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Austin Mitchell says Gordon Brown can tackle economic problems by opting for a dose of Keynesianism

SHORT of opting for self-catering at Butlins, Gordon Brown couldn’t have chosen a dafter holiday destination than Southwold in Suffolk. It might be good for his carbon footprint and demonstrate the contrast with his predecessor who preferred luxurious foreign jaunts at someone else’s expense, but it provides no escape, no rest and no protection from the pounding pressures of government and none of the other things the Prime Minister desperately needs. It would have been far better to escape to some faraway place in order to rest, think and recharge his batteries. Then he could have returned home, not saying “Crisis? What crisis?” in the style of James Callaghan, but to announce loud and clear: “There is a crisis. I’ve devised new policies to deal with it and we will lead Britain through.” Cue cheering – particularly from an increasingly desperate Parliamentary Labour Party.

If Brown followed this course, it would show that he finally recognises the depressing realities which the Government, blundering along a downhill slope, has hitherto ignored. Britain is sliding into recession just like the United States, but a few months behind. Market-oriented policies will no longer work. We must change them. There are only 22 months left for new policies to take effect before the next general election must be held.

It’s not Labour’s fault, but after 11 years of growth we are now being hit by a combination of problems to which our gambler’s progress has made us very vulnerable. As in the 1970s, we face a massive oil and commodity price hike which transfers wealth and power to the Middle East. Finance and lending institutions have loaned massively and irresponsibly on risky assets, then bundled up the irrecoverable debts and sold them as special purpose vehicles which promptly became unsellable. The result is a liquidity and credit crisis leaving financial institutions struggling to rebuild their capital balances. At the same time, the consumer boom which sustained growth has petered out because consumers have become weighed down by debt. Rising house prices which had sustained purchasing and confidence went into reverse, leaving a massive debt burden coupled with negative equity.

This was the morning after the decade before – a crippling combination which was the inevitable result of 10 years of market forces, state withdrawal from areas such as housing and economic management, deregulation and the failure to invest properly. Economic power has been transferred from production to finance. Asset prices were inflated and this led to hitherto unknown levels of personal debt and, with the gaping trade deficit, national debt, too. All this has made the policies of the so-called nice decade irrelevant because they now compound the problem. The Government has gambled and lost.

This brings Labour to a crossroads. If it reacts like predecessor governments in similar but less serious situations, it will deflate and proclaim a “war on inflation” to add to all its other wars on crime, poverty, carbon emissions and unpaid library fines. This course of action would allow the electorate to reward the Government in 2010 for its courage and orthodoxy. Or not, as the case may be.

This course is already being counselled by the City and the Bank of England, which obstinately keeps interest rates at a high 5 per cent. The Chancellor of the Exchequer talks of a 2 per cent pay policy for the public sector, while cost and spending cuts are in the air. That suggests a long confrontation with public sector unions which the unions might well win, so hard have their members been squeezed already. Growth will stall, economic activity will slow and unemployment will rise. Credit will remain tight and house prices will fall further, meaning more negative equity and repossessions. That’s hardly the recipe for a successful election, although it should cheer the Tories who would inherit any bounce back which results – if any does.

The bolder but riskier alternative is to break Brown’s self-imposed rules and the European Union’s deflationary mandates and rupture the Prime Minister’s long love affair with finance by going for a big boost.

Our key problems are declining demand and unprofitable production. So we should tackle both by encouraging demand, splashing out money in tax rebates, fuel allowances, pensions and benefits, as well as reducing interest rates substantially. Without mentioning the dread word “devaluation”, the pound should be allowed to continue the fall it has already begun as a consequence of benign neglect. This would boost exports and make British production profitable and competitive. We should add the stimulus of a big house-building programme paid for by the Government, because neither the private sector nor the housing associations can now do it. It should all be financed by Government borrowing. The resulting Keynesian jamboree would provide a substantial diet of his own words for the Prime Minister to eat, but it would boost growth and avoid the damage of deflation. The twin bogeymen of gaping deficits and galloping inflation are likely to frighten the electorate rather less than they frighten the Bank of England. Even if either were to develop – which is unlikely – they could be dealt with after our successful re-election.

If we view the situation in its historical context, it is clear that Labour’s destiny is to lose office because of deflation. Labour governments have been ever ready to do their duty to high finance and protect the asset inflators who did the damage in the first place. Famously, then Labour Chancellor Roy Jenkins deflated massively and kept up the squeeze right up to the 1970 general election – which the party lost. There was the same performance in 1950 and 1976 and in each case there was the same result at the subsequent general election.

It’s the representatives of wealth, the Tories, who are more confident in taking risks and bolder in defying the orthodoxies. Indeed, every recent Tory government has gone out on a reflation. Alec Douglas Home went out with a bang and Reginald Maudling’s 1964 boom. Edward Heath repeated the trick with the Tony Barber boom and his inflation escalator. Nigel Lawson had a borrowing boom before 1987 and even the less bold John Major Government added big increases in public spending to the fast growth resulting from the1992 devaluation. Only one of these four boosts produced electoral success, but all boosted government morale and gave Tory MPs a fighting chance in situations where defeat was almost inevitable anyway because of non-economic factors.

Labour is currently stumbling towards a defeat of our own. It is not yet inevitable, but it will become so if we add deflation to the accumulated grievances hung round the neck of any party long in power.

Indeed, we already display too many of the symptoms of a government at the end of its tether: the bickering, the declining enthusiasm, the shuffling positioning and repositioning of leadership contenders, along with escapist dreams about a period in opposition in order to get our heads straight. If all this builds up into a death wish, it won’t just be fatal for Labour, but for an economy which needs rebalancing towards investment and production. It would signify a major step backward, because, although the Conservatives haven’t yet noticed, the national mood is moving back to favour regulation, public services and spending, state intervention and moving away from Thatcherism and failed market ideologies.

This is why Gordon Brown, the prudent Presbyterian on his miserable British holiday in his respectable suit, is also in the last chance saloon. Unless he takes decisions far tougher than those he has congratulated himself on for so long and opts for economic sense rather than further deference to finance and business, then it’s morituri te salutamus – we who are about to die salute you. But not much. Have a good holiday, Prime Minister, but please come back giving us a big dose of “New world, new Gordon”. It’s only a year late.

Austin Mitchell is Labour MP for Great Grimsby