“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
                        Jim Callaghan, addressing the Labour conference 1976

Why has Labour gone on yet another borrowing spree rather than reduce public spending to fund it’s tax cuts? Brian Monteith argues the approach lies in Labour’s humiliation during the seventies.

It has not taken long for the wheels to come off Alastair Darling’s fire engine that is his Pre-Budget Report. Such is the size of the inferno that the Prime Minister and his Chancellor have stoked up, that the sirens were screaming as they approached the Commons, but it was soon Brown and Darling that were to be hosed down.

Labour’s attempt to dampen the flames of recession was met with ridicule and cutting jibes as the Conservatives at last managed to land some blows on these fire-raisers posing as firemen. No one did more to collapse the Chancellor’s Simon Snorkel extendable ladder than Tory MP Michael Fallon when he posed the question, “is it not often the case that in a major conflagration the arsonist is spotted in the crowd watching the fire brigade at work?”

Not only was this funny, he was right.

The main thrust of the government’s sprinkler system is to cut VAT by 2.5% and delay previously announced tax rises, such as that on petrol duty, and extend supposedly one-off bribes to Labour backbenchers, such as the tax-credit to those people formerly on the 10p tax rate. To fund this attempt at a fiscal stimulous public borrowing will now have to rise to towering levels while some pathetically cheap shots were taken against the high earners by increasing national insurance by 0.5% and introducing a new top rate tax of 45% for those earning over £150,000.

That the marginal cut in VAT will probably have an immeasurable effect is neither here nor there, nor is the mean-spirited attempt at soaking the rich of huge importance (it will only raise £600,000 – so why bother?). No, the problem with Darling’s PBR is it’s reliance on heavy borrowing. Thankfully the Tories are asking the right question – if a consumer-led boom fuelled by easy borrowing on the back of government inspired property inflation was the cause of Britain’s own economic problems (and it was) then how will spending more money funded by yet more debt be the solution.

Darling and Brown are not dousing the flames of recession but pouring petrol on a fire.

Don’t take my word for it – it was Labour Premier Jim Callaghan that famously said in the seventies that you can’t spend your way out of a recession.

It is the history of the seventies that Brown and Darling are desperate to avoid. The day the IMF arrived in 1976 and ordered Callaghan’s government to make serious cuts in public expenditure has scarred the Labour Party deeper than we realise. Rather than reign back his past largesse Brown would rather borrow more money, mortgaging our children and grandchildren’s futures, so his name does not go down in history as yet another example of a failed Labour government – that spent itself into an economic oblivion.

The arrogance of Brown and Darling shall hopefully consume them; they believe they can restore Britain’s economic performance without having the blood on their hands of public sector cuts. If they are to portray the Tories as cruel and lacking in compassion they need to avoid cuts at all costs. It doesn’t matter if they would be central to a sensible economic recovery (after all, it will be up to the private sector to pull the economy out of the mire)

A total of 300,000 private sector jobs are expected to be lost in the six months to the end of 2008 – while the public sector will have grown by an astonishing 50,000 in the same time.

All hope of any competence from the current Chancellor – a proxy for the Prime Minister if ever there was one – evaporated when he was forced into an embarrassing volte-face over his proposed rise in whisky duties. His willingness to raise the duties on spirits so as to counteract the fall in VAT – and supposedly leave a tax neutral outcome - was an example of high tax ideology over low tax experience. Darling’s previous increase of 59p had actually led to a 2% reduction in sales and a fall of tax revenues of some £300 million – therefore he should have been cutting duties as well as VAT to bring about an increase in tax revenues that he so badly needs. But no, that was not possible for it would only confirm what free-market tax cutters had been saying for a long time - that marginal cuts in tax can actually increase government revenues.

Darling and Brown look back at the seventies with horror, it haunts them to the core and they will do anything to try and avoid the reputation that Labour earned – for introducing huge public spending cuts and consequently falling foul of Britain’s trades Unions when the Fire Brigade strike of 1978 started the winter of discontent. Brown has a strong sense of Labour history and will do anything to resist cutting the expenditure that he so treasures – and so his Chancellor has done his bidding.

This is not just about history of course; we now know that Unite, Britain’s largest union, baled Labour out from insolvency in the summer. Who pays the piper calls the tune – or drives the fire engine. Nor is it just the Tories that have been laying into Darling’s figures; independent commentators have been queuing up to point out the weaknesses in his plan.

The Organisation for Economic Cooperation and Development (OECD) anticipates that economic growth in the USA and the Eurozone will not recover until the third quarter of 2009 – making Darling’s prediction for a British recovery by the second quarter look foolishly optimistic. It also expects British economic growth to recover by only 0.8% in 2010 - half the rate the Chancellor is predicting.

Delivering even lower interest rates – and fast - is the OECD’s preferred policy for Britain “because fiscal policy is constrained by the weak budgetary position”. Amen to that.

Britain is going to pay the price, not just now but well into the future, for the vainglorious hubris of Gordon Brown. He believes he has a destiny with history – as the all-seeing all knowing Labour leader that was able to continually increase public spending. Pride comes before a fall – such a pity then we have to wait a little longer for it.