The Guardian has reported today that John McDonnell will announce to the Labour Party conference that he will back George Osborne’s fiscal charter and support the concept of a balanced budget over the course of a Parliament.
Some people – including those like Caroline Lucas whose claim to be the radical conscience of the nation has been looking a little tarnished since Jeremy Corbyn’s landslide election as leader – have presented it as the new Labour leadership throwing in the towel at the first opportunity; even though Shadow Chancellor John McDonnell has made it clear that only the current account should be balanced, and that the burden of eliminating the deficit should not fall on the poorest and most vulnerable – as it clearly does now.
McDonnell is clear that Labour should not be seen as deficit deniers – in order to deny the Tories a free shot. Equally the Tories’ inability to control the deficit when it has made that deficit its sole criterion of success is a key weakness that Labour must be able to exploit.
But ultimately, the point about the deficit is that it is a symptom – of low growth, of falling real incomes and hence tax revenues, and of long-term failures to invest. McDonnell – building on how Labour economic thinking was developing before the election as well as the ideas that emerged during Jeremy Corbyn’s leadership campaign – understands that the deficit is a symptom of economic failure, eight years on from the 2007-8 crisis. Get the economy right and the deficit will fall.
And it seems to me that McDonnell understands the politics of the deficit: that its significance lies not in its economic impact but in the political choices – austerity, welfare cuts, a smaller state, a shift in wealth from poor to rich – for which it provides a rationale. For Labour to deal with the economic and social impacts of Cameron and Osborne, it’s essential to move the deficit off centre stage, and to deal with the real economic issues; those around a low productivity and low investment economy characterised by falling real incomes, soaring living costs and growing inequalities. Laying the deficit issue to bed now gives Labour the space to develop that thinking.
Labour’s biggest economic failing in the last Parliament was its failure to articulate a credible alternative, while the deficit continued to take centre stage, allowing the Tories to keep the economic debate on their ground; Labour was never credible while the deficit was allowed to dominate economic discourse. The Corbyn leadership campaign was marked by the determination to offer an economic alternative, moving beyond deficit obsessiveness. If McDonnell is moving now to neutralise the debate about the deficit, and clear the ground for a credible and grounded alternative to austerity – and to deny the Tories the economic advantage that the economic timidity of the Balls years offered them – that looks like pretty shrewd politics. And it suggests that those who are criticising him for this have misunderstood the political significance of this latest move.
Notes from a Broken Society 
” the point about the deficit is that it is a symptom – of low growth, of falling real incomes and hence tax revenues, and of long-term failures to invest”
This is just not true at all. The budget deficit is commonly seen as a failure, whereas in reality it is a success! A budget deficit, without simultaneous high inflation, is only possible if savers wish to purchase govt securities ie gilts. They purchase them, confident in the knowledge the gilts are totally safe.
The big purchasers are currently the central banks of the big exporters who are not only financing the govts budget “deficit” they are financing our trade “deficit” too. Would they do that if they considered the UK to be a failed state?
The word ‘deficit’ of course brings negative connotations. But a deficit in money terms is a ‘surplus’ in real terms. In other words our trade with the rest of the world is in surplus to the extent that we receive more goods and services for supplying fewer goods and services. Our government is in the happy position of being able to create more goods and services from its spending than it requisitions from the economy in taxation.
There’s no inflation, so what’s the problem? We can safely spend a bit more and tax a bit less to hit our 2% target!