Policy Research in Macroeconomics

An Open Letter to Jeremy Corbyn: Labour needs to act fast

This article is co-authored by Ann Pettifor and Jeremy Smith

After an exhausting and successful national campaign, it is hard for campaign strategists to think of next steps. But we are at a critical historical juncture, and a range of opportunities present themselves. Choosing the right political and economic strategy now is vital. 

Here’s a proposal. 

Labour should pursue two major complementary policy goals. The first: to end austerity, and implement a Green New Deal across Britain. 

The second major policy goal: to reset the framework and relations with our European partners; and to gain policy space and Treaty reforms which benefit British citizens as well as all Europeans. 

To achieve the first goal, the task is to assemble a progressive alliance of British MPs, including the Greens, the SNP,  the Lib Dems – and even some Conservatives –  to back an end-to-austerity alliance. There should be a singular goal: to demand that government – and the Treasury in particular – end austerity immediately, and begin to invest in the creation of skilled, well-paid employment in areas of the economy vital to both economic, but also energy security. The latter goal – of greater energy security – is particularly important at a time when nearly a third of the UK’s liquefied gas imports are from a Gulf state, currently at the centre of a potentially ugly middle eastern conflict – Qatar. 

In other words, Labour should call for a Green New Deal

This will lead to investment in infrastructure and the creation of skilled and unskilled jobs locally, especially targeted toward areas of low-paid, insecure employment. Greater energy efficiency will lower bills, but above all a Green New Deal will begin to build Britain’s defences against the threat of climate change; a threat only too real to the agriculture sector, and to those individuals and firms living and working in for example, areas vulnerable to flooding. 

Given that BREXIT negotiations with EU partners begin in just a few days, and thus far in the worst possible atmosphere and approach, from both Brexiteers  but also to some extent reflected on the European side, it is crucial that Labour and allies put forward an alternative European strategy straight away. 

The aim of this strategy should not be focused narrowly on simply securing ‘the best deal’ for Britain, but to reset the whole long-term relationship with Europe for the benefit not just of Britons, but of all Europeans. 

 A European Green New Deal

The purpose will be to enable Britain to have access to the Single Market and customs union, while also achieving improvements in economic policies across the European Union and the Eurozone.  Already our European partners are discussing the necessary Treaty changes to enable the Eurozone to work more effectively. This provides an ideal opportunity to discuss issues that could enable a positive and mutually beneficial economic, social, security and environmental framework for the relationship between Britain and current European partners. 

To achieve this, it is most important to ensure that we have time. For this to happen we must seek to extend the Article 50 timeline to at least four-years. But this requires Britain now to make clear that it would fully honour all budget commitments during this period and in particular, confirm that EU citizens resident in the UK would have their rights protected.  
This should include a commitment to pay our fair share for the future mutual benefits arising from our future framework of partnership. 

For Labour’s progressive economic policies (e.g. railway nationalisation) to take effect a number of EU Treaty as well as policy changes would need to be negotiated and agreed. The neoliberal economic policies that underpin austerity within the EU need to be changed. 

First, a stronger commitment to full, good quality employment should become a primary, not secondary aim of Article 3.3 of the Treaty on European Union.  

Second, Article 126 of the Treaty on the Functioning of the European Union sets in concrete the so-called excessive deficit rules – ultimately punitive. This reflects the ‘household budget fallacy’ so prevalent in neoliberal economic theory.  At the same time the Article ignores other major economic imbalances, such as the excessive build-up of private debts and the imbalances in current account surpluses and deficits. 

Third, some restoration of more discretion on state aid matters to be restored to member states under Article 107. 

Fourth, the policies that require the liberalisation of public services, or impede the democratic power to restore sectors to public ownership, need to be changed so that this becomes a democratic choice of the member states. 

Last but not least (for now), the provisions on industrial strategy need to be strengthened, including the role of the European Investment Bank (EIB). We need to strengthen the role and tasks of the EIB, if there is to be a European as well as UK Green New Deal.  

(Further details of Treaty changes required are outlined in this reportpublished by PRIME and the Rosa Luxembourg Foundation in March, 2017). 


If the aspirations of the British people, as expressed in the election result, are to be fulfilled by Labour, and to avoid the dissipation of the momentum and energy generated by the campaign, it is urgent that Labour lays out a viable and popular political and economic strategy.  We believe that the ideas outlined above would attract substantial political and popular support. 

7 Responses

  1. I’m tempted to support this, tho’ would find it very hard to collaborate with LibDems. But if we can get another general election soon then we might do it without them. Certainly pressing the revived Labour party to re-think it’s position on brexit is a top priority. Why don’t you mention DIEM25 which is pressing a similar line? We are not alone in wanting to democratise the EU and take neo-liberal precepts out of the treaties.

  2. This is mixing up change required within the EU (I agree with all of it!) with the forthcoming (eventually) UK-EU agreement.

    I believe the emphasis should be elsewhere.

    This is a UNIQUE opportunity (because of Brexit AND because of hung parliament) to set up a cross-party Constitutional Commission to finally WRITE a UK constitution, defining UK post-Brexit, taking into account and settling cultural and aspirational differences between the 4 current UK countries & underwriting the fundamental responsibilities of the UK government to every single UK citizen.
    This would also help in building a deal with the EU (and others) as common values may be immediately identifiable and partners will be able to identify indelible UK values to be respected ahead of any cooperation/trade agreements (including Middle East partners etc.) In the current arrangement, many principles that should be constitutional in nature are made up on the hoof by the incumbent government, sometimes under the influence (financial and otherwise) of large and/or multinational special-interest lobbies.

    There will surely not be a similar opportunity for many decades, or longer still.

  3. I would like an explanation of this ‘household budget’ fallacy.
    The EU members have a rule that government budgets should be broadly balanced to within a few per cent. The view of Ann and Jeremy appears to be that a good government should overspend by much more than this, because a good government budget is not like a good household budget.
    So how should a good household run its budget?

    1. The problem becomes clear when you derive the ‘sectoral balances equation’ from GDP. To follow the laws of accounting, expenditure of the Government sector, the private sector and the external sector must equal zero. To put it simply, unless you have a trade surplus large enough to cover the shortfall, a balanced or surplus Government budget is reducing the assets of the private sector.

      So for the economy to grow while the Government is spending less than it is taxing, either the savings rate must be going down (i.e. people on aggregate are getting poorer) or private debt must be increasing. This becomes a huge problem when the private debt gets too large, which is basically what was going on behind the GFC.

      So, a responsible household should spend less than it earns. But a responsible Government must spend more than it taxes!

    2. From time to time households overspend relative to their income. They might extend the house, buy a house, start a business, subsidise their children’s rent for the first years after leaving home, switch careers or be a carer while longer term plans are made. You could think of many reasons for using the rainy day fund. I’d love to be a fly on the wall when you tell those householders that they are doing it wrong.

    3. "So how should a good household run its budget?" Answer is that households are currency USERS and thus have to balance their budgets.

      In contrast, the government of a country that issues its own currency is a currency ISSUER, and does not need to balance its budget. As to how "unbalanced" the budget should be, Keynes answered that one. As he said, the deficit needs to be whatever deals with excess unemployment. Or in his own words, "Look after unemployment, and the budge will look after itself".

  4. Great respect for you Ann. You have a grip on the situation in terms of serious understanding of the monent and the urgency of compassionate problem-solving communication and we all feel the benefit of that. I am glad someone is looking at the EU treaties and reviewing what we need to effect to survive and thrive in the world. This hard intellectual labour is vital in harmony with other labours of the movement for economic justice. It seems essential that we should be of the moment, the change we seek in the world through our conduct, and also really well informed empathic skilful critical thinkers with a plan, a fruitful fray to join. It is great that you highlight we need to not just get "the best deal" but the mutually beneficial. There is too much dominating talk of ‘competing on the world stage’. These are our day to day lives in billions we are talking about. Is competition necessary? No.

    Yes let’s embrace the challenge of Brexit as enormous transformation is at hand and we must find the progress in that.

    I’m in agreement with you basically and know I’ll need to do some more reading to verify and corroborate your summary assessment. It comes from hard study, it deserves nothing less than a similar contribution to respond.

    Here’s the burning questions that came to me:
    In such a progressive alliance would Lib Dems really support such an approach? And if it meant a highly chaotic acrimonious coalition delaying article 50 wouldn’t we be vulnerable to Tories politically and all the societal harm that goes along with that? Or do you think by acting as the adults in the room we could be different to political ponying and be respected as the adults in the room? Another general election soon seems likely. And so does a global depression or liquidity crisis seem likely, given the bubbles and stacked up denials, it could be now or in a few years but its within a decade, right. I know a decent egalitarian government with a grasp of the production of money, wealth, conditions and means, would help to decrease that threat and if/when that happens, handle that storm admirably and be a beacon of hope for others. If it happens the Tories will try to stick us as at fault for overspending, and that will be the difficulty and the sabotage, and it will take enormous strength to defy that. And so it is vital to attain that government for a secure and free future.

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