New Labour is dead. It took a long time to die, and has done terrible damage to the interests of Labour, the country and indeed the world. Its final act of hubris was the 10 per cent tax rate abolition, but its nemesis has now descended. Finding a way back for the real Labour Party and the whole working'class movement is going to be hard but we have to start now. The party could well begin by reading Socialist Campaign Group News and following the wisdom of its columns each month.
New Labour has been anti-socialist, anti–working class, anti–trade union, anti–welfare state and anti–peace, and millions of despairing former Labour voters have either stopped voting or even switched to the Tories in a final act of anger and frustration.
A government which increases taxes on the poor to pay for reduced taxes on the better off puts itself even to the right of Thatcher. It is a disgrace which will shame New Labour beyond the grave in which it is soon to be buried. In its 11 years in office, New Labour has supported the US neo-cons in its wars and the global corporations in their neo–liberal economics.
From the start, the Socialist Campaign Group of Labour MPs has resisted, beginning with the single parent benefit revolt in 1997. It was Ken Livingstone who spoke up at the very first Parliamentary Labour Party meeting after the 1997 election to protest about Gordon Brown giving 'independence' to the Bank of England without even consulting the Cabinet let alone the party.
One of the myths of New Labour was that it ran the economy brilliantly. This is simply not true. New Labour happened to come into office when the economy was growing strongly out of the deep recession of the early 1990s generated by the catastrophic and doomed decision to join the European Exchange Rate Mechanism. That economic growth was sustained by surging house prices, irresponsible bank lending and easy credit building a mountain of debt. The day of reckoning was inevitable.
After 1997, sterling was substantially over-valued against other currencies making imports cheap and exports expensive. This led to a gigantic structural trade deficit – the largest trade deficit in Britain's history. The pound has now depreciated by a sixth of its value in the first half of 2008, but only several years after this column urged support for the scheme proposed by economist and former IPPR Director, Richard Holtum urging government intervention in the currency markets to reduce the value of the pound. However, Gordon Brown, Britain's 'successful' Chancellor sustained his rigid belief in unfettered financial markets governed only by the supposedly independent Bank adjusting interest rates according to an ill–judged inflation target.
The Brown, Darling and Bank of England triumvirate now seem likely to compound past errors, just when house prices start to fall and the economy is on the brink of serious downturn. The price inflation being suffered by ordinary people derives from external factors, rising world prices for energy and food. Trying to squeeze out inflation in the domestic economy by keeping interest rates too high will simply accelerate the economic downturn and deepen any recession.
At this point, the government should be using all three macro economic weapons to counter the forces of economic recession, interest rates, fiscal policy (public spending and taxation) and the exchange rate. The exchange rate has already fallen but interest rates must also be reduced. As to fiscal policy, the government's panic response to public anger at the abolition of the 10 per cent tax rate will actually be beneficial by injecting more money into the economy, exactly right at this time.
Gordon Brown's fiscal rules are mostly nonsense so breaking them matters little at this moment. His rule about public borrowing being neutral over the economic cycle can be adhered to provided he recognises that now is the time to relax public borrowing and allow for repayment only when the economy turns up in the future.
Squeezing public sector pay below inflation is unnecessary and unjust. Indeed, putting more money into the pockets of the lower paid is just what is needed at this moment, as the less well off tend to spend all their income just to get by each week and therefore help to sustain demand in the economy. A boost to pensions at this time would also be helpful, so that an increase in the basic state pension to the minimum credit guarantee level and restoring the earnings link is again just what is needed.
If the government feels it does need to raise more income to cover at least some of this expenditure, there are obvious ways of doing this. First it could make serious efforts to close the tax gap, identified in Richard Murphy's pamphlet for the TUC Closing the Gap. Clawing back some of the £33bn a year lost in tax avoidance and tax planning by the rich would help restock the Treasury's coffers. VAT fraud and tobacco smuggling together costs some £14bn a year and with political will much of this could also be recouped.
Then there is more than £20bn a year lost to the Treasury in unjustified tax breaks on savings by the rich. Restricting those tax allowances to the standard tax rate would rake in billions for the Treasury. Another source of revenues would be to lift the earnings cap on National Insurance contributions. The National Insurance fund already has a massive surplus, getting larger every year, and this could and should be used to pay for the long overdue increase in the state pension.
And all of this can be done without even looking at tax rates. It is however a scandal that the rich pay the same top tax rate as millions of people earning less than £40,000. It is time for a wholesale revision of the income tax system with lower taxes on the less well off being paid for by higher taxes on the rich, the opposite of what the government did with its 10 per cent rate abolition.
Such changes would not be difficult, would raise substantial sums for the Treasury and essential public spending and make possible a strong counter–inflationary fiscal strategy. Redistributing income from the rich who save much of their marginal income to the poor who spend all their marginal income is a classic method of boosting consumer demand and sustain economic activity. It is necessary now both for reasons of social justice and to sustain the economy. Such policies would also be enormously popular and help Labour win the general election in two years' time.
Kelvin Hopkins MP
