Farewell to welfare

New Labour embraces an economic model that promotes inequality, says Donald Hagger.

The social contract and the Labour Party are dead. Tony Blair has completed Margaret Thatcher's destruction of the welfare state by announcing recently on Radio 4's Today programme that inequity is beyond either the interest or power of government to correct. This has always been implicit in the economic theory driving new Labour, but never explicitly stated.

The new contract largely abrogates government social responsibility in favour of market-led management, aimed at maximum profit. Indefensibly, new Labour insists it remains the party of social justice, while widening inequality. This model of economic management, initiated by the Tories, disenfranchises any voter demanding even mildly socialist principles.

The welfare state and government intervention went together and were based on Keynesian economics that countered the previous economic orthodoxy. Now resurrected, pre-Keynesian practice has destroyed the contract between state and people that delivered universal public services funded by general taxation, with redistribution of wealth at its core.

Today, provision of "public services" must involve the private sector. Prevailing economic theory precludes either the taxation or government borrowing that would be necessary for public investment. But private profit, efficiency and equity are not compatible. The privatisation of the railways shows that public subsidy is necessary if cost-cutting and tariff-raising are insufficient to maintain dividends and share price.

In the absence of increased progressive taxation, subsidy is a charge on the less well-off because proportionately they pay more of their total income, a disadvantage increased because this group's earnings rise less fast than those of high earners.

It can be claimed that the government had no electoral mandate to undertake the changes in the relationship between the economy and the social order that is implicit in the form of management of the economy they have adopted. It was never explained to the electorate that new Labour's policies would terminate the welfare state. What new Labour chooses to call apathy is confusion and disillusion.

As so far practised, the third way, new Labour's philosophical base, turns out to be no more than a refined version of the Thatcherite model. There has been some amelioration of the plight of those at the very bottom of the social scale but a model that is inimical to equity and the idea of public services is incompatible with the social ideals of old Labour.

What has been passed off as prudent management of the economy was a fundamental change in political and economic philosophy, symbolised by the switch from direct to indirect taxation and the adoption of the Tories' public expenditure plans. The resulting malaise in the public services must now be "corrected" by the injection of private capital.

It is significant that there is no government-led discussion about the principles by which the economy should be managed. The din of claim, refutation and counter-claim about taxation usefully obscures the fact that the main parties are in agreement about the way the economy should be run.

What can we expect from new Labour's election promises and the subjects it carefully avoids? That private capital and the imperatives of the market will assume an ever larger role. That public services will cease to be public in the sense of being financed by public investment. Legislation to protect the labour force against easy dismissal has no place in global capitalism; the railways will remain privatised because an alternative would not fit the ruling theory; the National Health Service will become an area for private profit, as will what was once state education; and income inequality will widen.

The chancellor's pledge to reduce poverty will have no effect on inequality. Poverty reduction is a matter of lifting a section of the population above an arbitrary level. It requires no fundamental manipulation of economic forces.

New Labour is in this position because it accepts the realities of global capitalism and the counter-Keynesian revolution in economic theory. Past election defeats persuaded it that a break with old Labour policies was essential. It also realised that occupation of the middle ground would force the Tories into ever more extreme areas, with attendant risks of bigotry. New Labour's neo-classical economic dogma has a lot to explain - and explains a lot.

Donald Hagger is honorary research fellow at the University of Edinburgh, the consultant to the Sterling Group of Senior British Universities and a former World Bank-funded adviser to Indonesia.

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