Shadow Chancellor John McDonnell got his loudest cheer at the Labour party conference for declaring an end to ‘austerity politics’.
Gone was Ed Miliband’s austerity-lite approach; to be replaced by no austerity at all.

This is definitively the end of New Labour and the beginning of a new narrative.

McDonnell signs up to the argument that the economic fundamentals around the globe shifted dramatically as a result of the credit crunch. But he thinks governments just haven’t woken up to what has happened.

He also revealed the membership of his economic brains trust, and his Six Sirens of Neo-Liberalism certainly don’t nuance their thinking on this. There’s Ann Petiffor, for example, who declares that “the establishment is in stupid denial” and Anastasia Nesvetailova, who declares that “neo-liberalism is dead and buried.”

McDonnell’s conference narrative allowed him a neat side-step around the trap that Chancellor George Osborne set when he introduced his Charter for Budget Responsibility, which declares, “a target for a surplus on public sector net borrowing by the end of 2019/20.” But then came the change of tactics. The Shadow Chancellor concluded that the Charter was too much austerity for him to swallow. Labour’s argument that it would balance the books without austerity but by higher taxes on the wealthy, cuts in corporate tax reliefs, and further tightening of avoidance, now has to compete with Osborne’s gleeful claim that Labour are, after all, deficit-deniers.

McDonnell and the Sirens assert that the Chancellor cannot in fact get to his goals, because austerity is self-defeating, locking the economy in a liquidity trap: spending cuts are undermining demand and depressing wages, so limiting the scope of consumption to lift the economy.

Instead, they argue, balance the books by, in effect, some wealth redistribution, and combine that with boosting investment in services and infrastructure, by a combination of spending increases and ‘people’s QE’. That way the deficit melts away under the glow of a virtuous cycle.

By setting up the dividing line as one of austerity vs anti-austerity, McDonnell has made the deficit the central player in this unfolding political drama. The shape of the 2020 contest will turn substantially on whether it has gone or not, by the time the voters return to the polls.

The government pins its hopes on the deficit turning to surplus, and in the belief – which the 2015 election seemed to confirm – that the voters back ‘austerity.’ Next year, the deficit is projected to drop to £69bn, dwindling thereafter and turning into a modest surplus by 2019/20. If the economy continues to grow steadily, it’s not an unrealistic target. If the deficit drops away, as projected, debt, as a share of GDP will also be falling by 2019/20 – although it will be reaching £1.6 tr, as opposed to the current £1.4tr level. To get there, public spending in real terms needs to continue falling at broadly the same rate as in the last Parliament.

Labour’s new gamble is to stake the house on the government not getting there.

If indeed the establishment is in ‘stupid denial’, then we should expect the recovery to falter – even to swing into reverse – and for the deficit to prove stubbornly hard to reduce.

How does a ‘dump austerity, and tax the rich harder’ message go down against the backdrop of a stubbornly large deficit, mounting public debt, cuts in services, and cuts in middle income welfare support? Quite attractive, one might imagine.

But how does it look against a backdrop of balanced books, a surplus used to increase investment in the NHS, and a sprinkling of carefully targeted tax cuts (Osborne’s ideal scenario)? Quite irrelevant, one might imagine.

That’s the gamble now. Much will turn on what happens to the deficit in the next four years. If it comes good, the Shadow Chancellor will have placed the wrong bet. If recovery comes off the rails and the deficit numbers stall, the Shadow Chancellor will be a sage, with an argument.
There’s now a simple, clear dividing line. And the deficit numbers will tell us, over time, which side of it everyone is on.