A background paper for the AGM of Democratic Left Scotland,

22^nd September 2012

Middle Reading Room, Edinburgh University Students Union, Teviot Row

David Purdy

This paper originated as part of an even longer one dealing with the proposal to relaunch Perspectives under a new title. A report on that proposal will be presented in the morning session of the AGM. What follows is intended as background material for the afternoon session from 2.00 to 4.00 pm, which will be devoted to a general discussion of contemporary politics, introduced by Luke March, Lecturer in Politics at Edinburgh University, under the heading All that is solid melts into air. In section 1, I outline the origins and character of the democratic left (lower case) and of Democratic Left (DL): the former a political disposition or state of mind; the latter a UK-wide political network from which, in 1999 with the re-establishment of the Scottish parliament, DLS separated to become an autonomous organisation. To put this brief sketch in a wider perspective, in sections 2, 3 and 4 I review the changing contours of global and British politics from the early 1990s to the present.

The democratic left

When the final congress of the CPGB voted to disband in 1991, some remnants of its former Eurocommunist wing regrouped under the aegis of Democratic Left. For some time, the aims and character of the new organisation remained fluid, but at a national conference held in Manchester in 1994, it was agreed that DL was neither a party nor a think-tank, but a network open to members of all parties and none. The adoption of this organisational form marked a rejection of class politics, whether in the Leninist or Labourist mould. The centralised and disciplined vanguard party prescribed by Lenin is at odds with a principled commitment to parliamentary democracy, just as the ingrained economism of the British labour movement stands in the way of efforts to democratise the economy.[1] And while class structure continues to shape the distribution of life-chances, it is neither the sole nor always the most important influence on political attitudes and behaviour. DL sought to salvage whatever was still valuable from the wreckage of socialism and to work for a coalescence of the socialist, green and feminist traditions of political thought and action, a project that had already made some headway during the previous twenty years and was thought to offer the most promising basis for building a new political formation. When DLS was formed in 1999, it stood by these revisionist ideas.

Survivors of twentieth-century communism were only too conscious of the historical baggage they carried. They had suffered a loss of faith comparable to that experienced by many educated and thoughtful people in the second half of the nineteenth century as they struggled to reconcile the claims of religion with the findings of science. They knew what they no longer believed, but were unsure what new stars to follow. The only certainty was that no single individual, organisation or school of thought had a monopoly of wisdom and truth. It seemed best, therefore, to follow the advice of John Stuart Mill and try to combine the partial truths offered by diverse, or even divergent, world-views and theories, in the hope that each would correct the omissions, limitations and biases of the others.[2] The tentative, exploratory and pluralistic spirit of this approach is nicely encapsulated by the titles of publications such as Soundings and Perspectives.[3]

The second age of neo-liberalism

It is worth recalling the circumstances in which the democratic left emerged. In Eastern Europe and the former Soviet Union, Communist regimes had collapsed, bringing the Cold War to an abrupt and unexpected end, leaving the US – for the time being – as the world’s sole surviving superpower, and killing debate about the possibility of life after capitalism – perhaps not forever, but at least for the foreseeable future. In the advanced capitalist world, especially in its Anglophone regions, the first stage of the neo-liberal revolution had been completed, the post-war settlement had been dismantled, and a globally integrated capitalist economy was fast taking shape in which Brazil, Russia, India, China and South Africa – collectively known as the BRICS – would become major players, with other large and once poor, but now rapidly developing states such as Turkey, Malaysia and Indonesia following close behind. Within the EU, Germany had been reunited and plans were being laid to admit the fledging capitalist democracies of Eastern Europe and to establish an Economic and Monetary Union, beginning with the replacement of separate national currencies by a single European currency.

In Britain, the left and the trade unions were a spent force, having suffered repeated setbacks and disasters from the mid-1970s onwards, and a fifteen-year-long wave of economic expansion was about to begin. An important political milestone was Labour’s “shock” defeat in the general election of 1992, its fourth in succession. The economic turning point came six months later when sterling was forced out of the ERM (European Exchange Rate Mechanism). Much to everyone’s surprise, the depreciation of the pound stimulated recovery from recession without sparking off a new wage-price spiral: the counter-reforms of the Thatcher years – the abandonment of full employment, the emasculation of the unions and the deregulation of the labour market – were finally bearing fruit.  Shortly after, in 1994, the death of John Smith cleared the way for the birth of New Labour, which set about charting a “third way” beyond both radical new right and conservative old left. Under the leadership of Tony Blair, the party won a landslide victory at the polls in 1997 and went on to win the next two general elections, in 2001 and 2005, the first time Labour had ever secured three wins in a row.

New Labour offered a less abrasive and divisive, more sophisticated and subtle version of neo-liberalism. The party accepted the primacy of market forces and private capital in determining the course, pace, pattern and character of economic development, but accorded the state a vital role in ensuring that individuals acquired the skills and motivations required to make a success of their lives, it being taken for granted that these would be lives dedicated to owning, earning and spending. The Thatcher governments of the 1980s had been more concerned with restraining social spending than with recasting the welfare state and their efforts at social engineering were limited to breaking the power of the labour movement, preaching the virtues of self-reliance and giving people incentives to help themselves. New Labour, by contrast, sought to “modernise” the public services by redefining their purpose, reorganising their structures – often several times over – and opening them up them to the three c’s: competition, contract and choice.

The prime task of social security, for example, was to encourage, enable and, if necessary, compel able-bodied citizens of working age who were, or risked becoming, excluded from mainstream society to find and retain regular paid work. To this end, the payment of benefits was separated from the task of getting claimants (back) into employment, and a variety of rehabilitation, retraining and work experience schemes were launched, mostly run by private contractors. Public services still had to be financed from taxation. But they did not need to be provided by public agencies, under the control of central government. Instead, the work could be contracted out to private providers, whether commercial firms or social enterprises. Thus, although there remained a generic difference between public services and marketed commodities, the boundaries between the public, commercial and voluntary sectors of the economy became increasingly blurred, while business norms and market forces increasingly penetrated areas of social life from which they had hitherto been largely excluded, even under Mrs Thatcher.

The second, gilded age of neo-liberalism came to a sudden, unexpected and ignominious end in 2007, though as always with turning points, it took some time for this to be recognised. On the global stage, the bursting of the US housing bubble in the winter of 2006-7 gave rise to a “credit crunch” as inter-bank lending and borrowing, once used mainly to balance the books of prudent retail banks, but now critical to the trading activities of giant universal banks, began to seize up. Over the next eighteen months, the world financial system suffered a series of convulsions, culminating in the bankruptcy of Lehman Brothers in September 2008 and the near-collapse of several other major banks – most, though not all, headquartered in London or New York. The financial crash, in turn, triggered the onset of the deepest and longest economic recession since the 1930s.

For about nine months, from the autumn of 2008 to the summer of 2009, it looked as though policy-makers had learned the lessons of the Great Depression. The US and British governments moved quickly to restructure and recapitalise insolvent banks, not hesitating to take them into partial public ownership, while the Federal Reserve and the Bank of England provided general support to the banking system by disposing of toxic assets, buying up government bonds with newly created money and bearing down on interest rates, both short- and long-term. At the same time, governments across the world took concerted action to counter the downturn, not only allowing their budget deficits to rise automatically as tax revenues fell and social security spending rose, but also improvising emergency fiscal stimulus packages aimed at boosting total spending on currently produced goods and services so as to maintain employment and prevent the recession turning into a major slump.

Neo-liberal opponents of “big government” were temporarily thrown off balance by the financial crash, which hardly anyone had anticipated. It was not long, however, before they rallied under the banner of fiscal conservatism, warning that without prompt action to cut public borrowing and halt the rise in public debt, governments would lose the confidence of bondholders, with consequences for the real economy that would, they claimed, be even worse than those of pre-emptive fiscal austerity. When market sentiment moves against a country’s bonds, the government is forced to pay higher interest rates in order to borrow. Indeed, it may find itself unable to borrow at any rate of interest. This in turn raises the cost of private borrowing and crowds out private spending, negating the expansionary impact of budget deficits, while adding to the cost of servicing public debt.

From late 2009 onwards, these warnings gained plausibility as a wave of sovereign debt crises successively overwhelmed the governments of Greece, Ireland, Portugal and Spain, threatened to engulf Italy and even lapped at the shores of France. For the most part – the main exception was Greece – the governments concerned were not guilty of fiscal profligacy, but during the bubble years their economies had, to varying degrees, lost competitive ground to Germany and were running persistent trade deficits within the eurozone. In addition, some of them – notably, the governments of Ireland and Spain – had presided over credit-fuelled housing booms and reckless property speculation, which they were unable to prevent because they no longer had their own currencies and their central banks could not control the cost of borrowing. Nevertheless, at the behest of Germany, which as Europe’s economic powerhouse was in a position to dictate the rules of the game and was no longer willing to be Europe’s paymaster in order to do penance for the sins of the Third Reich, governments requiring so-called bailouts – actually official loans jointly funded by the rest of the eurozone and the IMF – had little alternative but to introduce tough fiscal austerity packages until such time as their public finances were restored to health.

The irony is that as a percentage of GDP, the combined budget deficits of eurozone member states are lower than those of the US and UK, while their combined public debt is less than half that of Japan. Yet the rates of interest at which the US, British and Japanese governments can borrow have never been so low. The problem is not the eurozone’s aggregate deficits and debts, but the fragmentation of fiscal authority and the difficulty of persuading increasingly eurosceptical electorates to accept the surrender of national budgetary sovereignty for the sake of creating a supranational fiscal union. Thus, between them, the fiscal conservative backlash and the crisis in the eurozone are exerting a powerful drag on global economic growth, plunging Europe into depression, snuffing out recovery in the US and slowing down export-led expansion in the BRICS, with adverse repercussions for primary producers in Latin America, Africa and Australia.

Britain: the politics of fiscal austerity

A central pillar of New Labour’s fiscal regime was a tacit agreement with the financial sector, whereby in return for light-touch regulation and official tolerance of runaway rewards for fund managers, market traders and senior executives, the rapid growth of financial services and the resulting surge in tax revenue would help to pay for extra spending on public services. In Peter Mandelson’s words: “We are intensely relaxed about those who become filthy rich as long as they pay their taxes.” The crash of 2008 destroyed this pillar. It also forced the government to scrap Gordon Brown’s fiscal rules: to keep current public spending and tax receipts in balance over the cycle, to borrow only for public investment, and to keep National Debt below 40% of GDP.[4] The budget statement of November 2008 cut taxes and brought forward capital spending plans, though the fiscal stimulus was modest: equivalent to 1.5% of GDP over three years. However, between the fiscal years 2007-8 and 2009-10, the budget deficit rose from 2% of GDP to 11%, the major source of the increase being the automatic stabilisers: falling tax revenue and rising social security spending. Over the same period, the ratio of National Debt to GDP ratio rose from 37% to 53%.[5]

Part of the budget deficit was “structural” in the sense that it would persist even if the economy were operating at its full potential. The recession had opened up a gap between the potential level of output and employment and the actual level. If this gap could be closed, the automatic stabilisers would work in reverse, boosting tax revenue and decreasing social security outlays. It was hard to say exactly how large the structural deficit was, but it would eventually have to be tackled either by cutting public spending programmes or by raising taxes.[6]  The issues to be decided were: When should fiscal adjustment start? How quickly should it be completed? And what balance should be struck between spending cuts and tax rises? It was also evident that in the longer run, beyond these immediate questions of crisis management, the country was going to need a new fiscal regime, along with radical reform of the banking and financial system.

To their credit, Gordon Brown and Alistair Darling argued that full fiscal adjustment should be delayed until recovery from recession was assured, though their room for manoeuvre was constrained: by the need to maintain credibility with nervous bondholders and myopic credit rating agencies; and by the need to fend off attacks by the opposition and a hostile press. In a situation where output had fallen 7% below its pre-recession peak and households and businesses either could not or would not increase their spending, no matter how low interest rates were, the best or least bad option was for government to act as spender of last resort. This, of course, entailed continuing to borrow and add to the stock of public debt. But the alternative was worse: prompt recourse to stiff public spending cuts and tax hikes was likely to deepen or prolong the recession, undermining business confidence and entrenching the slump. The budget deficit might even grow, once account was taken of the impact of lower output and employment on tax revenue and benefit payments. “Look after employment,” Keynes was fond of saying, “and the budget will look after itself.”

There was, to be sure, a risk that deficit budgeting would spook the bond markets, but the risk was neither high nor urgent. Given that the outlook for equities was poor, gilts offered investors a safe haven, and the government’s short-to-medium term refinancing needs were limited since the average bond was not due to be repaid for fourteen years. Moreover, unlike members of the eurozone, the UK still had its own currency and independent central bank, which could, if necessary, redeem bonds by creating money. History too offered reassurance: in the three centuries since the Bank of England was established and the bond market emerged, Britain had never once defaulted on its debt; and after both the First and the Second World Wars, the ratio of the UK’s National Debt to its GDP far exceeded the current level, standing at 200% in 1919 and 250% in 1945.

These considerations may have weighed with bondholders, but they failed to convince the electorate. Why was this? In part because, like other governments in office when the crisis struck, Labour was held to blame and received little credit for rescuing the banks and averting a re-run of the Great Depression; in part because there is a difference between staving off disaster and promoting recovery; and in part because the economic downturn coincided with a full-scale crisis of political legitimacy, triggered by popular outrage at the parliamentary expenses scandal. This was widely felt to symbolise the gulf separating Britain’s political elite from ordinary citizens. People sensed that there was something rotten in the state of Britain. They were not mistaken: over the previous thirty years, with one notable exception, the institutions of representative democracy had degenerated: through the hollowing out of political parties, the fall in electoral participation, the debilitation of local government, the demise of Cabinet government, the decline of the House of Commons, the dumbing down of the mass media and the corruption of the press. The exception was the devolution of powers and responsibilities from Westminster to the Scottish parliament and to elected assemblies in Wales and Northern Ireland.

Even so, Labour’s rearguard resistance to fiscal conservatism blunted its impact. Between the autumn of 2009 and the general election of May 2010, a large and longstanding Tory lead in the opinion polls was gradually whittled away. The upshot was a hung parliament, the first time this had happened since February 1974. To be sure, Labour fared badly: at 29% – six points down on 2005 – its share of the vote was the second lowest since 1923, when it replaced the Liberals as the main alternative to the Tories. But the result was not catastrophic: the party lived to fight another day. By the same token, the Conservatives failed to win an overall majority and were forced to choose between forming a minority government and striking a deal with the Lib-Dems. In so far as it is ever possible to discern the will of the people, a hung parliament was roughly what the voters wanted: they had lost faith in Labour without being won over by the Conservatives.

4.      Things fall apart

During the inter-party talks that followed the election, David Cameron and Nick Clegg considered and rejected the option of a minimalist agreement whereby the Lib Dems would support a Tory government on confidence motions and finance bills, without joining a full coalition. This, they concluded, was too flimsy a basis on which to tackle the economic crisis and would soon be followed by another election, with the attendant risk of provoking panic in the bond market. Instead, in the space of five days, the two parties’ negotiating teams crafted a memorandum of understanding setting out a comprehensive and jointly agreed programme for government and signalling their intention to serve a full five-year term.

The Lib-Con coalition announced three central aims: to shift the balance of the economy away from public spending, consumption and imports towards private spending, investment and exports, with financial services shrinking relative to high-end manufacturing; to build a stable financial system so that taxpayers would never again be called upon to rescue insolvent banks; and to restore public faith in Britain’s political institutions. To rebalance the economy, the government would introduce a phased programme of fiscal austerity, starting immediately and weighted towards cuts in public spending rather than increases in taxation. To rebuild the financial system, it promised radical reform of the banks and a new regulatory regime. To repair the political system, there would be new rules for party funding, fixed-term parliaments, a referendum on the Alternative Vote, boundary changes to reduce the number of MPs from 650 to 600 and reduce inequalities in the size of parliamentary constituencies, reform of the House of Lords, and efforts to persuade local authorities in England to adopt elected mayors. Underpinning the programme as a whole was the vision of a “big society”, an umbrella term covering various ideas for revitalising civil society and rolling back the state, of which the most developed were proposals to empower local communities, encourage volunteering and promote social enterprise.

The new government had several major strengths. The memorandum of understanding offered the makings of a serious reforming project, which was embraced with enthusiasm by senior figures in both parties. The government had a comfortable parliamentary majority of 80, which insured it against deaths and defections, whether on the Tory right or the Lib Dem left. And for some time to come, the undoubted pain of fiscal austerity could safely be blamed on the fiscal irresponsibility of the outgoing government. Thus, while Labour was preoccupied with a five-month-long leadership contest, the new government seized the moment to introduce an emergency budget of unprecedented severity. In June 2010 George Osborne announced plans for fiscal adjustment equivalent to 1.5% of GDP each year from 2011-12 to 2014-15, with three quarters of the total coming from spending cuts, including cuts in social security benefits. If all went according to plan, the share of public spending in GDP was set to fall from 47% in 2009-10 to under 41%.

To justify this display of fiscal shock and awe, the Chancellor argued that prompt action to put the budget deficit on a downward trajectory had protected the government’s triple-A credit rating and secured the confidence of bondholders, enabling monetary policy to be kept as loose as possible for as long as necessary. Cheap money, he claimed, coupled with the depreciation of the pound against other currencies by almost 25% since 2007, would facilitate an export-led recovery, helping to revive business confidence, boost private investment and initiate the desired rebalancing of the economy. Thus, far from halting the UK economy’s fragile recovery and tipping it back into recession, this was going to be an expansionary fiscal contraction.

For some twenty months, public support for the coalition remained solid, despite a flat-lining economy, the government’s refusal to contemplate any easing in the scale or timetable of fiscal adjustment and the slump in support for the Liberal Democrats, who paid a high price for ditching manifesto pledges to oppose higher student tuition fees and premature cuts in public spending. Thereafter, however, Labour overtook the Conservatives in the polls and began to open up a strong lead. By July 2012, according to UK Polling Report’s average of all the polls by all the polling organisations, Labour was on 42%, the Conservatives 33% and the Lib Dems 10%. This was broadly in line with the results of UK-wide local elections in May, when Labour did well, the Tories did badly and the Lib-Dems suffered a second successive year of carnage, their total number of council seats falling below 3,000 for the first time since the Liberal-SDP merger in 1988.[7]

Can the slide in the coalition’s fortunes be put down to normal mid-term blues? To some extent perhaps, but the main problem is that little progress has been made towards any of the government’s main objectives. Fiscal austerity is hurting, but not working. GDP is still 4% below its pre-recession peak and between 9 and 11% below its potential level, while total unemployment stands at 2.6 million (8.2% of the workforce) and youth unemployment at 1 million (one in five of those aged 18-24).[8] Moreover, since GDP started to fall again in the fourth quarter of 2011, not only is unemployment, a lagging indicator, set to rise from now on, perhaps eventually reaching 3 million (9.5%), but the target date for eliminating the structural budget deficit will recede further into the future, putting at risk the government’s much vaunted triple-A credit rating.

In a bid to escape from the doldrums, the government has recently announced two new initiatives: a so-called Funding for Lending scheme worth up to £80 billion, whereby the Bank of England provides ultra-cheap loans to the banks provided they, in turn, issue new loans to small and medium enterprises; and a parallel scheme aimed at large companies and worth up to £40 billion, to be spent on infrastructure projects, to be financed by private investors such as pension funds, and to be guaranteed by the government. These desperate measures are a tacit admission of failure and a silent tribute to those who long ago argued for a Green New Deal. But they also reveal the lengths to which the government is prepared to go to avoid public borrowing and state investment – further evidence, if it were needed, that neo-liberalism is not dead, though policy improvisation on this scale shows that there is a long way to go before we get to what might be called neo-liberalism 3.0.

The government has broadly accepted the proposals of the Vickers Commission for changing the structure of banking: erecting a firewall between the retail and investment arms of universal banks rather than splitting them into separate entities, obliging banks to hold higher ratios of equity capital to total assets and promoting greater competition on the high street. The intention is to have the necessary legislation on the statute book by the end of this parliament, with full implementation by 2019 – twelve years after the crisis began. Somewhat faster progress has been made in revamping arrangements for financial regulation. The Bank of England is to resume responsibility for regulating banks, and alongside the existing Monetary Policy Committee, a new Financial Stability Committee has been set up to keep an eye on the financial system as a whole.

Even so, the government still faces major problems in its dealings with the financial sector, both of day-to-day management and of strategic design. The banks have lobbied hard to blunt the edge and slow the pace of reform and skeletons from the light-touch years continue to drop out of the closet, from exorbitant executive pay packages to the Libor rate-rigging scandal. Meanwhile, net lending to businesses continues to fall, as repayments of old loans exceed the take-up of new ones, and banks are accused of taking advantage of repeated injections of cash by the Bank of England to repair their balance sheets rather than easing the supply of credit. At the strategic level, the government’s opposition to eurozone plans for a financial transactions tax sits uneasily beside its desire to demonstrate that British economic policy is decided in Downing Street, not the City of London. It also militates against the creation of a more balanced economy, for if the eurozone introduces such a tax and the UK does not, some financial business currently transacted in Frankfurt and Paris will migrate to London, exacerbating already pronounced economic disparities between the metropolis and the rest of the country.

Public indignation at the behaviour of the banks spills over into the unresolved crisis of political legitimacy. It is a moot point whether the hotch-potch of ideas for reform announced in the coalition agreement were capable of restoring faith in Britain’s political institutions and retrieving the reputation of Britain’s business and political elites. Take, for example, the proposal to replace the First-Past-The-Post method of electing MPs by the Alternative Vote (AV). The trouble was that no one loved AV: the Tories loathed it, Labour were divided and the Lib Dems lukewarm. The Tories had only agreed to put the proposal to a referendum as the price to be paid for coalition. Such a modest reform with such indifferent support seemed an unlikely tool for regenerating democracy even if the voters approved it. Similarly with the bill to replace the half-reformed House of Lords by a mostly elected revising chamber, whose members, chosen by PR from open party lists and serving 15-year terms, were to represent nine regional constituencies: this artful addition to the constitutional cook-book was hardly going to set the world on fire in a modern-day re-enactment of the Peers versus the People. If the purpose of reform is to reconnect citizens with government, why not convert the House of Commons into an English parliament and turn the House of Lords into a wholly elected second chamber of a federal state?

In the event, AV was decisively defeated by a majority of two to one and the impetus for reform was lost. Talks on the funding of parties stalled. Revelations of cash for access and dodgy donations continued to befoul the political stage. Only a handful of English cities opted to follow the example of London in having elected mayors. And when an unholy alliance between rebel Tory backbenchers and a partisan PLP intent on punishing the Lib Dems killed the prospect of reforming the House of Lords, the Lib Dems retaliated by withdrawing their support from legislation to implement the revision of constituency boundaries.

Wrangling within the coalition was compounded by the resurgence of tensions over Europe. As eurozone leaders edged towards closer fiscal integration, steering a perilous course amidst the ice of depression, the fire of the bond markets and the ire of their electorates, Tory eurosceptics stepped up pressure for a referendum on Britain’s membership of the EU. The party leadership had already conceded that a referendum would be held if Britain were called upon to transfer further legislative powers to the EU, and was hoping to secure the repatriation of some powers previously transferred, notably in relation to social and employment policy, which was to be the object of a renewed drive for deregulation. Faced with demands for an early, in/out referendum, Cameron temporised, pointing out – reasonably enough – that it made no sense to ask voters whether they wanted the UK to remain in a trans-national union which was in the throes of an existential crisis and was most unlikely to survive in its current form. Nevertheless, this ancient source of inter- and intra-party strife had lost none of its potency. Indeed, the clout of the Tory right was enhanced by the weakness of the Lib Dems and the threat posed by UKIP, the former fearing electoral annihilation if the coalition fell, the latter confident of ousting pro-EU Tory candidates standing in marginal seats. The coalition was not about to collapse, but it was coming apart, its purpose faltering, its partnership fraying.

Meanwhile, north of the border, another union was coming unstuck. In May 2007, just as the credit crunch was beginning to bite, the SNP emerged from elections to the Scottish parliament as the largest single party, beating Scottish Labour by one seat. After serving a full term as a minority government, skilfully manoeuvring and negotiating to get budgets approved and bills enacted, the party went on to win an overall majority in the 2011 election, an astonishing achievement that Scotland’s hybrid electoral system was supposed to preclude. The SNP was thus finally in a position to fulfil its longstanding promise to hold a referendum on whether Scotland should remain in the UK or become an independent country. Whatever the eventual outcome of the referendum now set for autumn 2014, the march of the SNP from protest to power has opened up the prospect of “an ever looser union” in which the constituent nations of the UK renegotiate their relationships and reconfigure their systems of government. As a result, seemingly arcane debates about constitutional, fiscal and monetary arrangements have begun to connect with big political questions about what kind of society the people of Scotland want to live in and how it is to be achieved.

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