Principles for a new Labour economic policy - part 1
Can we grow our way out of trouble, and how far are we prepared to go? Labour cannot rely on another recession; growth may in fact return quickly. Instead it must argue for spending oriented towards making the UK more productive.
The UK has just experienced a deep recession and government debt levels have risen. At some point, and to some extent, spending will have to be cut (see my article in the latest Progress magazine). Ultimately, growth is the answer but that doesn't mean keeping government spending at current levels indefinitely.
After the financial crisis, GDP fell 6.6 per cent from its peak. It is still down 4.8 per cent. Unlike past recessions, many sectors of the economy experienced a large drop in confidence at the same time. Labour in government responded, by preventing the banking sector from collapsing and with measures to stimulate the economy. Failure to do so would have seen us in a Depression, with even basic payments systems unable to operate.
These measures cost. The bailouts and the stimulus measures increased the public debt. As the business and household sectors adjusted their balance sheets by cutting borrowing and investment, so the government balance sheet had to adjust (towards a larger deficit). Rising unemployment triggered ‘automatic stabilisers' ie. more people claiming benefits injected a stimulus into the economy. The increased public debt has to be reduced at some point. Can we not do this with growth?
The official estimates of GDP growth for the second quarter of this year surprised economists on the upside, at +1.2 per cent. Borrowing figures this year seem on track (and in July were lower than expected). The deficit in 2009-10 was £23 billion less than expected in December as government spending under Labour helped growth and unemployment did not rise as much as feared. It would seem that growth can indeed cut debt levels. Over the summer, markets reacted to fears that there may be a ‘double dip' recession. The outlook is uncertain yet a look at the recoveries of the early 1980s and 1990s shows that economies do not return to growth in a straight line. The odd quarter of negative or lower than expected GDP growth should not be a surprise.
It is here that we need a reality check. Labour should not base its entire economic strategy on expectations of another recession. The underlying evidence has yet to point to that. For example, although the claimant count rose 2,300 in August, that month also saw the largest quarterly increase in employment for over 20 years. It is not surprising perhaps that consumer confidence recently dipped, with government talk of austerity. However, a slight improvement in credit availability and bank confidence could lead to a pick-up in consumer spending. The average consumer (ie. still in full time work) has not been as affected by the recession as he or she might have been in the past whereas companies have been paying down debt aggressively. When that slows or stops, vigorous growth could be the outcome (not the view of the conventional wisdom). Under that scenario, the annual deficit will fall faster than predicted, making some spending cutbacks unnecessary (some will never be achieved anyway).
Saying we need an economic policy that promotes growth is not the same thing as calling for existing spending levels to be sustained. We need the stimulus to continue for a while, rather than cut spending too soon and too far for ideological reasons as the Tory-Liberal Democrat government plans. Those plans may seriously limit growth two to three years out. But if we're thinking about a five year plus economic policy we have to think some more. Such is the scale of the annual deficit that we need a more radical vision to combine with necessary cuts in spending.
The ‘Labour investment versus Tory cuts' mantra served well for some years but came to seem outdated. Not least it was difficult to sustain when we planned to rein back capital spending aggressively (though in 2009 government investment helped support the economy). Labour left behind a creditable record on investment, such as new schools and hospitals and better infrastructure. Yet we sometimes confuse spending with investment. If we can avoid this, a focus on investing in the future is not a bad approach. The Tory-Liberal Democrat coalition would like us to argue for more spending against their cuts. But instead we should argue for spending to be reoriented towards making the UK more productive. That means more infrastructure development and green tax incentives. It means a stable business tax regime to help businesses plan ahead. It would mean some current spending gets redirected. It should always mean investing in jobs. A Britain with a growing economy and finding its identity as a vibrant trading nation once again should be our goal.
This article was published on the Progress website on 6 October 2010.