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Facing up to hard choices

My review of Progress's Purple Papers

A party ready for government needs to have a mature policy-making process.  It needs to be bold and realistic, and it needs to appreciate that there will be difficult challenges to face once it is elected. That is why the Purple Papers are a useful and distinct contribution to the policy debate.  The contributions face up to the hard choices we will have to make, even before the election. We should develop further some of the themes in the Purple Papers.

Economic policy is an entire arena of hard choices.  In his paper on the subject, Steve Van Riel spells this out.  He argues that such is the scale of the public debt problem that we cannot avoid taking measures that will affect the people we are most trying to help.  There is a limit to the amount of revenue a government can raise from the wealthy.  Furthermore, changing the nature of the economy cannot be done cost free simply by changing regulations or changing government procurement policy, for example to insist on higher wages.  A cost is incurred somewhere.  Labour will have limited political capital and will not be able to make all the changes it wants.

The author could have gone further.  We risk drifting through the years with little growth unless we are prepared to make significant changes to raise the productive potential of the UK economy and improve the longer term well-being of its people.  A sobering scenario beckons: low growth, with rising debt, requiring more austerity and punctuated by sporadic but ultimately half-hearted growth initiatives.  Because austerity measures were brought in too soon by the Coalition, we lost the best opportunity to boost demand.  Further stimulus now may not have the same impact.  Instead, we need to improve business and household confidence well into in the future.  That will mean difficult choices to make.  For example, to what extent are we prepared to cut current government spending to divert resources to capital spending (investment)?

Another important decision we need to make, and which is hardly discussed, is the extent to which we are prepared to let the market allocate resources.  To even mention this possibility may seem anathema to many on the left, especially after the financial crisis.  But we are making a big mistake if we think state action can solve all our problems alone.  Besides, we don’t live in a state-run economy. The future will be more complicated and will require government and markets to interact in new ways, with a more proactive (but hopefully wiser) government than before.

This is not a call for free market ideology, but we have a dynamic economy and the state has a poor record second-guessing the future.  Rather than worry too much about which emerging industries to subsidise, we should focus on what market incentives we need to help deliver the outcomes we want. So rather than subsidise renewable energy to combat climate change for example, we reward reductions in carbon emissions.  This approach can be applied across the economy.

One area where this principle could be applied is social care.  Not another wave of privatisation, but encouraging innovation, for example in technology and construction.  In his contribution, Patrick Diamond highlights the challenge of the rising demand for social and health care.  The Office for Budget Responsibility suggests the cost could lead to public sector debt rising significantly soon after the impact of the financial crisis has been dealt with.  However, one thing we do know about long term projections is that they are wrong.  The OBR (which to its credit was not claiming to make a long term forecast of government spending) cannot even get GDP growth forecasts right twelve months ahead.  This is the uncertain world in which we live and in which politicians have to govern.  Taking a step back, rising demand for healthcare and social care will probably lead to innovation in the way they are provided, which will reduce costs.  A Labour government should encourage and remove any obstacles to such innovation and not assume care needs should be met solely by increased spending.

One theme running through the Purple Papers is uncertainty and risk.  The dilemma the authors grapple with is that the last Labour government could deal with these in part by spending.  Following years of underspending on public services, we needed to fund them properly and this is what the public expected us to do.  Now, the spending options are limited and we face a narrowing of options, making our values still more important as we exercise and explain difficult policy decisions.  The solutions will include a market economy that works for people rather than against them, a focus on jobs (as Graeme Cooke advocates), and more explicit collective insurance approach to pooling risk (Cooke, Diamond).  This parliamentary term looks likely to be seen as five wasted years of Tory/LibDem government, characterised by misguided economic policy, poor leadership, and incompetence.  Labour must rise to the challenge in 2015.  If we negotiate some of these hard choices successfully, and if we are prepared to be bold, confident, and innovative, we – and more to the point, the country – will be much closer to becoming the One Nation we aspire to be.

This article was first published by Progress on 25 January 2013.
Progress, 25 January 2013, 25/01/2013

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