Austerity Remains

As someone who campaigned for the UK to remain in the EU and who believes that no exit deal will be as good as the deal we have as members of the EU, I subscribe to a number of Labour pro-remain groups.

From time to time one of these groups makes a false claim or cherry picks the evidence to support a particular course of action. I try to put these comrades right especially if they are likely to mislead people on important economic issues. I particularly object to claims that leaving would compel a Labour government to continue austerity.

The latest campaign to fall for this lazy argument is Remain Labour. On the basis of a curiously inept economic briefing this group has been lobbying the front bench. When I saw the letter it had sent to John McDonnell, I contacted the group to explain why a smaller tax take does not automatically translate into austerity.

The claim in the Briefing that lower government receipts could force the next Labour government to impose austerity is not only false but serves to legitimise the phony idea that austerity is somehow inevitable if government income is compromised.  

A moment's thought should be enough to see that the last Labour government did the reverse. Faced with an actual fall in tax receipts, not just a smaller increase than might otherwise have been expected, Gordon Brown's government cut taxes and brought forward spending particularly on investment. Why then would a Corbyn government default to austerity when slower than expected GDP growth limited growth in government revenue?

I have yet to receive a reply.

The group's claim is that leaving the EU on the terms Jeremy Corbyn had offered to the prime minister would cost the government finances £24bn. This is not a figure you will find in any reputable analysis. It is a number Remain Labour have arrived at apparently by splitting the difference between two estimates constructed using completely different methodologies. They base their case on a study carried out in a collaboration between the LSE and King's College which concludes that after ten years GDP would not have increased as much outside the EU as it would inside and consequently the fiscal position would be poorer.

This week the group's founder, Andrew Lewin, followed up with a letter to the secretary of state for education, Angela Rayner. This time he had persuaded a number of youth and student leaders to sign up to the argument that Labour could not deliver on its manifesto promises on education if Britain left the EU.

Labour needs £25bn to pay for its National Education Service and Early Years reforms set out in the 2017 manifesto. At the same time, the cost of Labour’s ‘alternative Brexit plan’ is £24 billion per year to the economy.

I wrote to Mr Lewin.

The interpretation of economic evidence can be difficult. In this case you have drawn an equivalence between additional expenditure funded from taxation with the estimated difference in long term fiscal outcomes under two scenarios. Clearly they are not comparable figures.

More seriously your claims misrepresent the conclusions of the study on which your analysis rests. The LSE/Kings study does not suggest a deficit nor a fall in government income. Its claim is that public finances would not increase by as much as they would compared to remaining in the EU.

To illustrate the significance of this error, assume that GDP would grow at 1.5% per annum in a remain scenario. Then a the end of the 10 year period to which the study refers the fiscal impact would be an increase of 6.4% of GDP, based on the same assumptions as in the study. It is from this figure that you would subtract the 0.4% - 1.8% fiscal impact of leaving the EU. That means the chancellor would still have an additional 4.6% - 6.0% GDP to allocate however he wishes. That is around 96bn to 126bn.

You also seem to have missed the significance of timing. The methodology of the LSE study does not allow it to say anything about the short term, but the shadow cabinet spending plans are precisely short term. A Labour government would implement its plans during its first years in government. The LSE study tells us nothing about the fiscal position at any point before its ten year horizon.

 If I get a reply I will give an update on this blog.