Five key ideas to build a new economy
There’s a lot of competing objectives for Labour’s developing economic policy to juggle at the moment. First, winning back our reputation for economic credibility, unfairly but successfully shredded by the Tories in the wake of the financial crisis. Second, showing a Labour government will tackle falling living standards at a time when many people haven’t had a pay rise for a couple of years, and families are struggling to keep pace with the escalating energy, childcare and transport costs. And last, setting out an agenda for delivering a more sustainable and inclusive growth – spread more evenly across sectors, regions and groups of employees.
That’s a lot of balls to keep in the air at once. The only way to manage this is to avoid taking a piecemeal approach. Over the last year, the building blocks of a more comprehensive strategy have emerged. The challenge going forward is fitting these together to form a coherent whole. There are five important pieces of this puzzle.
First, a dose of fiscal toughness to boost economic credibility. The 1997 version was of course pledging to stick to Tory spending plans. This could well be put back on the table for 2015 – but it’s difficult to make this kind of commitment now, given growth forecasts have been downgraded for this year and next, and it’s hard to know what the economy will be doing beyond that. An alternative for now would be to announce something symbolic that shows Labour is prepared to be tough with the public finances. It needs to be painful to do the trick – if it’s easy, it defeats the object – and to be something the coalition aren’t cutting.
Second, we need a macroeconomic strategy that recognises there were imbalances in the economy in the run up to the crisis. Dan Corry, Brown’s former economic adviser, has argued we can’t look at the public sector deficit in isolation: it needs to be understood alongside the emergence of a permanent corporate sector surplus since 2002, reflecting a lack of private sector investment. He’s suggested a new golden rule that would make bringing down the corporate surplus a legitimate goal of economic policy alongside reducing the public sector deficit. Others have suggested the Bank of England should be targeting asset-price bubbles alongside inflation through monetary policy.
Third, there needs to be a reassessment of the relationship between the economy and our public services. Increasing the earning potential of second earners holds the key to improving living standards for many families. But escalating childcare costs are preventing many women from entering work in the first place or working as much as they would like. At the other end of the life cycle, there are the costs of social care, with a growing number of families caught in a ‘care crunch’, simultaneously facing the need to care for children and elderly parents. Increasing childcare and social care provision would require some very tough choices, either by shifting the overall balance between cash transfers and services in the welfare state, or by reallocating spend from other public services. But as Nick Pearce and Gavin Kelly have argued, a Labour government must not shy away from taking difficult decisions about how to reconfigure the welfare state in the best interests of today’s economy and society.
Fourth, we need to once-and-for-all ditch the quintessentially British queasiness about industrial activism. Of course, industrial policy done badly is a waste of money – the dismal losses made by state-backed venture capital funds in the last twenty years are testament to that. But there are notable successes elsewhere in the world, such as the US’s hugely-successful programmes of state-backed investment for small businesses and innovation-based procurement. New investment will need to be funded from cuts elsewhere, but quantity is not always quality – for example, more effectively using the government’s power as the UK’s biggest consumer through procurement policy does not come with a big price tag. With industrial policy, however, the devil is always in the detail of execution. It will require a big culture and capability shift in Whitehall, in particular in how civil servants understand and interact with the private sector.
Fifth, we need more accountability in the economy. Excessive risk-taking within the financial sector, the growing inequality between the very top and the rest, and short-termism and lack of investment are all to some extent symptoms of an accountability deficit. Over the last thirty years, too much power has accrued with big global corporations, and not enough with those who work for them, who save with them, who own them through their pensions and who buy from them. This lack of accountability makes it more likely markets will deliver outcomes requiring correction, like low wages, high energy bills and low levels of investment. Addressing this is partly about changing the rules of how capitalism work – for example reforming corporate governance to give employees more of a voice on company boards, better regulating the energy market and breaking up the retail and investment arms of the banks. But it is also about building the institutions that can empower people as employees, savers and consumers, such as trade unions, credit unions and consumer associations.
There’s a lots of detail to be worked out, and some unavoidably tough choices. But if the policy review can successfully bring together these components, there’s a good chance it can achieve the impressive feat of keeping all the balls juggling.