Rightwing economic myths could derail Burnham’s project – to destroy them, look to Keynes | Larry Elliott

Andy Burnham does a nice line in nostalgia. His first party conference speech as prime minister was full of fond memories for the Britain of the 1950s and 1960s, when working-class families could sense their lives steadily getting better. The underlying message of his address was that, given time, he could rekindle that optimism and return the country to how it was before Margaret Thatcher wrecked everything.

Much of what Burnham says is true. The 1980s was a decade of deindustrialisation, asset-stripping and financial deregulation that has shaped modern Britain – and not in a good way.

But listen a bit more closely to the speech and it becomes clear that Burnham is struggling to find a way to turn back the clock. For a start, he might not be given time. Energy bills are forecast to rise sharply this winter. John Healey’s first budget, in less than a month’s time, is expected to raise taxes or cut spending – taking money out of an economy that is already struggling.

There’s no question that Burnham and Healey would prefer not to be taking these actions but feel they have no choice. Burnham may well rail against 40 years of neoliberalism. He may think neoliberalism was a dud. But his government is constrained by neoliberal ideas and the language used to express them. Burnham and Healey would never use this language themselves, but that’s irrelevant. To make a real difference, they need to tackle head-on the nostrums of the past four decades. Otherwise they will be for ever in thrall to them.

Top of the list is the idea that the UK government is no different from a household. That means it should match its spending to its income as closely as possible, borrowing prudently and within tightly defined limits. Otherwise it will “max out the nation’s credit card” and risk spiralling into unsustainable debt.

This analogy has the benefit of sounding like a statement of the obvious to many voters, but is actually entirely false. There is no such thing as the nation’s credit card, and a country that prints its own currency can never “max out” or face bankruptcy in the way an individual can.

The notion that the government is living well beyond its means is convenient for those on the political right who have an aversion to public spending. The reality is that, as John Maynard Keynes once said: “Anything we can actually do we can afford.” It was that mentality that allowed the Attlee government to create the welfare state when debt was running at more than 250% of national income – more than double today’s level. I don’t know whether Burnham has seen the new play about Keynes in London’s West End, but it seems as if he ought to.

By the same token, it makes no sense to talk about “black holes” in the public finances every time the government looks on course to miss its targets for borrowing as set out in its fiscal rules. These rules are treated as totemic when in reality they can be changed at any time – and are ditched altogether when there is a crisis.

Again, the idea of a black hole is a convenient fiction for those with an interest in shrinking the size of the state. As with “maxing out the credit card”, it forms part of the inquisition every time a minister goes on the TV or radio with a new spending measure: “That’s all very well but how are you going to pay for it?”

Burnham is committed to re-industrialising Britain, but to do so he will have to break with the neoliberal convention that it is not the job of the government to pick winners. As the prime minister should point out, China, Japan, Taiwan and South Korea have all built up their manufacturing strength by picking winners, and Britain could do the same. Indeed, the one sector that Thatcher picked out for special care and attention – financial services – has gone from strength to strength. Breaking the taboo on picking winners is central to a successful industrial strategy.

Last but not least, Burnham has to address Thatcher’s famous dictum: you can’t buck the market. A cursory glance back at recent economic history shows that governments buck the market all the time. In 2009, the Bank of England responded to the risk of a second Great Depression posed by the global financial crisis by buying government bonds. This provided money to the banking system while cutting the interest rate – or yield – on bonds. This was bucking the market. In 2020, the then Conservative government spent hundreds of billions on a furlough scheme that paid up to 80% of the wages of workers at risk of losing their jobs during the pandemic. This, too, was bucking the market.

So when Burnham, in his conference speech, harked back to the Britain in the immediate decades after the second world war, he missed out a key part of the reason working people felt things were getting better. Rather than being constrained by fiscal rules, governments were committed to full employment. Capital controls meant that financial markets were tightly controlled.

Before we get too nostalgic, it’s worth remembering that things were far from perfect in the so-called postwar golden age. By today’s standards, growth rates were spectacular, but they lagged well behind those of Germany and France. Even so, managed capitalism certainly delivered more for working people than has been the case in the unmanaged capitalism that has followed.

The postwar status quo has been turned on its head. Then, financial markets were caged to ensure that governments could pursue domestic economic goals. Now, governments are caged and the markets are free. It is a classic case of the tail wagging the dog.

Shifting back to a world where finance is fettered is not going to be easy – but until it happens, governments will remain boxed in. Burnham and Healey will be forced to do things they know will harm the economy because they know any deviation from what is acceptable to the received wisdom risks a backlash from the financial markets.

Some new economic thinking is required, and if ever there were a time for an iconoclast like Keynes, it is surely now. He would certainly have no truck with the wrong-headed economic policies of the past half-century and the seemingly commonsense phrases – such as maxing out the credit card – that have been used to disguise just how nonsensical they are.

All credit to Burnham. His analysis of what has gone wrong has clearly rattled his political enemies. Even so, he risks becoming the nearly man of British politics: the prime minister who asked the right questions but failed to come up with the right answers.

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Larry Elliott is a Guardian columnist