Labour’s Austerity Problem

Since losing the 2010 general election in the United Kingdom, Labour has struggled to develop a forceful alternative to the Conservative–Liberal Democrat coalition’s program for eliminating the public deficit through sweeping and sustained cuts in public spending. Labour’s current difficulties are partly of the party’s own making. They reflect its failure over the last twenty years to develop a social democratic economic alternative underpinned by a consistent, coherent reformist narrative. Too often Labour’s policies have been characterized either by their concessions to neoliberal arguments or by the pragmatic and ad hoc manner in which they were constructed. In government between 1997 and 2007, Labour made much of its apparent capacity to manage the economy successfully during what Gordon Brown called “the longest period of economic stability and sustained growth in our country’s history.” That expansion came to an abrupt end with the onset of a severe recession in 2008—an economic crisis that raised fundamental questions about the nature of Labour’s strategy and played a major part in Labour’s loss in 2010.

How should Labour confront austerity? The issue has not proved straightforward: the party is caught between challenging cuts and acknowledging the need for deficit reduction. Labour mapped out a program for a progressive reduction of the deficit during its last months in office, which left it vulnerable to the criticism that it conceded too much to the coalition’s orientation. However, a blunt rebuttal of austerity would leave the party susceptible to the charge that it was not taking the deficit seriously. Some within the party claimed that Labour’s electoral success and economic achievements since the mid-1990s had been based on a set of carefully constructed moderate measures. For others, the party’s emphasis on stability had already watered down the social democratic character of its program to the point of abandonment.

The Development of New Labour’s Economic Model

In April 1992 Labour lost its fourth general election in a row. The outcome was especially disappointing because of the intensive modernization that it had undergone under the leadership of Neil Kinnock. In a formal policy review between 1987 and 1989, Labour made significant revisions to its existing strategy, accepting that for the most part the market mechanism was an appropriate basis for the allocation of goods and services. But the party also identified a number of specific market failures that required extensive state intervention to correct. Firms did not invest sufficiently because open capital markets in the United Kingdom meant that they were liable to hostile takeovers while awaiting future dividends. Firms did not train workers for fear that they would be “poached” by other companies that, not offering skills acquisition to their workforces, could afford to pay higher wages. Rectifying ...