The Macroeconomics of New Labour

Abstract

This paper focuses on two particular aspects of economic policy pursued by the new Labour government, which we label one of new monetarism. The first concerns the role of the operational independence of the Bank of England and the use of interest rates as the major instrument of economic policy and directed to the control of inflation rather than any regard for the level of unemployment. The second concerns the policy focus on the labour market with an apparent acceptance of the notion of the non-accelerating inflation rate of unemployment and the neglect of the role of aggregate demand and of the creation of productive capacity. Policies on fiscal rectitude, adoption of the so-called golden rule, the virtual abandonment of fiscal policy and the handing over of monetary policy to the Bank of England represent a comprehensive rejection of Keynesian economic policies. The thrust of policy forgets two essential requirements for full employment, namely sufficient aggregate demand and adequate productive capacity.