Labour’s economic problems are compounded by the neo-liberal model it has enslaved itself to. Without the economic growth the government is praying for, there isn’t enough taxation revenue to cover even its limited public spending intentions. ‘Unforeseen’ events continue to undermine the ‘headroom’ it has to manoeuvre, without resorting to the tax increases or spending cuts ruled out by its election manifesto promises. So, for education, somewhat down the list of spending priorities anyway, things do not look good. Particularly if defence spending is hiked up.
Back in January, Treasury hacks were nervously monitoring the bond markets (on which the government depends for short term finance) fearing that rising borrowing costs* would hike up the cost of servicing government debt, reducing its headroom still further. Borrowing costs may have steadied, at least temporarily, but despite the Bank of England announcing a slight reduction in its main interest rate, there seems little optimism. In an increasingly precarious international climate and with quarterly figures showing the economy continues to ‘flatline’, but also to ‘stagflate’, the OBR has downgraded UK growth further.
But there are alternatives. To begin with, the Bank of England has always had the power to intervene and steady the bond markets; but also, to buy up extra debt issued by the Treasury to finance public spending. It did this under the banner of ‘quantative easing’ during the financial crash in 2008 and more recently during Covid to prevent the economy going into freefall. But this was considered to be an ‘emergency’ measure, with the Bank of England quick to restart neo-liberal orthodoxy; as debt was sold back to the markets **.
There’s no reason why this couldn’t happen today. But this would require the government to override the Bank’s ‘independent’ adherence to neo-liberal orthodoxy. The best solution would be to take the Bank back under political control, so its actions reflect an elected government’s policy objectives, rather than sabotaging them.
It would also enable the Bank’s mandate to be immediately reviewed –charged with promoting economic prosperity and increasing social welfare rather than being restricted to meeting narrow inflation targets. It would require the scrapping of the government’s self-inflicted ‘fiscal rules’, these stipulate that the amount of debt as a proportion of GDP must fall by the end of the parliament. A second requires current (‘every day’) government spending to be financed by government income.
Reactionary fiscal rules and misconceptions about government debt survive because in neo-liberal economics, government finances are seen to be like those of a ‘household’ – where a failure to pay off its debts will lead to financial ruin. But unlike a household, the government has its own bank and issues its own currency. In otherwords, if the economy is running below fall capacity there are no limits to what it can spend. And unlike a household, by implication it can never become bankrupt!
But even if Labour lacks the political will to challenge these assumptions, then rather than play hostage to the bond markets, there are other longer-term sources of finance the government could tap into. Firstly, legislation could be introduced to ensure pension fund surpluses are quickly and easily channelled into infrastructure projects.
Even more significantly, rather than being deposited with an array of private funds and at the discretion of city fund managers, personal savings could be made available through new ISA style tax-free saving schemes, topping up investment, rather than relying on a disruptive private sector. Once again, there’d be nothing to stop the Treasury issuing ‘Education Bonds’ with reasonable rates of interest for people to put their savings into.
Both of these would be important steps towards a more interventionist state and of course, in addition, the better off could also be taxed more heavily, or even the much talked about wealth tax introduced – but in current Labour thinking, this is for the birds.
*If there are more government bonds being sold than there are investors wanting to buy them, the price will fall and by implication, borrowing costs will rise. For example, a £100,000 bond with a nominal interest rate of 5% which is sold for £95000, will be incurring a 10% total interest cost, providing a potential 10% yield to the holder.
** Treasury debt held by the Bank of England is not the same as that held privately – rather one section of the state is in debt to the other (how can you be in debt to yourself?). Does the Bank really need to sell its holding back to the private sector, as it is doing at the moment (referred to as Quantative Tightening or just QT), simply to reduce its balance sheet?
Education, Economy and Society 
Gre