Monday, October 03, 2005

History has passed Blair's hopes on the wayside

The argument was advanced that this would be likely to force a cut&run approach. However with Blair likely to hold on to power through 2007, my argument is that when it comes to guns and butter and the EU it is butter or the EU that will lose.

As an overview of past events, Newsweek notes:

It's not that he hasn't tried. During Blair's first two terms, he pursued a reformist agenda but was hobbled almost every step of the way. First, he chose to go slow so as not to spook Conservative Party voters who crossed party lines to vote for him. Further along, the Treasury under Brown, Blair's longtime rival, stifled reforms it didn't like or believed Britain couldn't afford, operating as "a government within a government," in the words of Labour Party biographer Andrew Rawnsley. Then came the war. As one of Blair's closest associates put it, "The entire second term was hijacked by Iraq."...

Brown's Treasury has always had leverage over Blair's policy initiatives by controlling the money to pay for them. Now the British economy is cooling. GDP growth is at a 12-year low, consumption growth at a 10-year low. The budget deficit, at 3.2 percent of GDP, is in breach of European Union rules. "I sometimes think No. 10 is in denial about how much they can do," says a government official who used to work at Downing Street.

Gordon Brown's projected budget deficit was 2.6 % and as it turns out if you take 1.3 billion which is the cost of the war yearly and divide it by 519 billion you get 0.25%. Britain is into the 3.2% deficit range, which means that eliminating the cost of the war will not bring the budget back in line. Certainly it would help but the bottom line is that Labor needs to stop doing things like cutting the inheritance tax at the same time the Council Tax is fast outpacing inflation. Essentially the council tax is a property tax that funds local services while nominally progressive is in practice regressive and hits seniors on fixed incomes rather hard.

Now what if Blair had never gone to war? Well the war happened while Britain was in better financial straits. It is arguable that if Tony Blair had not gone to Iraq, many of his social initiatives in his second term would have been further advanced. The war costs could have gone to pay for progressive social changes instead. However that is not the same thing as saying that if Britain could quit the war now and produce progressive social changes instead.

There are three clear political choices. The first is to quite the war and spend the money on social reforms instead. The second is to try to blow off the EU and hope the markets underwrite spending. The third is to cut back on social reforms and undermine a progressive legacy. Given that Blair is ruling out a quick exit from Iraq, claims that 'Iraq invasion crucial for UK security', and that Blair is trying to hang on to power as long as he can with his main rival and heir Brown so far at least publicly being patient then it is highly unlikely that option number one will be taken.

The cost of the Iraq war is a fixed and unrecoverable cost in the past now for Britain.There are no do-overs unfortunately in history. Cutting and running will not buy them a progressive future. It is more likely given this cruel reality, that the time for change has passed by Blair, that trying to push back against EU criticism of the budget and cutting corners on social spending in some combination are likely to be the response to the deficit over target spending.

In Econ-speak we can say that cutting war spending doesn't have any marginal utility for a progressive future, and that the sunk cost of the war was the opportunity cost of forgoing progressive social changes at a time when the national economy could have supported them. That all being water underneath the bridge, there is no economic incentive to cutting and running now when it will cost political capital in terms of personal face for Blair and in fact for Labor more generally. Entering the Iraq war destroyed Britain's chance at a progressive future for a generation in all liklihood. Everything else is just details at this point.

For graphic of British budget expenditure and more complete citation, refer to my BOP post here: