efficiently and as fast as possible, he has clearly failed. But of course, his real aim all along has been to shrink the state and squeeze the public sector. The deficit has merely been a convenient pretext to enable him to do so.

Now the Chancellor is telling us that he will eliminate the structural deficit by 2019-20. Judging by the fact that he boasted that he would achieve that by this year, when it is still a whopping £90 billion, we can take that with a fair pinch of salt. His Budget forecasts assume a 2.5% a year growth rate all the way to 2020, but with the £25 billion of further expenditure and benefit cuts now being imposed on the economy, we are likely to see a reprise of what has happened in the past five years. The reimposed austerity will flatten growth, exactly as it did from 2010 to 2012, when it was relieved only by postponing austerity to generate a short 18-month economic surge in 2013-14. As I have explained, that surge has now deflated. That pattern is likely to be reproduced in the next five years. I fear that we will have the worst of both worlds—a short-lived growth spurt that fizzles out and is achieved only through a further postponement of deficit reduction extending well into the medium-term future.

The most fundamental question is: what is the right way to deal with a large deficit? We all agree that it is far too large and has to be reduced. It is a statement of the blindingly obvious, but one that is not publicly stated, that there are two ways of doing that—either by cutting expenditure or by increasing income. An individual does not have that option, of course, but the state does, because it controls the momentum of the economy through either expanding or contracting it. The Chancellor chose exclusively to pursue the latter because it suited his political ends of shrinking the state, but economically, it has been dire—the impoverishment of a quarter of the population and the generation of 350 food banks, rather like a third world country, while cutting the deficit by only a marginal amount.

Historically, all the evidence is against the Chancellor. The reduction of large deficits by both the US and Sweden in the 1990s occurred as a result of sustained growth policies. Above all, we have the precedent of Britain in 1945, when the debt was 260% of GDP—three times higher than the 80% it is today. That did not prevent the Attlee Government from introducing the NHS and the welfare state, building 300,000 houses a year, reconstructing the country’s broken infrastructure and, above all, restoring full employment, with the deficit steadily decreasing to 60% over the next 30 years.

The Chancellor has not only failed to cut the deficit by much, but his legacy will be that he fundamentally chose the wrong way to do it, for the wrong reasons, with huge, irrecoverable losses to UK growth and output.