Meeting the Growth Challenge

Fabian Society General Secretary writes for Next Left as the Fabians launch a new publication  "The Economic Alternative, following on from January's New Year Conference 2012. You can read the full report on the Fabian website here

Leaf through the Office for Budget Responsibility’s (OBR) November 2011 forecast and it is plain that any post-2015 government that wants to bring public debt under control will need to take hard fiscal decisions. So Ed Balls’ announcement at Fabian New Year Conference that the party would not reverse coalition tax rises or spending cuts should it return to power in 2015 may have been controversial, but it shouldn’t have come as a surprise. If anything Balls is being too optimistic. The chances are that as chancellor he will have to do more than accept the status quo he inherits and actually cut spending or raise taxes for himself.

That’s because George Osborne has stealthily pencilled in £20 billion of cuts for after the next election to complete his deficit reduction plan. This number is itself based on GDP projections that could be far too optimistic, as the effects of austerity and the eurocrisis combine. The detail is impossible to call this far from an election, but Labour’s shadow treasury team need to reckon on a fiscal squeeze of at least the scale Osborne has in mind, even if they choose to close the gap more slowly.

Labour will need to make a stand, however, on the question of how to close the post-2015 fiscal gap. George Osborne says that after the next election he will act only through tax cuts. On the OBR’s figures, that would leave the share of economic activity in the public sector below its post-war average. In other words, the chancellor is covertly planning to ‘overshoot’ his commitment to bring public spending back under control. This confirms the left’s suspicions that his real agenda is to reduce the state’s share of the economic pie for good.

If Labour wants to stop this structural shrinking of the state, it will need to set out an alternative, where tax rises, not spending cuts, are the main post-2015 route to deficit reduction. Since the debacle of the 1992 shadow budget this has been dangerous terrain for the left. But Labour needs to get used to the idea that ‘tax rises’ v ‘spending cuts’ might have to be a defining issue of the 2015 election. Better to prepare the ground now than pretend the choice will go away.

That dividing-line is some way off, however. What about the here-and-now? For the time being Labour needs to do much more to set out the ‘economic alternative’: what it would do if it were in power today.

Where I quarrel with Ed Balls is not over his realistic stance on the public finances post-2015. It is that he is not balancing this message with a radical short-term programme proportionate to the scale of the economic troubles we face. Had Balls set out a truly ambitious growth plan alongside his fiscal realism, he might be having much less trouble explaining his alternative both to the public at large and to allies within the left.

So what should be the key ingredients of an immediate plan for growth? First, Labour should champion a state investment bank. The idea is simple: sell tens of billions of pounds of long-term bonds at today’s astonishingly low interest rates and use the proceeds to capitalise an arms-length investment bank which can then lend for spending on infrastructure, business growth and house-building.

Second, Labour should make the running on short-term tax cuts to show that stimulus does not just mean public spending. The priorities for cuts should be employers’ national insurance (to create jobs) and highly visible tax cuts or cash-back for low and middle income groups (to get the tills ringing).

Third, a significant job-creation scheme is now essential – say a guaranteed job for everyone unemployed for 12 months. But this must be funded, be it through taxes on the rich or spending cuts elsewhere. That’s because arguing for fewer or slower cuts overall (as opposed to different spending priorities) is now counter-productive. The reason for saying this is partly political: Labour needs to convince people that its support for Keynesian stimulus is not simply motivated by pro-state ideology. There is also little point in putting off cuts when horrific spending decisions are inevitable, sooner or later. Why call for delay only to store up problems if Labour regains power?

But there are other more fundamental reasons; the left might not like it but it has to accept that governments need to retain the confidence of the bond markets. Osborne is now more-or-less following Alistair Darling’s original profile for deficit reduction, not through choice but because he has so mishandled the economy. To be credible the timescale for balancing the budget can’t be extended very much more or the markets will begin to believe the eventual end-point has been abandoned. For the same reason, they need confidence that any stimulus will be truly temporary and it’s easier to turn off the tap on one-off bond sales or time-limited tax cuts than public service spending.

A big public sector stimulus is necessary but not sufficient to kick-start growth. Many UK companies and households have very healthy balance sheets (corporate cash reserves and expensive homes) but they don’t see enough reasons to invest or consume. Others, who would normally be seen as credit-worthy, can’t borrow in today’s climate or are put off trying. A key element of the state’s response to the crisis should be to devise ways to facilitate or incentivise private spending by those households and companies not over-exposed to debt.