Doddnomics is 2017 Corbynomics with a twist

The now surely doomed November central forecast by the Office for Budget Responsibility has the government borrowing £100bn a year in targeting a 4 per cent budget deficit by the end of this parliament. When the last Labour government planned to run a 4 per cent budget deficit at the end of its forecast period in response to the last recession, it faced accusations of “deficit denial” by both the Liberal Democrats and the Conservatives. This accusation was then repeatedly thrown at both Ed Miliband and Jeremy Corbyn. But given the pandemic, no one is seriously considering throwing it at Keir Starmer.

It shows how much has changed in 10 years. Labour now faces a Tory chancellor whose planned public spending this year alone is higher as a share of GDP than under any Labour chancellor in history, and who plans to borrow more over his five years at the Treasury than the last Labour government did over 13 years. It is in this light that Labour’s new shadow chancellor yesterday wasted no time in setting out the new approach she will take to economic policy ahead of the next election. It is a clear break with the 2019 manifesto’s fiscal position, which was itself a break with that of the 2017 manifesto. And it is for good credible reasons she seems to be taking this approach.

The funeral pyre for Labour’s economic approach in 2019 was lit the moment we decided to update our fiscal rules weeks out from polling day – throwing away the three years of building up the meagre credibility we had for the cornerstone of our existing economic offer. Expecting to replicate it in such a short window was naive at best. We clearly forgot why in 2016 we adopted the Fiscal Credibility Rule (FCR) in the first place, but it seems the new shadow chancellor, who wasn’t even an MP then, has remembered.

The FCR was based on a 2014 paper by economists Professor Jonathan Portes and Professor Simon Wren-Lewis. It was submitted in 2015 to our Economic Advisory Council, on which Wren-Lewis sat, and we announced it ahead of the Budget in 2016. Its chief recommendation was for Labour to adopt a five-year rolling target for the deficit on day-to-day spending, leaving huge fiscal space for capital spending. Its main innovation was a “knock out” rule for when monetary policy had reached its limits with rates at the lower bound, then fiscal policy should kick in. 

It was a big gamble at the time. My thinking was to show ourselves as credible with a set of rules that worked when the then chancellor was about to break his own. But it was also to learn from the mistake I thought former shadow chancellor Ed Balls made in 2015 when he announced his fiscal rules just months out from the election, and got skewered on them by the SNP and the Tories. I felt a socialist leadership such as ours had to make the case early so we could get our arguments across. By going as early as she has done, Anneliese Dodds appears to believe she too must make the case for Labour’s fiscal framework over a decent period of time before the next election.

I added a further tweak to the FCR with a debt rule, against much internal protest, based on consultation with economist Joseph Stiglitz. My thinking was that we couldn’t avoid the national debt; otherwise it was an easy line of attack for the Tories. Dodds has not explicitly gone for this exact option, but seems to be sticking to the suggestion last summer by the now head of the OBR, Richard Hughes, to target overall public sector net worth. As well as suggesting that crisis spending, like we are doing right now to deal with the pandemic, should make use of long-dated gilts and consider the public sector debt over a longer time horizon. I suspect greater definition will be added here before the next election, and especially around her “fiscal anchor” that will set a limit on crisis spending. Notably, Prime Minister Justin Trudeau’s government in Canada has refused to update its fiscal anchors due to the current crisis. Because as Labour sadly learnt in 2019, it’s one thing to set out new fiscal rules, it’s another to convince people you will stick to them.

In our fiscal framework, I also added an extra bit of constraint with reforming the Office for Budget Responsibility (OBR) to ensure it was a fiscal council similar to the Congressional Budget Office. The shadow chancellor has added a similar tweak by having the National Audit Office (NAO) report to parliament each year on government spending. The logic for these constraints was an attempt to prevent our rule being misrepresented as an excuse for poor spending decisions or a lack of prioritisation, and so when Labour politicians had to talk about it in the media we could point to legitimate constraints. 

Interestingly, Dodds has returned in a similar vein to another separate policy suggestion of mine (and of my colleague James Meadway), which was for a reform to the OBR to model the impact of climate change at fiscal events. My thinking in this regard was that we needed to shift fiscal policy thinking into the long term. 

For example, fiscal events look forward only a few years, and now without formal equality impact assessments, and with major infrastructure projects such as HS2, climate impact stretches over decades. The impact of climate change doesn’t obey the five-year term of a government. We are today living with the climate consequences of the governments of the past. But the more we do today, the better chance we give ourselves in reaching future net-zero targets. It seems Dodds is continuing this long-term approach. It is also similar to what New Zealand’s Labour government currently does.

The FCR was initially attacked by some on the left who thought it was a mandate for, rather than against, austerity. But it was even described by some financial journalists to be more credible than the ones later adopted by the Conservative chancellor and his successors. You could argue that our FCR was more stringent than Labour’s new one announced yesterday.

Let me be clear, there is a very legitimate case for looser fiscal policy. Dodds has made such a case in her Mais Lecture. And Labour’s 2017 position was such a case. Productivity has been flat for a decade, real wages stagnating for the same length of time, real yields are negative, and the bank rate is at the zero lower bound, and we have creaking infrastructure that desperately needs updating. And this is all before you come to the issue of climate change or the recovery from the pandemic.

But the mistake Labour made in 2019 and 2015 was leaving too much too late, and expecting to stretch credibility with it. As campaign strategist Lynton Crosby reportedly once said, “you can’t fatten a pig on market day”. If Labour had wanted to update our fiscal rules in 2019, we should have done it at least in September at our conference. It’s not like we weren’t expecting an election, and the paper they were based on was published over the summer by the Resolution Foundation. 

The reality is that we chose a rule to fit the figures on a never-ending spreadsheet, but for it to have credibility we should have had figures that fitted the rule. If you don’t agree with that principle, don’t have a fiscal rule at all. As this is how you will be judged by those you’re seeking to convince by adopting one. Shadow chancellor Anneliese Dodds has clearly learned from 2019, and is laying the foundations now for the next election.

James Mills is a former strategic adviser to Jeremy Corbyn and John McDonnell