Labour's economic message
This has been a week for substantial economic data in the UK. The Christmas break will be the ideal time for Labour to think about its message on the economy. There is some work to do.
Inflation data for November surprised slightly on the upside. Prices in the UK were buoyed by food, clothing, and footwear. At the moment the inflation figures are prompting commentary about the Bank of England's inability to provide accurate forecasts for the inflation rate. The Bank will point to unusual circumstances in the world economy as the reason. Higher inflation may limit enthusiasm on the Monetary Policy Committee for more quantitative easing next year even if the economy shows signs of slowing. Unemployment rose with the rate now at 7.9 per cent, 2.5 million people out of work, and 839,000 people unemployed for over a year (the highest level since February 1997). The news shows that the economy is still not in a robust state. Risks to the banking system remain, as the Bank of England outlines today. The coalition heads towards the end of the year less on the front foot than it might have hoped, with mixed economic news and of course the controversy over tuition fees. Nick Clegg has had to resort to another burst of rhetoric against the banks but without any specific proposals for action.
Despite the unemployment data we cannot assume that the UK economic recovery is faltering. So far economic growth is roughly on track with the recovery in the early 1980s. Many economists were surprised by the third quarter GDP figures and it is possible the current quarter may surprise on the upside too. To some extent, consumers may be bringing forward purchases to avoid the rise in VAT in January. This confuses the picture, which is never usually clear this time of year: it is difficult to know how the retail sector is actually performing until we have a better perspective in January.
After the recession we saw a bounceback in inventories and we are at a key point in any economic recovery. The question is when firms will begin to start investing in future growth, increasing capital expenditure and, over time, increasing employment. We know that large companies do have relatively strong balance sheets and if they become more confident we may see some investment activity which could drive the next leg of growth. On the downside, smaller companies are still having trouble accessing finance and looming over the economy are the sharp cuts in public sector spending. We don't yet know what this will do to business confidence.
Labour should never concede the economic argument to the Tories and Liberal Democrats. We do need to refine our message, however. The coalition constantly hammers home the line that it inherited a debt position that was somehow out of control with the UK almost bankrupt. This argument betrays a complete misunderstanding of basic economics but that has not stopped Cameron, Osborne, Clegg and co repeating it.
Economic commentator Anatole Kaletsky suggests that progressives need to change their economic narrative. It is a good point. In Capitalism 4.0 Kaletsky argues that blaming the recession on the banks does not get us far enough. His case is that a cyclical financial crisis was turned into a deep recession by market fundamentalism. The Bush administration's decision to let Lehman Brothers go down was based on a markets-know-best worldview that had to be reversed only weeks later as banks worldwide were supported by government actions. On this reading, the worldwide deep recession was not inevitable but a consequence of a discredited and ideological approach to markets and economic management.
That market fundamentalism has been advocated by the Conservatives both before and after the general election. It is now embraced by the Liberal Democrat leadership. It is an ideology that has little room for the impact of economic events on individuals, families, and struggling communities. The banking system does need radical reform, to prevent it threatening the world economy and pleading for taxpayer bailouts once again. We need to make this case. Yet Labour's wider argument must focus on the harsh future Conservative economic policy offers for those not on high incomes, especially when people fall on hard times. Labour's economic message must be about encouraging investment in future growth and promoting a society in which all can prosper.
This article was first published on the Progress website on 17 December 2010