In Part III of his blog series on inflation, James Bartholmeusz looks at how a future Labour government can approach inflation.
Despite years and years of Tory rhetoric, if Labour won a snap election tomorrow it would inherit an economy in a much worse state than the one it left behind in 2010. Growth is still non-existent, inflation is running far beyond the ‘safe’ target rate of 2%, and public debt as a proportion of gross domestic product is far higher than in the aftermath of the bank bailouts. To be sure, only some of this morass is the result of poor government decisions (austerity, Brexit) as opposed to events beyond the government’s control (the pandemic, war in Ukraine). Nevertheless, Labour once again needs to reconcile its progressive programme with cleaning up the mess left behind by its predecessors. How should the party proceed?
The short-term priority has to be blunting the edges of the cost of living crisis. Here, we shouldn’t worry too much about the wider fiscal and monetary situation; in Britain in 2022, it is a point of principle that no one should be unable to eat, heat their home or meet other basic needs. There are a range of policy options for the party to consider, in addition to Rachel Reeves’ proposal to cut value-added tax on energy bills. Another step (as suggested by the Resolution Foundation) would be to increase both the generosity and reach of universal credit, providing windfall payments to millions of households in dire straits. Beyond this, Labour could also consider introducing temporary price controls on a basket of essential goods to shield them from inflation. There would undoubtedly be cries of outrage from the energy companies, but if you can’t provide affordable electricity and gas to a wide enough customer base then you’re clearly not fit to be in business. (More on this later.)
The second course of action is to ratchet up public spending. There is no shortage of priorities available, from repairing the NHS and other public services to funding the urgent transition away from fossil fuels and towards low-carbon and renewable energy. Labour should be unapologetic about spending the maximum amount commensurate with a realistic assessment of monetary and fiscal constraints. On the monetary side, the country can arguably tolerate a sustained higher rate of inflation if the prices of essential goods are retained at affordable levels, using the policy tools above. On the fiscal side, we can also make the most of the additional headroom created by the current ‘exceptional’ circumstances. Even our record-high public debt is still well below the G7 average (and between that of the EU27 and USA) suggesting that there is significant remaining capacity in financial markets to receive British public debt on favourable terms. With all the pressing challenges we face, a gradual reduction in debt levels is truly a problem for another day.
Thirdly, Labour needs to take a long-term approach to restructuring the British economy and increasing our resilience to future shocks. At the top of the list, the lines between the public, private and third sectors need to be reconsidered and redrawn. It is now abundantly clear that some services and sectors should never have been privatised, and should be returned to public ownership at the earliest and most cost-effective opportunity. Electricity, gas, water and public transport all fall into this category, as does our emerging digital infrastructure (despite allegations of “broadband communism” at the last election). Among many other benefits, state control of these key strategic services would allow future governments to react much more quickly and effectively to unexpected events. Imagine, for instance, how different our response might have been to surging energy prices if a single national provider could absorb wholesale costs and retain customer bills at a sensible level.
Another key aspect of restructuring would be to revive collective bargaining across the economy. One reason the cost of living crisis is now biting so hard is that wage growth has remained even more stagnant than other measures since the 2008 crash, a tendency exacerbated by certain policy choices. One unintended consequence of quantitative easing was a substantial inflation of asset values, further increasing the wealth divide at the same time as earned incomes for the majority were slipping behind. Collective bargaining between representative unions and businesses is one of the most effective ways to spread the proceeds of growth more evenly, and the government has a key role to play in facilitating and supporting it. The Institute of Employment Rights has developed a full policy programme in this area, including bargaining at the sectoral level to bring rogue employers into line.
These are only some of the tools available to a future Labour government in the new economic environment. Inevitably, some will argue that such measures are too radical, or simply bear too much resemblance to Corbyn-era policies from which the Starmer leadership is keen to distance itself. These objections are fairly feeble. The only check on using public spending to pursue progressive policy goals should be the prevailing fiscal and monetary constraints at any given moment in time. If these constraints can be effectively handled, there are no excuses for not seizing every opportunity available while in government.
Perhaps just as importantly, the electoral terrain has also shifted since David Cameron and Ed Miliband were arguing over who wrecked the public finances. Boris Johnson has managed to reinvent his party as the proponent of “levelling up”, as if this high-spending vision wasn’t the precise opposite of the austerity inflicted by previous Conservative governments. Tory strategists have rightly recognised that big government is back in fashion. Under the circumstances, it would be a grave error for Labour to re-fight the battles of the 2010s rather than seizing this historic moment for change.
James Bartholomeusz is a Young Fabian and works in campaigns and policy at a global union federation. He writes here in a personal capacity.