A guest post in a personal capacity from Stephen Beer. Stephen is Senior Fund Manager and UK strategist at the Central Finance Board of the Methodist Church and chair of Vauxhall Constituency Labour Party.
Debate about the economy in the Labour Party is at a really good level now and something I was looking for when the Fabian Society published my pamphlet The Credibility Deficit – How to rebuild Labour’s economic reputation at the Labour Conference this year. However, we need to tackle how we can have a credible economic policy, not simply one that is fiscally prudent.
Perhaps the biggest splash since Conference has been made by In the black Labour by Graham Cook, Adam Lent, Anthony Painter and Hopi Sen, and published by Policy Network (interest declaration: I’m a board member). The authors maintain that Labour needs to embrace fiscal conservatism and show how it will get the annual deficit down and where it will cut spending. They argue that this is a progressive policy, because if the public finances are not under control we will be unable to be progressive about anything much. Instead of triggering a harsh reaction, the discussion paper has been well-received (including by Ed Balls). That’s a healthy sign. However fiscal probity is a necessary condition for progressive economic policy but it is not sufficient. Even if Labour relied on a promise to keep to George Osborne’s latest fiscal plans, it would still not win an election centred on the economy.
What matters is being credible. I make no apologies for banging on about this because we need to get it. It’s the point I made in The Credibility Deficit. We lost credibility with both voters and markets. We lost it with voters because living standards got squeezed for years and we had no credible plan or even rhetoric to answer it. So we need to make sure we have a credible and relevant answer today. We lost credibility with markets because we fudged the way we kept our fiscal rules. Adopting new rules and saying we really will keep to them this time is therefore not going to be enough. Besides, the scale of the financial crisis was so enormous that any fiscal rules would have had to be broken to avoid a deep depression. It will be the same next time. And we lost credibility with both voters and markets because both now need convincing (whether fairly or not) that Labour will keep spending under control and effective. The Conservatives and Liberal Democrats have successfully blamed us for the deficits but if we had cut spending to match the fall in tax revenues, millions more would be unemployed and the UK would be heading rapidly down the economic performance tables.
We are living in grim economic times, with Office for Budget Responsibility forecasts suggesting we have years of flat or declining living standards ahead of us – and that’s if the eurozone actually sorts itself out. At the moment most people believe that austerity is the only answer. It will take a while for countries to travel down the austerity death spiral before they reach out for a different answer. Even if they do, the likelihood is that we will see years of half-hearted stimulus measures some of which, by virtue of their temporary nature, will make things worse.
The big problem is that the economy lacks sufficient demand. If we have a couple of quarters of unexpected growth I fully expect the OBR to change its mind and decide that perhaps more of the deficit is cyclical than it believes today (economic forecasts are not usually accurate; a reason against giving the OBR more say over policy). Business and consumer confidence is low. Who can blame them? Governments need a convincing and credible growth plan as well as a deficit-reducing plan (the In the black Labour authors make this point too) and not merely a new tax cut or spending tweak here and there.
Governments need to convince people and markets that they are fully committed to proactively increasing the productive potential of the economy for the next decade or more. Such a policy will be highly focused on encouraging enterprise and investment: spending on infrastructure will be high; a national investment bank will sit behind bank loans and stimulate small businesses. And government – or at least a Labour government – would stand behind the labour market with a jobs guarantee. The current debate about how Labour can be fiscally sound is welcome and much needed. But we need to do more to restore the economic reputation we spent so many years of opposition building last time around.