What drove Brexit? Osbornomics.

How Tory economic policies made migration toxic

This is the first of a series of articles I’m writing about the issues facing the progressive left in Britain and the Labour party during its leadership contest. They’ll link together into a mini-pamphlet about the challenge for the post-Brexit situation.

Labour’s leadership race is not primarily about “leadership”: it has to be about policy, narrative and solutions. Above all it has to understand:

• what the economic pressures were that drove 17 million to take a gamble on leaving the EU
• the disastrous policies that created these pressures
• the measures needed to put that right
• the elements of a story to reunite the two demographic halves of the Labour-voting electorate, broadly speaking the city salariat and the small town working class.

If we list the pressures on people with low or middle incomes, and understand how they shaped the discontent over migration that drove the Brexit vote, they are all traceable to specific — and in hindsight disastrous — policies from George Osborne.

End austerity!

First, austerity. Austerity created in a inbuilt pressure on public services which — even when the cuts were mitigated, as with schools and health — let people to understand that there was not enough money to go around.

Thus, while it’s true that inward migration is overall beneficial to GDP, in the context of a shrinking slice of the pie being spent on services, it looked — once you figured it out — like upward distribution.

That is, migrants come, contribute, and get access to public services — but however much they pay in tax or boost growth, it does not allow the service provision to catch up with the expanded population.

What’s the solution? End austerity. Austerity was a political choice made by the Tories to shrink the state — not simply an expedient measure to balance the books.

Going forward this problem will be acute. If we get 2% inflation and zero growth next year — some analysts fear a minus 1% recession — the deficit will rise. In the longer term the OBR may judge the economy’s entire future capacity to grow has been damaged by Brexit — which means the debt has to be calculated against a smaller economy long term.

Under the Tory fiscal rules, that would require massive cuts in public spending and tax rises — which would suppress growth further and create a feedback loop.

No. The only way forward is a double fiscal and monetary stimulus — to be applied early, as the economy slows. The monetary side should be much more targeted — for example writing off student debt, or creating a liquidity fund for businesses disrupted by the Brexit process.

I will discuss the shape of the stimulus in a future post, but — in principle — all candidates for the Labour leadership must pledge to end austerity, to aggressively stimulate growth even at the price of a rise in debt and deficit.

Build homes, cap rents!

The second problem was housing. The Conservatives pledged to allow 200,000 homes a year to be built. By stimulating the housing market through QE and Help to Buy they lined the pockets of the speculative property giants, like Berkeley, whose boss gets £23 million this year.

But it meant house prices soaring beyond reach of workers on the average pay; it created a global speculative target in big city housing markets which was guaranteed to price local people out. It dragged rents beyond reach of many — so that large parts of people’s incomes were being spent on housing costs. Osborne too late tried to quell the Buy to Let boom — but he never tried to stop the speculative building boom. Even social housing and social rents became unaffordable.

This intersected with migration in a very clear way. Inward migrants put a variety of stresses on housing. At the bottom end they are herded into overcrowded, migrant-only private sector slums. Or they join the queue for social housing. In the middle they simply add to the number of people chasing tenancies. Importantly, they have almost no political rights — so just as the ideal workforce is disenfranchised migrants, so is the ideal tenant base.

If you hear the figure 330,000 net inward migration and compare it to a government target of 200,000 homes (which is 90% off target anyway) it is not hard to conclude

The solution? First, reshape QE to stimulate everything except the housing market. Cap rents — as Sadiq Khan promised (but watch that space). Build hundreds of thousands of homes for social ownership or social rent. And peg social rents to incomes, not market rates.

End cheap labour!

The third policy was wage restraint and anti-union laws, which created a cheap labour economy and stangant incomes. Public sector pay fell in real terms under Osborne. And average private sector pay did not recover its 2008 level until the month of the referendum, eight years later. That’s an eight year crater in the prospects of families and young people.

Only the slump of inflation towards zero from 2014 onwards allowed real wages to rise.

Overall, though migration did not cause wage stagnation, it was eventually acknowledged to create a “wage compression” effect on the bottom quarter of the workforce (by skill) — in particular through the concentration of migrants into the two lowest skill categories — “elementary work” where they make up 35% and “operatives” where it’s 27%.

“The biggest impact of immigration on wages is within the semi/unskilled services occupational group,” wrote the Bank of England’s researchers.

And the impact of migration is less tangible to economics, but very tangible to workers, when it comes to conditions at work. The unacknowledge fact behind modern discontent is that work, for the lowest skilled, is shit.

You are constantly bullied, messed around; you are working for an agency, not an employer so there’s little redress; you face fines, extra charges for uniforms and other deductions, pushing your wage below the minimum. In theory migrant workers should be no harder to organise than resident workers — but the practice of recruiting from specific countries for specific skills — entire press operations of Poles or Lithuanians only — makes organising hard, even before you run into the anti-union laws, the weakness of private sector unions, and the union busting practices of firms who specialise in migrant-only operations.

The solution? End low pay and promote wage growth — both the real wage and the wage share of GDP. That should be an aim every candidate for the Labour leadership signs up to with specific measures and targets for example. Plus: outlaw migrant only recruitment, raise the minimum wage and empower every workforce to seek representation with management.

That means a profound break with Osbornomics.

Boost growth through investment, not population

The fourth and final thing Osborne and the Tories contributed to the Brexit catastrophe was their policy on migration itself.

They adopted a policy of GDP growth through an expanded workforce, not through making the existing workforce more productive — ie through private investment.

Thus, amid the biggest technoloical revolution ever, what it means to be an “entrepreneur” became either a property speculator or a low-wage service provider, always reliant on migrants to expand the workforce.

In the 2015 autumn statement , Osborne even formalised the reliance of his growth projection on migration. The plan to erase the deficit by 2020 was entirely reliant on an extra 1.1m migrants arriving to boost employment numbers by 2020.

And that would be fine — except that Osborne’s own government had explicitly promised to reduce migration to tens of thousands.

If people were as stupid as politicians think they are, this may have gone un-noticed. But time and again in the classic “tirade” of the Brexit-voting man or woman in the street the failures of Osbornomics were slotted together. “Migration lowers wages, increases pressure on public services, creates competition for inadequate housing supply and — while their migration target says one thing their economic projection says another.”

If you pointed out that this was solvable by ending austerity, raising the minimum wage and building new homes, and banning the exploitative employment practices then ofter, even among the most sympathetic people, the reply would be: “but it’s easier just to limit migration”.

When told “you can’t unless you leave the EU” a majority of people clearly drew the conlcusion that they would do just that. There were of course many other factors driving people to vote Leave — the democratic deficit, sheer racism and xenophobia, the sovereignty argument. But initial surveys suggest immigration was the #1 issue.

So what should Labour do on migration?

Labour’s challenge is to form a government that fights for social justice. To do that it needs an alliance of voters from the liberal minded city salariat and from the working class. This working class, incidentally — to be clear for non UK readers — is not innately socially conservative; nor is it only white. Around 33% of Asians voted leave and 27% of black people — according to Lord Ashcroft’s polls.

Labour cannot and should not try to outshout UKIP in its working class heartlands over migration. It is a no-win game and will alienate the salaried, urban and young demographic who have effectively become the core of modern social democracy. It is also unprincipled and stupid.

Labour’s offer on migration must be based on its historic values — social justice and democracy — and from the global outlook of the rising generation that will shape the political future. My fear is that some on the Labour right, having unleashed A8/A2 migration carelessly in 2004, will switch to a UKIP-lite rhetoric to try to win back the working class people who switched.

There is no need for this: Labour’s offer to the depressed ex-industrial towns should be revived growth, real jobs, affordable homes and massive investment in services.

Labour’s new policy on migration must start from its policy on Brexit. I strongly advocate an application to join the EEA, with an emergency brake on free movement for at least a decade.

In the process of achieving that, the UK government would have to spell out its expected target for inward migrants. This would be a specific projection as to the business needs of companies, universities etc.

I favour Labour setting that target initially fairly high, at between the 100,000 implied by the Tory target and the recent high of 333,000 in 2015.

That is, to avoid unneccessarily disrupting the existing business model of the UK — which we want to reform — we start with a figure designed to deliver net migration between 150,000 and 250,000.

This calls the bluff of the right wingers who claim they’re pro migration but just want control. And it will differentiate Labour from UKIP — whose racism and economic illiteracy will be exposed.

The target would have to be administered thorugh the existing points based system, which has a dormant provision (Tier 3) for EU migration. But there should be a non-political technocratic body set up, similar to the OBR, to predict migration and offer parliament annual targets on a rolling three year basis. Parliament itself shoud vote on the migration target.

This, of course, is alien language to a generation of left wing people who have grown up with free movement. But if designed carefully, as part of the offer to the EU 27, it could be enough to secure the UK membership of the EU.

The alternative — a straight split with Europe and the search for a bilateral trade deal — would only make it harder for Labour to design a fair and socially just migration system, which would then also have to cope with the return of, or slowdown of, British expats to the EU.

Labour must break with Osbornomics

In summary, whoever leads Labour, a clean break with Osbornomics is necessary. McDonnell understands this. Alistair Darling clearly did not, because he stood alongside Osborne promising a punitive austerity budget in case of Brexit. It remains to be seen what Angela Eagle and any other Labour contenders will do.

But for starters, the checklist I will judge Labour leadership hopefuls against is:

1. End Austerity. Immediate fiscal and monetary stimulus. Let the debt and deficit rise. Restore and enhance the Migration Impact Fund.
2. Build 200,000 homes a year, with social rents and help to buy prices pegged to wages, not market prices
3. End the public sector pay freeze. Pursue a targeted recovery in real wages and the wage share of the economy. Give workers representation rights in every workplace, even the smallest; discourage agency work; and prevent migrant-exploitation practices.
4. Apply to join EEA with a specific “emergency brake” provision, allowing a generous, socially just inward migration target from the EU. Set up an OBR-style body to monitor labour demand, set a flexible migration target, which parliament votes on.

These policies of course beg further questions — most importantly: what national economic model can the UK pursue to mitigate the impacts of rising debt and deficits; how can this be designed during the Brexit process; and what should monetary poliocy do faced with a falling pound, a dire current account balance (another legacy of Osbornomics) and a higher deficit? I will return to these themes.