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After Falkirk and Grangemouth, where next?
The article below should be seen as a contribution to an ongoing discussion. It draws on discussions with members of Democratic Left Scotland and others in late 2013. Any comments would be very welcome.

“… we represent the only real organised challenge in society to the values and views of our bankrupt establishment.” States Len McCluskey in relation to the events of 2013. Events we are told that help illuminate ‘the nature of power in society today’. A telling assertion that suggests that the Labour Party, as it is now at least, offers little in terms of taking on neo-liberalism and the interests of capital. Additionally Unite’s General Secretary also states that globalisation renders our politicians and governments weak in the face of the ‘almost unlimited power of private ownership to act as it pleases’.
Few on the Left would take issue with the general thrust of these comments and it is easy to see how they were informed by the events at Falkirk and Grangemouth but given the outcome some discussion is required.
Falkirk: At one point Falkirk was represented by the popular and effective MP Denis Canavan. That was before New Labour and boundary changes. Then the disastrous Eric Joyce prompted a selection battle. Unite unlike other unions Public Commercial and Services (PCS), Fire Brigades Union (FBU) and Rail Maritime Transport (RMT) have emphasised the recapturing of the Labour Party. Unison and GMB are more agnostic. This leaves Unite alone with an active strategy of ensuring more working class and anti-austerity MPs get elected to Westminster. A strategy that means taking on the Labour Party career machine where Lord Sainsbury supported candidates are pushed up the ladder of patronage. Interestingly many in Falkirk and elsewhere within the Labour Party opposed this challenge from Unite. For many in Miliband’s Labour Party Unite are seen as ‘the other’.
Conversely the fact that our biggest trade union feels the need to open up this second front to take on the bosses as a class, not just as employers, is remarkable. This is because Labour are considered, as suggested above, as ideologically and practically redundant when it comes to supporting legislation and action that will allow workers to challenge the power of private ownership.
In Falkirk this saw Stevie Deans, Unite’s leading lay official, divide his time between defending workers at INEOS and as he saw it promoting their interests via a changing Labour Party. Whilst the likelihood of Westminster passing laws that can effectively challenge globalisation can be debated the tactic of a ‘political’ as well as industrial strategy is understandable. Working to raise people’s political consciousness in a way that supports them to take part in the democratic process is a desirable proposition. Whether that is entirely what was happening is another question. However what is apparent is where the Labour Party establishment are challenged in selection battles for relatively safe seats; things can become very competitive and very mucky. More energy and money would appear to get spent on securing a favoured candidate rather than building political understanding and engagement of new and potential members.
All this effort is premised on Unite’s belief that the Labour Party is the only realistic potential political vehicle for change with all other options being considered fanciful or unworthy of consideration, this side of the UK general election in 2015. In this context Unite’s actions on the electoral front seem understandable. The connection between workers and all political parties is distant and becoming increasingly so. Labour retains a historic link to working people in realms of recoverable memory but the reality is different particularly out with the public sector.
Grangemouth: The private sector is different. As for all workers it is hard to hold onto gains but in the private sector asserting ‘moral guardianship’ over the relationship between the production process and a community is fiercely contested by the need for ever growing profit. In spite of this and the dirty and dangerous aspects of the work at INEOS the workforce were considered well organised and relatively well rewarded. The recent attacks by the owners on the workforce’s pensions had been resisted back in 2008; wages this year were increased against a background of erosion elsewhere.
But nothing stays the same. Changes to the ownership, access to raw materials, competition, the balance sheet, and scope of future production were taking place. This impacted on the workforce’s leverage over the manufacturing processes. Labour could still be withdrawn but INEOS had repositioned itself in relation to the chain of effects. It could control the turning on and off of the tap, the timing of this and to a degree the consequences.
Given Stevie Deans involvement in events in Falkirk they went for him too. Whether this provocation was simply vindictive or calculated is largely academic (except of course for Stevie as an individual). INEOS created a situation where a straight-forward strike was of little consequence to them. They were challenging the UK government, Holyrood and the workforce to fund the costs of the modification of the plant and their continued and increased profit margins. A bi-product was further reducing the terms and conditions of the workforce and taking on the union at the plant.
At that juncture retaining the jobs was important. INEOS had argued that Grangemouth without investment was becoming a liability. Its threat to close the refinery needed to be taken seriously. By the end of October it was too late to call their bluff, irrespective of the reality of Jim Ratcliffe’s bank balance, without having adequate local and national alliances in place to do so.
Where next: Hindsight is a wonderful thing and it is perhaps too easy for those at a distance to ask what if? But it is important that learning takes place.
Governments in London and Edinburgh had already agreed in principle at least to fund Jim Radcliffe and INEOS in their venture to re-fit Grangemouth with the capacity to process shale gas shipped from the USA to the Forth. The environmental and economic rationale for this only makes sense in the context of supporting the globalised tax avoiding pursuit of ever increasing profit. Whilst the media and others to some degree acknowledged the questionable moral position of Jim Radcliffe and INEOS they did little to fundamentally challenge his position. The plant have morally been ‘ours’ But the profit was Ratcliffe’s.
David Cameron compounded this by attacking, Unite, Ed Miliband and Stevie Deans. Labour in London appeared largely compromised by its electoral ambitions. Johann Lamont said nothing. Attempts were made by Unite to ensure the ‘bad bosses’ had nowhere to hide but the alliance between Britain’s political class and INEOS remained intact. Ideologically, globalised profiteering might not be considered pretty but right to exploit Grangemouth was not contested. Whilst people spoke about employment and the local community, the Scottish economy, or with Britain fuel needs no concrete alternative people’s alliance was formed.
For Unite, and other unions, industrial relations are informed by the right to withdraw labour. But little seems to be done to strengthen control and influence over the productive forces when advances have been made and negotiations are taking place. Jim Ratcillfe would appear to have been in sole control of the information and decision making relating to the future of Grangemouth. Does direct workforce involvement in the management and ownership of manufacturing needs considered? Limitations need to be taken into account but waiting for reluctant politicians to effectively legislate equally seems like a long haul. Strikes, occupations and work-ins must remain part of the equipment of challenging exploitation but ways need to be found to consolidate and expand control over wages, conditions, but also the means of production as part of the wider economy. However controversial this would appear to be, a more direct route to limiting and transforming relations with global capitalists is not on the horizon.
The European elections, the referendum and the 2015 general election result could provide us with a renewed political landscape upon which to build the strength of our movement. This will take hard work and imagination. However there also remains the need to find an effective political party that does not prioritise profiteering. It would be welcome if the Labour Party as an institution could be moved in that direction. Working people however cannot remain still whilst real wages are being reduced and the economy and environment are being continually exploited for the needs of the few. Unite needs to connect to this resistance if it wishes to contribute to an effective challenge to the values and views of our bankrupt establishment.
stuartfairweather@ymail.com

Scotland’s Other Union

In the debate about whether Scotland should be an independent country, three major topics have proved to be both predictably contentious and genuinely problematic:

  • Scotland’s relationship with the EU in a context where the institutions of the EU are being reshaped in response to the ongoing crisis in the euro-zone, and where, once a new settlement emerges, an in/out referendum on EU membership seems likely to be held, either in the UK as a whole or, if Scotland is independent by then, in the rest of the UK;
  • The monetary and financial options open to an independent Scotland and their implications for fiscal policy;
  • The defence and foreign policies of an independent Scotland, with particular reference to nuclear weapons, the intelligence services and membership of NATO.

In the current issue of Perspectives, we review the first of these topics. In the autumn and winter issues, we shall cover the other two. Thereafter, we plan to commission an article setting out the constructive case for maintaining the Union and to convene a roundtable discussion on the substance, conduct and quality of the referendum debate, inviting participants to reflect on what it tells us about the state of our society and the condition of our democracy.

37-Su13

Independence in Europe: a reality check

Until last year, Alex Salmond and his ministers repeatedly claimed that an independent Scotland would automatically inherit all the UK’s ties and treaty obligations. By analogy with the “velvet divorce” between the Czech Republic and Slovakia, they assumed that once the Union had been dissolved, Scotland and the residual UK (rUK) would inherit the same legal status as successor states. At a press conference in September 2012, José Manuel Barroso, president of the European commission, confuted both claim and assumption, explaining his views at greater length in an interview for the BBC given in December.

Barroso’s intervention should not have come as a surprise: he was merely repeating the position set out by his predecessor Romano Prodi, who in April 2004 told the European parliament that:

“When a part of the territory of a member state ceases to be part of that state – for instance, because the territory has become an independent state – the treaties will no longer apply to that territory. In other words, a newly independent region would, by the fact of its independence, become a third country with respect to the Union, and the treaties would, from the date of its independence, not apply any more.”

The legal basis of Prodi’s view is unclear, but this hardly matters. There are no precedents for the Scottish case. The velvet divorce occurred in 1993, long before the Czech Republic and Slovakia applied to join the EU as separate states. No existing member state has ever split into two, so the question of what happens if both parts want to stay in the EU or if one wants to stay and the other to leave, has never arisen. The political reality is that an independent Scotland would not automatically be a member, but would have to go through the same accession process as have all but the original six member states, and would need to gain the approval of all 27 existing member states (28 after Croatia joins on 1 July).

After some initial huffing and puffing, the SNP sought to play down the difference between their previous assurances of a seamless transition to “independence in Europe” and the prospect that now beckoned of potentially fraught three-way negotiations between Edinburgh, London and Brussels, followed by formal ratification in each member state. John Swinney, for example, declared:

“Assuming there is a yes vote as a result of the referendum, Scotland will still be at that stage a part of the UK. We have always accepted that there has to be negotiation about the details and terms of Scotland’s membership of the EU. Crucially, that would take place at a time when we are still part of the EU, of which we have been members for 40 years.”

(The use of the plural “members” in Swinney’s final sentence reveals his reluctance to accept, or at any rate admit, the difference between being part of a member state and becoming a new state, the central point – of law or Realpolitik, as you prefer – that Barroso, and before him Prodi, had insisted on.)

A timetable for transition

In a bid to restore credibility and regain the initiative, on 5 February 2013 the Scottish government unveiled a timetable that begins immediately after a presumed yes vote in the referendum – then still expected to be held in October 2014, but subsequently set for 18 September – and runs through to independence day on 31 March 2016, followed by the Holyrood election in May. A decision about whether Scotland would participate in the Westminster election due in May 2015 will be taken after the referendum. This schedule raises two questions: Will the EU authorities be willing to open talks with Edinburgh before Scotland achieves formal independence, while Edinburgh and London are still haggling over the terms of independence? And if so, could both sets of negotiations be concluded in the space of 18 months (in practice, only 17 months, allowing one month off for the Westminster election campaign)?

The answer to the first question is almost certainly yes. Neither London nor Brussels will address any of the issues to be settled by negotiation as long as they remain hypothetical, so the Scottish government cannot expect to start talks prior to the referendum, a fact of political life that voters, demanding more information before making up their minds, will simply have to live with. But assuming a yes vote, there is nothing in EU law that precludes a territory that has voted for independence negotiating its accession, while still sorting out the terms of a divorce settlement. And it would clearly be in the interests of all member states to avoid the legal and commercial disruption that would ensue if, on independence day, Scotland were to be removed from the EU until its application to join is approved. Provided everyone co-operates, much of the groundwork could be done before secession. But formally, Scotland would have to be a state before it could accede. Thus, a gap opens up between secession and accession. The formalities take time: accession negotiations with Croatia, for example, were completed in 2011, but national ratification, which is entirely a matter for individual member states, took two more years.

Complications and delays could also arise from the fact that during the transition period, Scotland would continue to be represented in the European Council by the UK government. Barring his unexpected demise or defenestration, at least until May 2015 that government will be headed by David Cameron, whose policy of “less Europe, not more” runs counter to the efforts of EU leaders to resolve the crisis in the eurozone by pressing on with further integration in the form of a banking union and a fiscal union. Negotiations over Scotland’s accession could fall foul of attempts by London to secure a revision of the EU treaties or to start the process of withdrawing from the EU after an in/out referendum in the rUK. I shall return to this problem later.

Whether the trilateral negotiations could be completed on the timescale envisaged no one knows. In their legal advice to the UK government on the consequences of Scottish independence, Professor James Crawford of Cambridge University and Professor Alan Boyle of Edinburgh University express scepticism, opining that three years would be a more realistic estimate. Certainly the scale of the challenge is considerable. The Scottish government would be negotiating with London over Scotland’s share of the UK’s national debt, public assets and oil and gas revenues, along with currency and financial regulation, pensions and social security, defence and foreign affairs, energy and telecommunications, and other, lesser matters At the same time, it would be negotiating with Brussels over the terms of Scotland’s accession to the EU. That said, since the UK has been a member state for forty years, Scotland is clearly not in the same position as Croatia or Turkey, so presumably its commitment to democracy, the rule of law and human rights could be taken as read.

The road to accession

How difficult would accession negotiations be? As John Kerr points out, much would depend on the stance of the Scottish government itself. It would be unwise for Scotland, as a prospective new member, to seek changes in, say, the Common Agricultural and Fisheries policies, however desirable such changes might be from Scotland’s point of view. The best course would be to stress from the outset that its sole aim is to reinstate the rights enjoyed and obligations accepted when part of the UK. This would make it difficult for EU governments uneasy about Scotland’s accession – notably, Spain, wrestling with the aspirations of Catalans and Basques – to raise objections or cause delay.

But there would still be problems over UK opt-outs from the acquis communautaire, the accumulated legacy of EU policies which new members are required to adopt. In ascending order of difficulty, the three main stumbling-blocks are: the Schengen Agreement on border controls, originally organised outside the framework of the EU, but incorporated into EU law under the Amsterdam Treaty of 1999, with opt-outs for the UK and Ireland; the budget rebate secured by Mrs Thatcher at Fontainebleau in 1984; and the opt-out from monetary union negotiated for the UK by John Major at Maastricht in 1992.

The borderless Schengen Area operates very much like a single state for international travel purposes, with external border controls for travellers entering and exiting the area, and with common visas, but no internal border controls. The UK has not signed up, but neither has Ireland, which maintains a separate travel area with the UK. So Scotland could follow the Irish precedent, thereby avoiding border checks at Gretna Green, and could signal its willingness to fall into line with continental member states as soon as London and Dublin do so.

The UK’s budget rebate repays two thirds of the difference between the UK’s contribution to the EU budget and EU reciprocal payments to the UK. Over the past thirty years it has saved the UK some £70 billion at today’s prices, or roughly £2.3 billion a year. The UK now contributes 10% of the budget, far less than Germany, which contributes 20%, and somewhat less than France and Italy. The rebate, originally secured by strong-arm tactics and regarded ever since by the Tory right and the tabloid press as a symbol of national virility, is deeply resented by other member states, not least because the EU budget is a zero-sum game: the less the UK pays, the more all the rest must pay. There is little chance that Scotland would be able to retain the Thatcher rebate, even if it wanted to. Better, therefore, to offer to give it up as a gesture of goodwill. This is, in effect, the price to be paid for joining the club.

New members of the EU now take on a commitment to join the euro when they have satisfied the conditions for doing so. This is not an insuperable barrier to Scotland’s accession. Sweden has no formal opt-out, but retains its own currency and though still committed in principle to joining the euro, is unlikely to do so any time soon. Most Swedes, like most Britons, want to keep their own currency and central bank. For a while, after the successful launch of the single currency between 1998 and 2000, Swedish opinion shifted from “No, not now” to “Yes, but not now”, but since the financial crash of 2007-8 exposed deep flaws in the design of the euro, dividing the northern “core” of the euro-area from its southern “periphery” and plunging half of Europe into depression, the issue has died. In the more benign global conditions of the early 1990s, Sweden made a full and relatively rapid recovery from its own financial crisis and has weathered the recent storm better than most other European countries. Thus, until the euro-area resolves its crisis, no Swedish government would dream of holding another referendum on whether to join it.

So is a commitment to join the euro at some “appropriate”, but unspecified juncture a token gesture, with no real consequences for Scotland? Not entirely, for it sits uneasily beside the SNP’s current policy of retaining the pound and seeking to form a currency union with the rUK. This might be presented as an interim arrangement, to be superseded one day, if and when Scotland and the rUK jointly decide to give up the pound and embrace the euro, presumably after a referendum in both countries. But what if Scotland votes for independence in 2014 and the rUK subsequently votes to leave the EU? The tension between membership of the EU and protecting Scotland’s ties with the rUK would then become apparent, as the prospect of bureaux de change along the Tweed passed from the realms of fantasy to the horizon of possibility.

More generally, in the hurly burly of the referendum debate, even the formal admission that Scotland might some day switch from one currency union to another gives SNP policy a provisional, makeshift appearance, adding to the irreducible uncertainty that the prospect of secession poses for business and financial interests. (The same applies to the proposal that, after a suitable interval, an independent Scotland should create its own currency. This proposal also carries the further risk of provoking conflict with the EU. It is one thing to retain your historic currency, pending a switch to the euro, but quite another to introduce an entirely new one, in preference to the euro).

An invidious choice?

Until now, the working assumption has been that an independent Scotland and the rUK would both remain in the EU. All Scottish parties, pro- and anti-independence, take it for granted that Scots are committed to Europe or, at least, have no wish to leave it. Bizarrely, this includes the Eurosceptic Scottish Tories, who try to scare voters with the threat that an independent Scotland would be forced out of the EU. But with the rise of Ukip in England and the growing likelihood of an in/out EU referendum in the next Westminster parliament, Scots now have to reckon with the possibility that they might end up there alone. Indeed, the SNP has started urging people to vote for independence in order to stay in the EU.

According to Angus Roxburgh, a former BBC Europe correspondent:

“Scots now face an invidious choice: vote next year for independence (and, it is assumed, membership of the EU) and risk the collapse of links with England if it then votes to leave the EU; or vote to stay in the UK and risk being taken out of the EU anyway, courtesy of voters down south.”

This dilemma, he notes, falls into a familiar pattern in British politics. In 18 general elections since the Second World War, the Conservatives have won a majority in Scotland only once (1955), yet they have formed the government at Westminster nine times. Despite voting consistently for the left, Scotland has been governed by Labour for only 30 years out of 68.

How serious is the danger that if Scotland votes to stay in the UK, it could end up outside the EU? Asked how they would vote if an in/out referendum were held today, the British public is evenly divided. According to a Guardian/ICM poll conducted in mid-May, a majority of 43-41 favours withdrawal, with the rest undecided, and this at a time when Europe is in the doldrums and hardly anyone has a good word to say for it. Moreover, only one voter in ten regards Europe as the most pressing issue facing the country.

The meteoric rise of Ukip as an English nationalist party has spooked the Tories because it threatens to split the right and let Labour back into government, whether alone or in coalition with the Lib Dems, just as thirty years ago the rise of the SDP split the left and handed Mrs Thatcher a landslide victory in 1983. But the root cause of Ukip’s success is less antipathy to the EU – 40% of Ukip voters want to stay in Europe – than general disgruntlement with the political class and the decline of Britain. In this respect, their views are a more extreme version of attitudes held by English voters as a whole. Indeed, while the Ukip threat to the Tories is real, it may have been overstated, for though the Tories have suffered most from defections to Ukip, England’s fourth party has also taken votes from Labour and the Lib Dems.

As an “island-race” that once ruled a global empire which has left its mark on the UK’s constitutional arrangements, foreign policy, military posture, trade links and financial system, Britons have always been reluctant Europeans. However, recent history suggests that when questions of geo-political alignment are seriously debated, British voters have no time for “splendid isolation”. In 1975, only months before the referendum on whether to accept the terms of a cosmetic “renegotiation” conducted by Harold Wilson for reasons of party management, opponents of the “Common Market”, as it was then generally known, were well ahead in the polls. In the event, they were decisively defeated by a majority of 2 to 1.

By calling a national referendum at a time of intractable economic crisis – with recurrent strikes, double-digit inflation, dwindling profits and rising unemployment – the wily Labour leader managed to rout his critics on the left, who shared with the Tory right the illusion that Britain could somehow solve its problems by going it alone as a sovereign power, free from continental entanglements and constraints. David Cameron may be hoping to emulate Wilson’s example. It is, however, salutary to recall that though the Labour government of 1974-9 won this particular battle, it went on to lose the war. Just over three years later, its Herculean efforts to manage industrial conflict, control inflation, restore profitability, boost investment and reduce unemployment on the basis of a social contract with the unions, fell apart in the “Winter of Discontent”. With this disaster, responsibility for tackling the crisis passed to the neo-liberal right, which seized the opportunity to emasculate the unions, dismantle the post-war settlement and establish a “free economy” under the aegis of a strong state.

The crisis we face today is different from that of the 1970s, but no less daunting. Besides recovering from depression and rebalancing our economy, we need to repair the fabric of our society and regenerate our democracy within the framework of a new constitutional settlement that gives greater responsibility and fiscal powers to local authorities, as well as extending and strengthening the powers of devolved national governments. And beyond these shores, the historic nations of the UK should all be actively involved in efforts to reform the EU, helping it to regain popular legitimacy. For the moment, this is a project in search of agencies with the will, strength, patience and skill to see it through in the face of organised resistance, structural bias and institutional inertia. In broad outline, we know what needs to be done. The problem is to work out how to get it done and who is going to do it. Nevertheless, in thinking about the coming spate of parliamentary elections and national referendums – in Scotland, the UK and the EU – we should do well to keep both project and problem in mind.

Saturday 29th June 2013, 2pm. Augustine United Church, George IV Bridge, Edinburgh.

The Counting of Votes is Only the Final Ceremony of a Long Process” – Antonio Gramsci

We believe that the political situation in Scotland offers a real opportunity to change the way in which our country functions, whatever the outcome of the referendum next September. The long process of the campaign is as important as the outcome of the referendum.

We have three speakers who will spark a discussion about what Scotland we want and how we can create it.

Sign up on Facebook here. Or through Eventbrite here.

Speakers:

Maggie Chapman – Scottish Green Party lead MEP candidate

Maggie Chapman is Green Councillor for Leith Walk and is the top European candidate for the 2014 European election. Maggie also teaches cultural geography and environmental philosophy at Edinburgh Napier University and is an EIS representative. Originally from Harare, she has worked in environmental management and community care.

Janet Paisley – Poet, Playwright, Author

Janet Paisley is an award-winning writer, poet and playwright from Scotland writing in Scots and English.

Her first play Refuge won the Peggy Ramsay Award in 1996. She was awarded a Creative Scotland Award to write Not for Glory a collection of interlinked short stories in Scots. set in a small village in Central Scotland. Not for Glory was one of the ten Scottish finalists voted for by the public in the 2003 World Book Day ‘We are what we read’ poll. The short film Long Haul, written by Paisley, won a Bafta nomination in 2001.

Robin McAlpine – Director: Jimmy Reid Foundation

Robin McAlpine is amongst other things the editor of Scottish Left Review and the founding director of The Jimmy Reid Foundation. Previously he worked as a journalist and as press officer to George Robertson, then Leader of the Scottish Labour Party and Shadow Secretary of State for Scotland. He was Deputy Director of Universities Scotland and is the author of “No Idea: Control, Liberation and the Social Imagination.”

This will be an opportunity to discuss the type of Scotland we would like to see and how we get there.

by Willie Thompson

 

Eric Hobsbawm, who died at the beginning of October aged 95, was the last representative of the remarkable generation of Marxist historians who comprised the Communist Party Historians’ Group of the late forties and early fifties. An article to appear in a forthcoming issue of Perspectives will examine his remarkable achievement as a political, economic and social historian as well as commentator on historical theory, and also discuss his life history and autobiographical writing, along with his often controversial politics.  The latter revolved around his unyielding attachment to Marxism and the Communist Party – for which he was excoriated by the right ­– and his critique both of labourism and romantic leftism, which drew fire from the further left.

 

The Perspectives article will take as the centrepiece of his historical legacy the series of four volumes covering the years from the French Revolution to the end of the Soviet Union, The Age of Revolution, The Age of Capital, The Age of Empire and Age of Extremes, but also consider his other historical writings.  It will deal also with the the media reactions since his death, both sympathetic and hostile, and conclude with an overall evaluation of the great historian.

David Purdy

In what follows, I take up three of the issues raised by Stuart Fairweather in his recent posting Two Years of Crisis: What Potential for Change: the prolonged economic depression induced by the financial crash of 2007-8; the current state of British politics; and the referendum on Scottish independence to be held in the autumn of 2014 under protocols finally agreed this week by Alex Salmond and David Cameron.

 

Escaping from depression

 

At a meeting in London organised by NPEN (New Political Economy Network) to consider responses to the current economic crisis, the Tory MP for Hereford, Jesse Norman, asked: Where is the left? It is a fair question. For some nine months after the banking collapse of September 2008, the right was in disarray, but since the financial crisis morphed into a fiscal crisis, the right has dominated policy discourse. To be sure, the crash toppled a central pillar of the neo-liberal temple – the notion that the financial system needs nothing more than “light touch” regulation – but the edifice still stands and in the name of repairing our public finances and rebalancing the economy, Britain’s coalition government has set about dismantling what remains of the welfare state.

 

We should not despair. Sometimes it is better to swim against the tide than to go with the flow. In any case, there are signs, discussed below, that the tide may be turning. The important thing is to keep on challenging the combination of monetary activism and fiscal austerity that both in the UK and across much of the eurozone has either stifled incipient recovery or plunged the economy deeper into recession. In some cases, the resultant fall in tax revenue and rise in social security outlays has more than offset savings from tax hikes and public spending cuts, widening the budget deficit that these fiscal adjustment measures were intended to reduce.

 

However, the perverse consequences of fiscal orthodoxy should not blind us to the scale and make-up of the UK’s budget deficit, currently equivalent to about 8 per cent of GDP, down from 11 per cent when the coalition was formed in May 2010. Roughly half the deficit is structural in the sense that it would still be there even if the economy were operating at full employment. At some stage, therefore, any government, whatever its political complexion, would need to cut public spending or raise taxes by about 4 per cent of GDP. There is no need to make the structural adjustment all in one go: better to build up to it gradually over three or four years. But in any case, adjustment should not begin until recovery from recession is assured. In other words, the alternative to coalition policy is not no cuts or tax rises ever, but a policy of short-term fiscal expansion, focused on public investment, complemented by cheap money, and followed, once recovery is under way, by a period of sustained fiscal restraint. In the long run, this measured approach to deficit reduction will do far less damage to our economy and society than gung-ho fiscal overkill.

 

As it is, private spending is still insufficient to ensure that the European and US economies produce and employ at their full potential. Accordingly, those governments that can still command the confidence of bondholders and/or are running persistent trade surpluses – the US and UK qualify on the first count, China qualifies on the second, while Germany and Japan qualify on both counts – should act as spenders of last resort, not hesitating to finance any temporary (widening of their) budget deficits by issuing new bonds and adding to the stock of public debt.

 

Provided governments act in concert, taking care to explain in advance what they are doing, there is no reason why internationally co-ordinated fiscal stimulation should spook the bond markets, driving up interest rates and “crowding out” private spending. In point of fact, there has never been a better time for creditworthy governments to finance public investment by borrowing, for long-term interest rates have never been so low. The nominal rate of interest on ten-year bonds currently paid by the German government is around 1.5 per cent per annum. Since prices in Germany are rising by 2 per cent per annum, the real rate of interest is negative: investors are actually paying the German government to put their money in German bonds. The corresponding rate of interest on UK government bonds is 1.7 per cent per annum. With the annual rate of consumer price inflation currently running at 2.2 per cent, the real rate of interest is minus 0.5 per cent.

 

There is nothing particularly left-wing, let alone “socialist”, about an “invest now, adjust later” policy. It seems plain common sense that a global crisis calls for a co-ordinated global response. And spending on any kind of public investment produces both immediate and longer-term benefits. In the short run, it creates new jobs and stimulates higher household spending as newly employed workers spend some of their additional income on consumer goods. For both reasons, as economic activity revives, tax revenues grow and social security outlays fall, offsetting any temporary rise in the budget deficit. And when the investment is complete, society benefits from the assets created. What specific projects should be undertaken is a matter of priorities. In Britain today, as advocates of a Green New deal have long argued, we urgently need to build more social housing and to improve the energy efficiency of the existing housing stock, as well as developing renewable energy sources and implementing other measures to combat climate change.

 

It is, though, important that the fiscal stimulus should come from the government’s capital budget, not from current public spending on wages and consumables. The current budget should continue to be restrained, partly because we need to shift the allocation of national resources from consumption to investment, and partly because the government has to convince its creditors that it is serious about eliminating the structural component of the budget deficit as soon as the economy is strong enough to take the strain. The left should not, therefore, support calls from public sector unions for strikes over wages. (Short demonstrative stoppages to protest against government policy are a different matter).

 

In current circumstances, sectional wage militancy, though understandable, is misguided. Politically, it plays into the hands of fiscal conservatives and even if the government were to concede inflation-busting pay rises for public sector workers, in the absence of any compensating increase in departmental budget allocations, the result would simply be more public sector redundancies and higher unemployment. Since the first post-crash recession levelled out towards the end of 2009, the number of people wholly unemployed in the UK has oscillated around 2.5 million, about 8 per cent of the workforce. This compares with 5 per cent when the economy was at its pre-recession peak. Some 900,000 people have been out of work for 12 months or longer, and the youth unemployment rate stands at 20 per cent. In addition, some 1.5 million people are working part-time either because their hours have been cut or because they are unable to find full-time jobs. In these conditions, reducing joblessness and underemployment must take precedence over pay rises for full-time jobholders.

 

 

The turning of the tide

 

Since Britain re-entered recession in the last quarter of 2011, there have been growing signs of unease among the business community. Employers’ organisations such as the CBI (Confederation of British Industry) and the Institute of Directors have been pleading with the government to ease up on fiscal austerity and to promote infra-structural investment, though in common with the Bank of England (which is supposed to take no view on fiscal policy, a convention that the current governor, Sir Mervyn King, has flouted several times during his term of office) they are still reluctant to endorse straightforward deficit-budgeting, instead proposing various convoluted forms of public-private partnership. The idea of temporarily adding to the national debt in order to promote economic recovery is still anathema.

 

Last week, however, the IMF (International Monetary Fund) acknowledged that it had previously underestimated the impact of fiscal austerity on economic activity. Two years ago, it reckoned that other things being equal, every dollar of fiscal adjustment would lead, over the following twelve months, to a fall in GDP of fifty cents. The IMF now believes that the true impact is more like one dollar thirty cents. Thus, unless in any twelve-month period total private spending – the sum of consumer spending, business investment and net exports – rises by enough to add 1.3 per cent to GDP, fiscal adjustment equivalent to one per cent of GDP will cause overall output and employment to fall. This finding clearly reinforces the case for postponing fiscal austerity until the world economy is in better shape. 

 

The reasons for the IMF’s change of mind have not yet been reported, but two factors are likely to be at work. Like all governing institutions, the IMF is a site of struggle between rival theoretical standpoints and general views of the world. Hence, its reports and pronouncements often reflect an uneasy compromise between opposing positions. As the crisis has unfolded, the balance seems to have shifted from hard-line fiscal conservatism to pragmatic managerial realism. In addition, the initial, over-optimistic estimate of the effects of cuts was based on experiences such as that of Sweden in the early 1990s when the government, faced with a threefold banking, budgetary and foreign exchange crisis, introduced a tough, but even-handed programme of fiscal adjustment against a relatively benign background of global economic expansion. But when most Western governments launch austerity packages simultaneously, the result is a mutually ruinous depression.

 

This is one of the lessons of that governments were supposed to have learned from the 1930s. That it has been forgotten is testimony to the continuing grip of neo-liberal ideas over the minds of political leaders and opinion-makers, doubtless influenced by the fact that nowadays Western governments spend much higher proportions of GDP on public services and social transfer payments than their counterparts eighty years ago, while taxes absorb a correspondingly higher share of national income. We must, however, insist on disentangling arguments about how to cure depression and stabilise the economy from disputes about the “proper” size of the public sector. The case for active fiscal policy applies just as much to countries like France where the cyclically adjusted ratio of public spending to GDP is nearly 60 per cent as it does to those like the US where the figure is closer to 30 per cent.

 

One-nation politics

 

To his credit, Ed Balls has consistently opposed ill-timed and over-zealous fiscal austerity, whether imposed in London, Brussels or Frankfurt. Austerity is hurting, but not working and Europe’s governments need to change course. This is indeed “a consummation devoutly to be wished”. But how is it to be achieved? Neither Labour nor the Conservatives contemplate international action to tackle the crisis. The horizons of both parties appear to stop at Dover. Labour, of course, has just rebranded itself as the one-nation party. From a Westminster perspective, this is a smart move, neatly disposing of yesterday’s quarrel between Old and New Labour by laying claim to the mantle that the Tories discarded in the 1980s when Mrs Thatcher purged her government of one-nation Conservatives, contemptuously denouncing them as “wets”. It also enables Ed Miliband to proclaim the politics of the common good and to disavow sectional interests, whether in the City or the unions, while insisting, against the SNP, that what matters in Britain is the division between rich and poor, not the border between England and Scotland.

 

Whatever one thinks about the future of the UK and relations between its constituent nations, from a wider European or global standpoint, one-nation politics is obtuse. These days, of course, few people can find a good word to say about the EU. Nevertheless, we need to draw two distinctions: between the euro and the eurozone; and between a currency and a continent. My own view is that the best or at any rate least bad way to rescue the euro is to slim down the euro area to a central core comprising Germany, Austria, the Benelux countries, Finland and other small northern European states which are closely integrated with the German economy and are willing to embrace Germany’s social market model, including the budgetary discipline implied by further fiscal integration. The so-called peripheral members – a suitable term, perhaps, for Greece, Portugal and Ireland, but hardly apt in the case of Italy and Spain – would revert to their old national currencies, at least for the foreseeable future. France would have to decide whether to cling to the old Franco-German axis, albeit in a subordinate role reflecting its diminished competitive strength, or to join its “Latin” neighbours outside the new “euro nord”.

 

Larry Elliot, the Guardian’s financial columnist, recently expressed the hope that the euro would be “smashed to smithereens”, comparing the single currency to the ill-starred attempt to revive the gold standard after the First World War. This is irresponsible talk. An orderly reconfiguration of the eurozone is one thing, but a disorderly break-up could easily wreck the EU itself, risking a resurgence of the currency and trade wars that followed the piecemeal demise of the gold standard and helped to inflame international relations in the “low, dishonest decade” before the real fighting started in September 1939. Certainly, the institutional design of the euro was flawed and its geographical coverage over-extended, while the conduct of crisis management has been, by turns, indecisive, dogmatic, myopic and fractious. But none of these failings provides any reason to give up the attempt to build trans- and supranational forms of government. Some problems in today’s world, from the protection of the environment to the regulation of banking, cannot be adequately handled by “sovereign” but separate nation-states. Similarly, while policy- and decision-making in the EU, as it is currently constituted, enjoys little democratic legitimacy, simply repatriating powers and responsibilities to member states, as demanded by UKIP and the Tory right, will do nothing to resolve the inherent contradiction between national democracy and global capitalism.

 

The Tories have no European strategy: they simply want to leave the EU. As Martin Kettle wrote in The Guardian (11th October, p. 33), “The Cameron government’s guilty secret is that it understands withdrawal would be undesirable for Britain. Ministers know this, but won’t say so. They dangle the prospect of a referendum, but not the in-out one that the party or the Europhobes crave. As a result, the UKIP threat to the Tories steadily rises.” A large part of Cameron’s “sink or swim” speech to last week’s Tory party conference was predicated on the assumption that Britain can somehow go it alone. Like Miliband, he offers a one-nation strategy: Britain against Europe or even Britain against the world. This may win short-term popularity, but it remains an illusion and thus, in the long run, a source of weakness. In a world where the balance of economic and political power is shifting from North America and Western Europe to China, India, Russia and Brazil, isolation is not “splendid”, just stupid.

 

Scotland’s Referendum

 

While Europe burns and Cameron fiddles, Scotland prepares to decide whether to remain part of the Union or to become an independent state. It was always more likely than not that Scottish voters would eventually have to choose between these polar options: in negotiations over whether there should be a third option in the shape of devo max (maximum devolution short of independence), Westminster’s legal prerogative in constitutional matters trumped the SNP’s electoral mandate. For almost nine months, Alex Salmond held out for two questions, but in the end, although this proposal was backed by civic Scotland and proved at least as popular in opinion polls as the other two options, it was not taken up by any political party and thus lacked political clout.

 

Even so, from a democratic standpoint, the Edinburgh Agreement is a disgrace. Those voters whose first preference is devo max – roughly a third of the electorate – must now decide whether Scotland will be in a better position to govern itself by staying in the Union or by becoming independent. Given that the SNP wants to retain the monarch as head of state, to form a monetary union with the rest of the UK and to stay in NATO, this is tough call. But at least “undecided” voters know more or less what the SNP is offering, even if many details remain unclear. The same cannot be said for the Unionist parties. Having succeeded in squeezing the referendum debate into a narrow frame, they would do well to explain what further powers they wish to see devolved to the Scottish parliament, how they envisage using these powers to help make Scotland a better country, and what, for them, “a better country” looks like. Would it, for example, be one that is fairer, happier, greener, less divided, more cohesive and more democratic than it is now? In the absence of such a forward offer, “undecided” voters will surely be drawn into the nationalist camp.

 

Provided the three Unionist parties can see where their best interests lie and can agree on a sufficiently attractive forward offer – both strong assumptions – current polling evidence suggests that the Better Together camp will carry the day. Since devo max will not now appear on the ballot paper, perhaps the democratic left should keep it alive as an unofficial presence in the referendum debate by spelling out answers to the three questions posed just now: What would devo max entail? How would it help to build a better Scotland? And what, in this context, does “better” mean?

 

Why bother explaining and defending an option that is not on the table? Because the exercise would set an example to the Unionist parties and provide a benchmark against which to judge their efforts. And because if the result of the referendum is close, allowing neither side to claim a decisive victory, it would provide a focus for further discussion and negotiation about the governance of Scotland and the future of the Union.

 

The crisis is causing pain and major uncertainty.  At Westminster the electoral response to this was the establishment of the Con/Dem Coalition. Their policies have added to the pain and to the questions.

In Scotland we’ve seen the election of a majority Scottish National Party (SNP) Government to the Edinburgh Parliament. For many the scale of the result was a surprise.  The programme of the SNP Government has not addressed the crisis.  Alone its policies never could.  But some of the Salmond administration’s actions have provided a degree of continued social insulation for Scotland’s people.

Traditionally across Britain the assumed vehicle for socialist advance has been the Labour Party.  Expectations have been inflated and depressed many times, but the recent history of war and the embracing of casino capitalism have done major damage.  Devolution across Britain has allowed for differentiated responses to this.  In Scotland it has led to two consecutive SNP victories at Holyrood.  Labour disarray and a ‘successful’ minority administration contributing greatly to the second of these.

It is in this context that we now move towards a referendum on Scottish self-determination planned for autumn 2014.  We need to think about what kind of Scotland we want.


 A background paper for the AGM of Democratic Left Scotland,

22nd September 2012

Middle Reading Room, Edinburgh University Students Union, Teviot Row

David Purdy

This paper originated as part of an even longer one dealing with the proposal to relaunch Perspectives under a new title. A report on that proposal will be presented in the morning session of the AGM. What follows is intended as background material for the afternoon session from 2.00 to 4.00 pm, which will be devoted to a general discussion of contemporary politics, introduced by Luke March, Lecturer in Politics at Edinburgh University, under the heading All that is solid melts into air. In section 1, I outline the origins and character of the democratic left (lower case) and of Democratic Left (DL): the former a political disposition or state of mind; the latter a UK-wide political network from which, in 1999 with the re-establishment of the Scottish parliament, DLS separated to become an autonomous organisation. To put this brief sketch in a wider perspective, in sections 2, 3 and 4 I review the changing contours of global and British politics from the early 1990s to the present.

The democratic left

When the final congress of the CPGB voted to disband in 1991, some remnants of its former Eurocommunist wing regrouped under the aegis of Democratic Left. For some time, the aims and character of the new organisation remained fluid, but at a national conference held in Manchester in 1994, it was agreed that DL was neither a party nor a think-tank, but a network open to members of all parties and none. The adoption of this organisational form marked a rejection of class politics, whether in the Leninist or Labourist mould. The centralised and disciplined vanguard party prescribed by Lenin is at odds with a principled commitment to parliamentary democracy, just as the ingrained economism of the British labour movement stands in the way of efforts to democratise the economy.[1] And while class structure continues to shape the distribution of life-chances, it is neither the sole nor always the most important influence on political attitudes and behaviour. DL sought to salvage whatever was still valuable from the wreckage of socialism and to work for a coalescence of the socialist, green and feminist traditions of political thought and action, a project that had already made some headway during the previous twenty years and was thought to offer the most promising basis for building a new political formation. When DLS was formed in 1999, it stood by these revisionist ideas.

Survivors of twentieth-century communism were only too conscious of the historical baggage they carried. They had suffered a loss of faith comparable to that experienced by many educated and thoughtful people in the second half of the nineteenth century as they struggled to reconcile the claims of religion with the findings of science. They knew what they no longer believed, but were unsure what new stars to follow. The only certainty was that no single individual, organisation or school of thought had a monopoly of wisdom and truth. It seemed best, therefore, to follow the advice of John Stuart Mill and try to combine the partial truths offered by diverse, or even divergent, world-views and theories, in the hope that each would correct the omissions, limitations and biases of the others.[2] The tentative, exploratory and pluralistic spirit of this approach is nicely encapsulated by the titles of publications such as Soundings and Perspectives.[3]

The second age of neo-liberalism

It is worth recalling the circumstances in which the democratic left emerged. In Eastern Europe and the former Soviet Union, Communist regimes had collapsed, bringing the Cold War to an abrupt and unexpected end, leaving the US – for the time being – as the world’s sole surviving superpower, and killing debate about the possibility of life after capitalism – perhaps not forever, but at least for the foreseeable future. In the advanced capitalist world, especially in its Anglophone regions, the first stage of the neo-liberal revolution had been completed, the post-war settlement had been dismantled, and a globally integrated capitalist economy was fast taking shape in which Brazil, Russia, India, China and South Africa – collectively known as the BRICS – would become major players, with other large and once poor, but now rapidly developing states such as Turkey, Malaysia and Indonesia following close behind. Within the EU, Germany had been reunited and plans were being laid to admit the fledging capitalist democracies of Eastern Europe and to establish an Economic and Monetary Union, beginning with the replacement of separate national currencies by a single European currency.

In Britain, the left and the trade unions were a spent force, having suffered repeated setbacks and disasters from the mid-1970s onwards, and a fifteen-year-long wave of economic expansion was about to begin. An important political milestone was Labour’s “shock” defeat in the general election of 1992, its fourth in succession. The economic turning point came six months later when sterling was forced out of the ERM (European Exchange Rate Mechanism). Much to everyone’s surprise, the depreciation of the pound stimulated recovery from recession without sparking off a new wage-price spiral: the counter-reforms of the Thatcher years – the abandonment of full employment, the emasculation of the unions and the deregulation of the labour market – were finally bearing fruit.  Shortly after, in 1994, the death of John Smith cleared the way for the birth of New Labour, which set about charting a “third way” beyond both radical new right and conservative old left. Under the leadership of Tony Blair, the party won a landslide victory at the polls in 1997 and went on to win the next two general elections, in 2001 and 2005, the first time Labour had ever secured three wins in a row.

New Labour offered a less abrasive and divisive, more sophisticated and subtle version of neo-liberalism. The party accepted the primacy of market forces and private capital in determining the course, pace, pattern and character of economic development, but accorded the state a vital role in ensuring that individuals acquired the skills and motivations required to make a success of their lives, it being taken for granted that these would be lives dedicated to owning, earning and spending. The Thatcher governments of the 1980s had been more concerned with restraining social spending than with recasting the welfare state and their efforts at social engineering were limited to breaking the power of the labour movement, preaching the virtues of self-reliance and giving people incentives to help themselves. New Labour, by contrast, sought to “modernise” the public services by redefining their purpose, reorganising their structures – often several times over – and opening them up them to the three c’s: competition, contract and choice.

The prime task of social security, for example, was to encourage, enable and, if necessary, compel able-bodied citizens of working age who were, or risked becoming, excluded from mainstream society to find and retain regular paid work. To this end, the payment of benefits was separated from the task of getting claimants (back) into employment, and a variety of rehabilitation, retraining and work experience schemes were launched, mostly run by private contractors. Public services still had to be financed from taxation. But they did not need to be provided by public agencies, under the control of central government. Instead, the work could be contracted out to private providers, whether commercial firms or social enterprises. Thus, although there remained a generic difference between public services and marketed commodities, the boundaries between the public, commercial and voluntary sectors of the economy became increasingly blurred, while business norms and market forces increasingly penetrated areas of social life from which they had hitherto been largely excluded, even under Mrs Thatcher.

The second, gilded age of neo-liberalism came to a sudden, unexpected and ignominious end in 2007, though as always with turning points, it took some time for this to be recognised. On the global stage, the bursting of the US housing bubble in the winter of 2006-7 gave rise to a “credit crunch” as inter-bank lending and borrowing, once used mainly to balance the books of prudent retail banks, but now critical to the trading activities of giant universal banks, began to seize up. Over the next eighteen months, the world financial system suffered a series of convulsions, culminating in the bankruptcy of Lehman Brothers in September 2008 and the near-collapse of several other major banks – most, though not all, headquartered in London or New York. The financial crash, in turn, triggered the onset of the deepest and longest economic recession since the 1930s.

For about nine months, from the autumn of 2008 to the summer of 2009, it looked as though policy-makers had learned the lessons of the Great Depression. The US and British governments moved quickly to restructure and recapitalise insolvent banks, not hesitating to take them into partial public ownership, while the Federal Reserve and the Bank of England provided general support to the banking system by disposing of toxic assets, buying up government bonds with newly created money and bearing down on interest rates, both short- and long-term. At the same time, governments across the world took concerted action to counter the downturn, not only allowing their budget deficits to rise automatically as tax revenues fell and social security spending rose, but also improvising emergency fiscal stimulus packages aimed at boosting total spending on currently produced goods and services so as to maintain employment and prevent the recession turning into a major slump.

Neo-liberal opponents of “big government” were temporarily thrown off balance by the financial crash, which hardly anyone had anticipated. It was not long, however, before they rallied under the banner of fiscal conservatism, warning that without prompt action to cut public borrowing and halt the rise in public debt, governments would lose the confidence of bondholders, with consequences for the real economy that would, they claimed, be even worse than those of pre-emptive fiscal austerity. When market sentiment moves against a country’s bonds, the government is forced to pay higher interest rates in order to borrow. Indeed, it may find itself unable to borrow at any rate of interest. This in turn raises the cost of private borrowing and crowds out private spending, negating the expansionary impact of budget deficits, while adding to the cost of servicing public debt.

From late 2009 onwards, these warnings gained plausibility as a wave of sovereign debt crises successively overwhelmed the governments of Greece, Ireland, Portugal and Spain, threatened to engulf Italy and even lapped at the shores of France. For the most part – the main exception was Greece – the governments concerned were not guilty of fiscal profligacy, but during the bubble years their economies had, to varying degrees, lost competitive ground to Germany and were running persistent trade deficits within the eurozone. In addition, some of them – notably, the governments of Ireland and Spain – had presided over credit-fuelled housing booms and reckless property speculation, which they were unable to prevent because they no longer had their own currencies and their central banks could not control the cost of borrowing. Nevertheless, at the behest of Germany, which as Europe’s economic powerhouse was in a position to dictate the rules of the game and was no longer willing to be Europe’s paymaster in order to do penance for the sins of the Third Reich, governments requiring so-called bailouts – actually official loans jointly funded by the rest of the eurozone and the IMF – had little alternative but to introduce tough fiscal austerity packages until such time as their public finances were restored to health.

The irony is that as a percentage of GDP, the combined budget deficits of eurozone member states are lower than those of the US and UK, while their combined public debt is less than half that of Japan. Yet the rates of interest at which the US, British and Japanese governments can borrow have never been so low. The problem is not the eurozone’s aggregate deficits and debts, but the fragmentation of fiscal authority and the difficulty of persuading increasingly eurosceptical electorates to accept the surrender of national budgetary sovereignty for the sake of creating a supranational fiscal union. Thus, between them, the fiscal conservative backlash and the crisis in the eurozone are exerting a powerful drag on global economic growth, plunging Europe into depression, snuffing out recovery in the US and slowing down export-led expansion in the BRICS, with adverse repercussions for primary producers in Latin America, Africa and Australia.

Britain: the politics of fiscal austerity

A central pillar of New Labour’s fiscal regime was a tacit agreement with the financial sector, whereby in return for light-touch regulation and official tolerance of runaway rewards for fund managers, market traders and senior executives, the rapid growth of financial services and the resulting surge in tax revenue would help to pay for extra spending on public services. In Peter Mandelson’s words: “We are intensely relaxed about those who become filthy rich as long as they pay their taxes.” The crash of 2008 destroyed this pillar. It also forced the government to scrap Gordon Brown’s fiscal rules: to keep current public spending and tax receipts in balance over the cycle, to borrow only for public investment, and to keep National Debt below 40% of GDP.[4] The budget statement of November 2008 cut taxes and brought forward capital spending plans, though the fiscal stimulus was modest: equivalent to 1.5% of GDP over three years. However, between the fiscal years 2007-8 and 2009-10, the budget deficit rose from 2% of GDP to 11%, the major source of the increase being the automatic stabilisers: falling tax revenue and rising social security spending. Over the same period, the ratio of National Debt to GDP ratio rose from 37% to 53%.[5]

Part of the budget deficit was “structural” in the sense that it would persist even if the economy were operating at its full potential. The recession had opened up a gap between the potential level of output and employment and the actual level. If this gap could be closed, the automatic stabilisers would work in reverse, boosting tax revenue and decreasing social security outlays. It was hard to say exactly how large the structural deficit was, but it would eventually have to be tackled either by cutting public spending programmes or by raising taxes.[6]  The issues to be decided were: When should fiscal adjustment start? How quickly should it be completed? And what balance should be struck between spending cuts and tax rises? It was also evident that in the longer run, beyond these immediate questions of crisis management, the country was going to need a new fiscal regime, along with radical reform of the banking and financial system.

To their credit, Gordon Brown and Alistair Darling argued that full fiscal adjustment should be delayed until recovery from recession was assured, though their room for manoeuvre was constrained: by the need to maintain credibility with nervous bondholders and myopic credit rating agencies; and by the need to fend off attacks by the opposition and a hostile press. In a situation where output had fallen 7% below its pre-recession peak and households and businesses either could not or would not increase their spending, no matter how low interest rates were, the best or least bad option was for government to act as spender of last resort. This, of course, entailed continuing to borrow and add to the stock of public debt. But the alternative was worse: prompt recourse to stiff public spending cuts and tax hikes was likely to deepen or prolong the recession, undermining business confidence and entrenching the slump. The budget deficit might even grow, once account was taken of the impact of lower output and employment on tax revenue and benefit payments. “Look after employment,” Keynes was fond of saying, “and the budget will look after itself.”

There was, to be sure, a risk that deficit budgeting would spook the bond markets, but the risk was neither high nor urgent. Given that the outlook for equities was poor, gilts offered investors a safe haven, and the government’s short-to-medium term refinancing needs were limited since the average bond was not due to be repaid for fourteen years. Moreover, unlike members of the eurozone, the UK still had its own currency and independent central bank, which could, if necessary, redeem bonds by creating money. History too offered reassurance: in the three centuries since the Bank of England was established and the bond market emerged, Britain had never once defaulted on its debt; and after both the First and the Second World Wars, the ratio of the UK’s National Debt to its GDP far exceeded the current level, standing at 200% in 1919 and 250% in 1945.

These considerations may have weighed with bondholders, but they failed to convince the electorate. Why was this? In part because, like other governments in office when the crisis struck, Labour was held to blame and received little credit for rescuing the banks and averting a re-run of the Great Depression; in part because there is a difference between staving off disaster and promoting recovery; and in part because the economic downturn coincided with a full-scale crisis of political legitimacy, triggered by popular outrage at the parliamentary expenses scandal. This was widely felt to symbolise the gulf separating Britain’s political elite from ordinary citizens. People sensed that there was something rotten in the state of Britain. They were not mistaken: over the previous thirty years, with one notable exception, the institutions of representative democracy had degenerated: through the hollowing out of political parties, the fall in electoral participation, the debilitation of local government, the demise of Cabinet government, the decline of the House of Commons, the dumbing down of the mass media and the corruption of the press. The exception was the devolution of powers and responsibilities from Westminster to the Scottish parliament and to elected assemblies in Wales and Northern Ireland.

Even so, Labour’s rearguard resistance to fiscal conservatism blunted its impact. Between the autumn of 2009 and the general election of May 2010, a large and longstanding Tory lead in the opinion polls was gradually whittled away. The upshot was a hung parliament, the first time this had happened since February 1974. To be sure, Labour fared badly: at 29% – six points down on 2005 – its share of the vote was the second lowest since 1923, when it replaced the Liberals as the main alternative to the Tories. But the result was not catastrophic: the party lived to fight another day. By the same token, the Conservatives failed to win an overall majority and were forced to choose between forming a minority government and striking a deal with the Lib-Dems. In so far as it is ever possible to discern the will of the people, a hung parliament was roughly what the voters wanted: they had lost faith in Labour without being won over by the Conservatives.

4.      Things fall apart

During the inter-party talks that followed the election, David Cameron and Nick Clegg considered and rejected the option of a minimalist agreement whereby the Lib Dems would support a Tory government on confidence motions and finance bills, without joining a full coalition. This, they concluded, was too flimsy a basis on which to tackle the economic crisis and would soon be followed by another election, with the attendant risk of provoking panic in the bond market. Instead, in the space of five days, the two parties’ negotiating teams crafted a memorandum of understanding setting out a comprehensive and jointly agreed programme for government and signalling their intention to serve a full five-year term.

The Lib-Con coalition announced three central aims: to shift the balance of the economy away from public spending, consumption and imports towards private spending, investment and exports, with financial services shrinking relative to high-end manufacturing; to build a stable financial system so that taxpayers would never again be called upon to rescue insolvent banks; and to restore public faith in Britain’s political institutions. To rebalance the economy, the government would introduce a phased programme of fiscal austerity, starting immediately and weighted towards cuts in public spending rather than increases in taxation. To rebuild the financial system, it promised radical reform of the banks and a new regulatory regime. To repair the political system, there would be new rules for party funding, fixed-term parliaments, a referendum on the Alternative Vote, boundary changes to reduce the number of MPs from 650 to 600 and reduce inequalities in the size of parliamentary constituencies, reform of the House of Lords, and efforts to persuade local authorities in England to adopt elected mayors. Underpinning the programme as a whole was the vision of a “big society”, an umbrella term covering various ideas for revitalising civil society and rolling back the state, of which the most developed were proposals to empower local communities, encourage volunteering and promote social enterprise.

The new government had several major strengths. The memorandum of understanding offered the makings of a serious reforming project, which was embraced with enthusiasm by senior figures in both parties. The government had a comfortable parliamentary majority of 80, which insured it against deaths and defections, whether on the Tory right or the Lib Dem left. And for some time to come, the undoubted pain of fiscal austerity could safely be blamed on the fiscal irresponsibility of the outgoing government. Thus, while Labour was preoccupied with a five-month-long leadership contest, the new government seized the moment to introduce an emergency budget of unprecedented severity. In June 2010 George Osborne announced plans for fiscal adjustment equivalent to 1.5% of GDP each year from 2011-12 to 2014-15, with three quarters of the total coming from spending cuts, including cuts in social security benefits. If all went according to plan, the share of public spending in GDP was set to fall from 47% in 2009-10 to under 41%.

To justify this display of fiscal shock and awe, the Chancellor argued that prompt action to put the budget deficit on a downward trajectory had protected the government’s triple-A credit rating and secured the confidence of bondholders, enabling monetary policy to be kept as loose as possible for as long as necessary. Cheap money, he claimed, coupled with the depreciation of the pound against other currencies by almost 25% since 2007, would facilitate an export-led recovery, helping to revive business confidence, boost private investment and initiate the desired rebalancing of the economy. Thus, far from halting the UK economy’s fragile recovery and tipping it back into recession, this was going to be an expansionary fiscal contraction.

For some twenty months, public support for the coalition remained solid, despite a flat-lining economy, the government’s refusal to contemplate any easing in the scale or timetable of fiscal adjustment and the slump in support for the Liberal Democrats, who paid a high price for ditching manifesto pledges to oppose higher student tuition fees and premature cuts in public spending. Thereafter, however, Labour overtook the Conservatives in the polls and began to open up a strong lead. By July 2012, according to UK Polling Report’s average of all the polls by all the polling organisations, Labour was on 42%, the Conservatives 33% and the Lib Dems 10%. This was broadly in line with the results of UK-wide local elections in May, when Labour did well, the Tories did badly and the Lib-Dems suffered a second successive year of carnage, their total number of council seats falling below 3,000 for the first time since the Liberal-SDP merger in 1988.[7]

Can the slide in the coalition’s fortunes be put down to normal mid-term blues? To some extent perhaps, but the main problem is that little progress has been made towards any of the government’s main objectives. Fiscal austerity is hurting, but not working. GDP is still 4% below its pre-recession peak and between 9 and 11% below its potential level, while total unemployment stands at 2.6 million (8.2% of the workforce) and youth unemployment at 1 million (one in five of those aged 18-24).[8] Moreover, since GDP started to fall again in the fourth quarter of 2011, not only is unemployment, a lagging indicator, set to rise from now on, perhaps eventually reaching 3 million (9.5%), but the target date for eliminating the structural budget deficit will recede further into the future, putting at risk the government’s much vaunted triple-A credit rating.

In a bid to escape from the doldrums, the government has recently announced two new initiatives: a so-called Funding for Lending scheme worth up to £80 billion, whereby the Bank of England provides ultra-cheap loans to the banks provided they, in turn, issue new loans to small and medium enterprises; and a parallel scheme aimed at large companies and worth up to £40 billion, to be spent on infrastructure projects, to be financed by private investors such as pension funds, and to be guaranteed by the government. These desperate measures are a tacit admission of failure and a silent tribute to those who long ago argued for a Green New Deal. But they also reveal the lengths to which the government is prepared to go to avoid public borrowing and state investment – further evidence, if it were needed, that neo-liberalism is not dead, though policy improvisation on this scale shows that there is a long way to go before we get to what might be called neo-liberalism 3.0.

The government has broadly accepted the proposals of the Vickers Commission for changing the structure of banking: erecting a firewall between the retail and investment arms of universal banks rather than splitting them into separate entities, obliging banks to hold higher ratios of equity capital to total assets and promoting greater competition on the high street. The intention is to have the necessary legislation on the statute book by the end of this parliament, with full implementation by 2019 – twelve years after the crisis began. Somewhat faster progress has been made in revamping arrangements for financial regulation. The Bank of England is to resume responsibility for regulating banks, and alongside the existing Monetary Policy Committee, a new Financial Stability Committee has been set up to keep an eye on the financial system as a whole.

Even so, the government still faces major problems in its dealings with the financial sector, both of day-to-day management and of strategic design. The banks have lobbied hard to blunt the edge and slow the pace of reform and skeletons from the light-touch years continue to drop out of the closet, from exorbitant executive pay packages to the Libor rate-rigging scandal. Meanwhile, net lending to businesses continues to fall, as repayments of old loans exceed the take-up of new ones, and banks are accused of taking advantage of repeated injections of cash by the Bank of England to repair their balance sheets rather than easing the supply of credit. At the strategic level, the government’s opposition to eurozone plans for a financial transactions tax sits uneasily beside its desire to demonstrate that British economic policy is decided in Downing Street, not the City of London. It also militates against the creation of a more balanced economy, for if the eurozone introduces such a tax and the UK does not, some financial business currently transacted in Frankfurt and Paris will migrate to London, exacerbating already pronounced economic disparities between the metropolis and the rest of the country.

Public indignation at the behaviour of the banks spills over into the unresolved crisis of political legitimacy. It is a moot point whether the hotch-potch of ideas for reform announced in the coalition agreement were capable of restoring faith in Britain’s political institutions and retrieving the reputation of Britain’s business and political elites. Take, for example, the proposal to replace the First-Past-The-Post method of electing MPs by the Alternative Vote (AV). The trouble was that no one loved AV: the Tories loathed it, Labour were divided and the Lib Dems lukewarm. The Tories had only agreed to put the proposal to a referendum as the price to be paid for coalition. Such a modest reform with such indifferent support seemed an unlikely tool for regenerating democracy even if the voters approved it. Similarly with the bill to replace the half-reformed House of Lords by a mostly elected revising chamber, whose members, chosen by PR from open party lists and serving 15-year terms, were to represent nine regional constituencies: this artful addition to the constitutional cook-book was hardly going to set the world on fire in a modern-day re-enactment of the Peers versus the People. If the purpose of reform is to reconnect citizens with government, why not convert the House of Commons into an English parliament and turn the House of Lords into a wholly elected second chamber of a federal state?

In the event, AV was decisively defeated by a majority of two to one and the impetus for reform was lost. Talks on the funding of parties stalled. Revelations of cash for access and dodgy donations continued to befoul the political stage. Only a handful of English cities opted to follow the example of London in having elected mayors. And when an unholy alliance between rebel Tory backbenchers and a partisan PLP intent on punishing the Lib Dems killed the prospect of reforming the House of Lords, the Lib Dems retaliated by withdrawing their support from legislation to implement the revision of constituency boundaries.

Wrangling within the coalition was compounded by the resurgence of tensions over Europe. As eurozone leaders edged towards closer fiscal integration, steering a perilous course amidst the ice of depression, the fire of the bond markets and the ire of their electorates, Tory eurosceptics stepped up pressure for a referendum on Britain’s membership of the EU. The party leadership had already conceded that a referendum would be held if Britain were called upon to transfer further legislative powers to the EU, and was hoping to secure the repatriation of some powers previously transferred, notably in relation to social and employment policy, which was to be the object of a renewed drive for deregulation. Faced with demands for an early, in/out referendum, Cameron temporised, pointing out – reasonably enough – that it made no sense to ask voters whether they wanted the UK to remain in a trans-national union which was in the throes of an existential crisis and was most unlikely to survive in its current form. Nevertheless, this ancient source of inter- and intra-party strife had lost none of its potency. Indeed, the clout of the Tory right was enhanced by the weakness of the Lib Dems and the threat posed by UKIP, the former fearing electoral annihilation if the coalition fell, the latter confident of ousting pro-EU Tory candidates standing in marginal seats. The coalition was not about to collapse, but it was coming apart, its purpose faltering, its partnership fraying.

Meanwhile, north of the border, another union was coming unstuck. In May 2007, just as the credit crunch was beginning to bite, the SNP emerged from elections to the Scottish parliament as the largest single party, beating Scottish Labour by one seat. After serving a full term as a minority government, skilfully manoeuvring and negotiating to get budgets approved and bills enacted, the party went on to win an overall majority in the 2011 election, an astonishing achievement that Scotland’s hybrid electoral system was supposed to preclude. The SNP was thus finally in a position to fulfil its longstanding promise to hold a referendum on whether Scotland should remain in the UK or become an independent country. Whatever the eventual outcome of the referendum now set for autumn 2014, the march of the SNP from protest to power has opened up the prospect of “an ever looser union” in which the constituent nations of the UK renegotiate their relationships and reconfigure their systems of government. As a result, seemingly arcane debates about constitutional, fiscal and monetary arrangements have begun to connect with big political questions about what kind of society the people of Scotland want to live in and how it is to be achieved.


[1] It is, of course, one thing to reject the old class-based parties and quite another to rule out, on principle and forever, the idea of forming a new democratic party of the left, though no one should underestimate the practical difficulties building a new organisation from scratch, of achieving a significant electoral breakthrough or, indeed, of reconnecting party politics with ordinary citizens at a time when people have lost confidence in the political class and the institutions of government.

[2] Mill based this maxim on his own personal experience of recovering from a nervous breakdown, when he found a corrective to the narrow, calculating and mechanistic ethos of Bentham’s utilitarianism, in which he had been schooled since the age of three, in the holistic, intuitive and developmental outlook of the romantic movement, as expressed in the writings of Coleridge.

[3] Renewal, the title of a comparable publication launched by former members of the Labour Co-ordinating Committee in 1993, conveyed a similar intention to overhaul the left’s mental furniture, though as critical supporters of the New Labour project, its editors, Neil Lawson and Paul Thompson, were inclined to the view that renewal meant applying old values to new times, which appears to imply that there is no need to re-examine the old values themselves.

[4] These rules were more flexible than they seemed. The Treasury altered the definition of the cycle several times to accommodate New Labour’s spending plans and, thanks to PFI and other wheezes, the distinction between current spending and capital spending became fuzzy. Nevertheless, from 1999 to 2001, there were small budget surpluses and from 2001 to 2007 the budget deficit averaged 2.3 per cent of GDP, while the National Debt rose from 29% to 36% of GDP. The deficit was lower than the average of 3.3% under Tory rule from 1979 to 1997 and Brown had kept public debt below the 40% ceiling. Moreover, against charge that the Brown Treasury went on a spending spree, it can be argued that fiscal expansion helped to avert recession after the bursting of the dot.com bubble in 2001 and that the country needed new schools, hospitals and improvements in infrastructure after years of Tory neglect.

[5] It currently stands at 70% and is expected to peak at around 80% in 2016-17, though in turbulent times like these such forecasts must be taken with a large pinch of salt.

[6] Besides the permanent loss of tax revenue from a stricken financial sector, which was overlarge and needed to be slimmed down, there was the problem that the longer the recession lasted, the greater the risk that the economy’s underlying growth rate – the rate at which potential output was growing over time – would fall as physical productive capacity was lost, collaborative social networks got dispersed and individual skills and know-how deteriorated through disuse.

[7] In Scotland, the Lib-Dems lost 74 seats and retain only 56, mostly in the Highlands.

[8] This range-estimate of the gap between actual and potential GDP is based on two assumptions: that when GDP peaked in the first quarter of 2008, the gap was zero; and that since then, for reasons explained in footnote 6, the annual rate at which potential GDP is growing has fallen from 2.5%, the previous long-term trend, to between 1.5 and 2.0%.

 

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