The supposed fiscal black hole is needed by Starmer’s government in order to justify austerity, not the other way around, argues Dominic Alexander

Keir Starmer insisted on Tuesday that the October budget would ‘be painful. We have no other choice, given the situation that we’re in’. It’s true enough that the Sunak government was operating something of a scorched-earth strategy, including the unfunded 2p national-insurance cut. Of more long-term significance was the fourteen years of destructive austerity that has seen, among other dismal measures, growth in economic productivity stagnate, at an average of 0.6% a year between 2011 and 2022, down from 2.2% a year between 1971 and 2007. The Starmer government has decided that in order to maintain a reputation for fiscal prudence, and the trust of capital interests, it needs to continue the debilitating path of austerity. This is, of course, a recipe for an even worse fiscal outlook in the future.

The £22bn ‘black hole’ is no way a hard fact; it is merely a dubious metaphor designed to frighten us, and to justify continuing austerity. All it means is there’s a gap between projected government income and the entirely artificial target for government borrowing over a set period. No gravitational doom is involved. The current fiscal rules insist that over a five-year period, the share of fiscal debt must be falling based on estimates by the Office for Budget Responsibility. Additionally, the ratio of the annual budget deficit to GDP should be below 3% by the end of the same period. For a start, calculating these is by no means a science, and depends entirely on the assumptions that are made, what is counted, and what isn’t.

The arbitrary nature of the fiscal rules is reflected in the fact that, since 1997, they have been significantly changed nine times. If chancellors find the targets too difficult to meet, they change them, making them little more than a tactic in political messaging. There are, therefore, a host of choices involved in Starmer and Rachel Reeves’ decision to choose austerity based on a fictional ‘black hole’. There is a great deal of scepticism about the fiscal rules among economists, and not just left-heterodox ones: a former chairman of Goldman Sachs Asset Management, and the Treasury’s commercial secretary under George Osborne, has since argued that the government should ​‘drop such petty and arbitrary fiscal rules that magically claim the deficit in five years’ time will be lower’. Austerity, in any case, does nothing to bring about a falling ratio of debt to GDP: the debt-to-GDP ratio was substantially higher at the end of Tory George Osborne’s period as Chancellor than at the start. The current fiscal rules have been proven to be self-defeating.

We can change the rules

Whether the fiscal rule about the debt to GDP ratio has any real-world significance is entirely debateable. For Britain, that ratio is currently around 86%, excluding the Bank of England’s debt. However, in the case of Japan, for instance, debt-to-GDP has risen to over 250% in recent years, while its economy has remained essentially stable. In contrast, Ukraine defaulted on its debt in 1998 when the ratio was only 41.8%. In other words, the debt-to-GDP ratio is a very poor guide to whether or how much a government can borrow without deleterious economic results.

If the fiscal rules are to be kept, out of fear of the reaction from financial markets if they were to be abolished, then there are still many options. One purely technical move would be to start counting public-sector net worth into the measure opposed to the debt. This would legitimately bring the ratio down without any need for austerity. A second related move, that many Keynesian economists favour, is not to count borrowing for infrastructure investment in government debt. Since the fiscal rule discourages public investment, which is the primary mechanism for encouraging growth, this perverse incentive for austerity should be removed.

Another move, suggested by a number of commentators, including the Guardian’s Larry Elliott, is to cease paying as much interest on the banks’ deposits at the Bank of England. The interest paid by the BoE on these savings is used as a mechanism to engineer interest rates in the wider economy. However, the same could be achieved by only paying interest on a fraction of these savings held by the BoE. Both the Bank of Japan and the European Central Bank do this, so there is no reason why the BoE could not do the same. If it paid interest on just a third of the amount in these deposits, the whole £22bn ‘black hole’ would simply disappear, and the national debt would be reduced by £400bn at the same time.

This is a very neat solution, but the Keynesians who advocate it miss one important aspect: instituting it involves a confrontation with major capitalist institutions, who would, of course, kick up a fuss about their consequent loss of profits. As a skirmish in the class struggle, it would be an easy one to win, since there is not a lot of public sympathy for banks and their profits. Any Labour government confidently committed to advancing the public good could make the argument that banking profits are much less important than the wellbeing of society, and of prostrate public services which are crying out for investment. It would be easy to make a centre-left argument that borrowing to invest in public services is necessary for economic recovery after fourteen years of austerity, and that the borrowing would be repaid through a healthier economy a few years down the line. However, even such a moderate, social-democratic class argument is clearly beyond the capacity of Starmer and Reeves.

Instead of a very limited clipping of the wings of capitalist interests, this government prefers to whittle down its imaginary £22bn deficit by refusing to spend the £3.4bn a year it would take to lift the two-child benefit cap. It has also decided to remove winter fuel allowance from pensioners, saving as little as £1.4bn. The poorest pensioners keep the allowance, of course, but those on the margin of the cut-off point, with still limited means, will suffer greatly from this move. Meanwhile, the government is quite happy to spend more than that, £1.7bn, on prolonging the bloody and unwinnable war in Ukraine. The damage done to the fabric of society with the suffering caused by these measures of welfare cruelty will, in the long run, more than outweigh any benefit in terms of meeting arbitrary fiscal rules.

Change the direction of the class war

However, our ‘Labour’ government prefers class war on the poor and vulnerable, rather than the smallest confrontation with the power of capital. This is the same reason why they have ruled out any of the wealth taxes and other measures that could redistribute away from the UK’s bloated wealthy towards public services. Politically, the government could surely get away with rescinding the Tories’ 2p cut to National Insurance on the grounds that it was irresponsible and unbudgeted; this alone would bring in £20bn every year. Yet this government has so little political will or courage, it does not look like even doing that.

So how did we end up in this dire political cul-de-sac? The problem is the long-term disinterest capital has had in investing productively in Britain. Instead, capital has been investing in the more profitable sectors of finance, real estate, insurance and defence sectors. This trend has increasingly hollowed out the British economy to the point that it has become dangerously reliant on mobile capital that flows through the City of London, to no benefit to most people.

For example, our housing crisis is mostly down to the asset inflation that results from the imbalance, since housing acts as a way for international investors to park their money safely: ‘Britain does not suffer from a lack of houses, it suffers from an excess of landlords’. The right-wing Labour leadership have become so terrified of the power of the City, and thus the ‘financial markets’, that they cannot even conceive of inconveniencing their reckless and ruthless pursuit of profit to any degree at all. Thus they only wage a class war in one direction, against the working class and the poor.

The answer to this is not to revive the disasters of Blairite private-finance-initiative type of arrangement, as Starmer seems keen to do with plans like ‘Great British Energy’, but genuinely to invest public money in a massive overhaul of infrastructure, and building a sustainable energy system. This would mean moving beyond neoliberalism, and probably taking control of the banks to fund it, but it could be done. One of the best things Keynes ever said was that ‘anything we can actually do, we can afford’. A genuine state-controlled investment programme, that made use of the wealth this country actually has, could achieve tremendous things. It would require taking control of these resources, with the banks as the best first step. Obviously, there is no possibility the present government would contemplate the least movement in this direction.

It is quite likely that the servile and timorous posture of our leading politicians towards the financial markets is a drastic overreaction to the implosion of Truss and Kwasi Kwarteng’s 2022 mini-budget, among other things. This was another economic argument in a long list that the left has lost, since Cameron and Osborne blamed Gordon Brown’s government for wrecking the UK’s finances in order to justify their austerity programme. The public ‘debates’ about economics have become so divorced from any sensible reality, that we are now regularly trolled with horror stories about fiscal ‘black holes’, which are no more than excuses for new rounds of class war and austerity. The only way to fight against this rhetoric, and bring back an economics that serves people rather than profits, is to build socialist organisation across the country. We need to be able to reach more and more people so as to win the argument, stating over and again: our rulers are telling us lies.