'How to Pay for a Labour Government' - James Melia

'How to Pay for a Labour Government' - James Melia

Britain is broken.

Inflation is soaring, energy bills are skyrocketing, but wages are lower than they were a decade ago. We live in a country where millions of children living in poverty has been normalised, and pensioners will have to turn to ‘warm banks’ to stave off the cold.

The NHS is collapsing. A record 6.6 million people are waiting for NHS treatment. Patients are being left to suffer for hours in the back of ambulances waiting outside A&E. The dental care system has disintegrated into a privatised mess, with most new patients unable to access NHS dental care.

And crime is soaring, yet arrest rates are down by 50%. Tory budget cuts mean that violent criminals go unpunished, whilst police officers spend more and more time on paperwork and bureaucracy.

All the while, the world is burning. Heatwaves and droughts are with us to stay. We must move immediately to reach net zero if we are to limit the catastrophic damage of climate change.

These concurrent crises require an urgent response. We must freeze energy bills, insulate millions of homes, and increase benefits payments. We need to rebuild the NHS, kickstart a green industrial revolution and recruit thousands more police officers.

But all this will cost a lot of money.

So how will a Labour government pay for the ex pensive changes that we need to see? The answer is plain and simple: the next Labour Government will have to borrow more money. We cannot be held back by frivolous concerns over the national debt.

In the wake of World War Two, Clement Atlee’s Labour government did not panic about the enormous war debt. Instead, they created the NHS, constructed millions of council houses and built the welfare state. In the US, after the great depression, rising deficits did not stop Roosevelt from investing in infrastructure, founding Social Security, and creating millions of government jobs. When the Covid crisis hit, the chancellor Rishi Sunak’s furlough scheme spent billions nationalising the payroll with no concern for the national debt.

In response to covid, even the Tories had to concede that the debt was no concern, spending over £400bn on saving the economy from the pandemic. But now that the pandemic is over, the deficit scaremongering has returned. Sunak has hiked to taxes to their highest rate in 70 years in order to ‘pay down the debt.’

However, we should not be worried about the national debt. As a nation with our own sovereign currency, the government will always be able to finance its spending. Whenever the government wants to spend more money, the Bank of England simply adds a few billion pounds to the government’s electronic bank account. The government can literally never run out of money. It is insane to worry about the level of our national debt because the government will always be able to make interest payments.

Yet this does not mean that government spending has no limits. Although we should not worry about debt or deficits, we should be worried about inflation. Government spending does not always cause inflation. However, when we begin to reach full employment, government spending will begin to drive inflation. This is because, instead of bringing unemployed resources into use, government spending will be bidding up the price of already employed resources. So, when the government is deciding to spend money, it should not be concerned about the national debt, but instead it should be thinking about whether the spending will contribute to inflation.

‘But inflation is at 10%’ I hear you cry. ‘Surely the government should cut spending to reduce inflation.’

Wrong.

The current inflation is not being caused by excessive government spending. It is being caused by the huge increases in energy price. So, there is room in the economy for more government spending without causing further inflationary pressures.

All the evidence shows that the UK economy is lacking in demand. Growth in industrial output is sluggish at best. Consumer confidence is even weaker than during the financial crisis. The UK is hurtling headfirst towards a recession. Thus, not only is there room within the economy to increase spending without further pushing up inflation, an increase in government spending is vital to prevent a horrific recession.

In fact, a well-targeted increase in government spending would reduce inflation. Action to bring down energy bills by freezing the energy price cap would reduce inflation by several percentage points. Rebuilding the NHS would lead to a healthier, more productive workforce, meaning goods can be produced at a lower cost. Investing in a green new deal would cut energy bills by insulating homes and using solar and wind energy, which are significantly cheaper than fossil fuels.

Of course, in some situations, government spending will drive inflation. If the government increased benefits payments at a time in the future when the economy is booming, the increase in consumer demand would of course increase inflation. So how should we drive down demand in such a hypothetical situation? We must tax the rich. We must tax the war-profiteering oil and gas companies. We must tax the investment bankers and hedge-fund managers who add nothing productive to the economy. And we must ask the question: why is there VAT on energy bills but not on private school fees? By taxing the rich resources will be diverted away from the construction of yachts, luxury apartments and second homes, and instead resources will be used to build council houses and lift children out of poverty.

To solve the urgent crises that we face, Labour must throw off the shackles of economic orthodoxy. The next Labour government must borrow to invest in our future. And when inflation does rear its ugly head we must drive inflation down by taxing the rich instead of punishing the working and middle classes with brutal interest rate hikes.

The British people are yearning for change. Either this desire for change will be captured by Liz Truss’ brand of economically irresponsible tax-cutting extremism, or Labour can set out a bold vision of borrowing to invest in a brighter, greener future.

[James Melia is a first year PPEist at Magdalen College. He was OULC’s Social Secretary this term.]