The coalition government is nearly halfway through its term and little way towards finding a strategy for growth. For the British Labour party, several key priorities for growth are taking shape, but sharper definition is now required
The Left has to identify a new politics of production and growth. The recent UK growth statistics underline the catastrophic damage and continuing aftershocks inflicted by the financial meltdown in 2008-9, exacerbated by the never-ending crisis in the eurozone.
Despite it’s disastrous track-record of macro-economic management, epitomised by the Lawson boom in the late 1980s and George Osbourne’s ill-timed retrenchment since 2010, the Conservatives have consistently positioned themselves as the party of fiscal discipline and economic competence, as well as the party of entrepreneurship and material affluence.
By contrast, for decades, the left was seen as merely interested in a fairer distribution of growth, while largely oblivious to expanding the frontiers of production. Wilson’s ‘White Heat of Technology’ in 1964 and Blair’s ‘New Britain’ in 1997 were exceptions to the rule. British Labour strove to secure a fairer share of the cake on behalf of the organised working-class, whereas the Conservatives sought to grow the cake and spread the benefits among all classes and interests in society.
Observing the state of the economy in 2012, ahead of an intervention by the Labour leadership in the City of London this week, it is clear that the UK’s Conservative/Liberal Democrat Coalition have no growth strategy. Across Europe, centre-right governments embraced the virtues of austerity, but are apparently devoid of answers as to how growth might be secured . What has been offered by David Cameron and George Osbourne is another version of the 1980s supply-side strategy focused on deregulation, lowering wage costs, making labour markets more ‘flexible’, and securing a permanently smaller state. The impact on UK growth has so far been negligible, and these ill-timed austerity policies have created a mood of pessimism and rising public discontent . A recent survey carried out by You Gov for the Sheffield University Political Economy Research Institute (SPERI) demonstrated that voters in Britain now prioritise growth over deficit reduction (47-34%), deeming current spending cuts to be hasty and excessive. A political and policy vacuum is emerging: social democratic parties must be in a position to seize the agenda as the economic credibility of Conservatism is sorely tested.
The principal task for parties of the Left, therefore, is to secure the mantle of fiscal credibility recognising that much of the credibility so painstakingly established after 1992 has been lost. This need not entail simply mimicking the Right’s programme of cuts. What is required is discipline in managing the public finances, with a root and branch review of all current expenditure commitments. The UK economy is currently among the most indebted in the OECD (second only to Japan in total levels of public sector, financial, and household debt). Nonetheless, the challenge for the Left is more profound than merely rebuilding confidence in its economic management credentials: key is framing a credible, post-crisis growth strategy – a new politics of production for the UK economy.
The seismic impact of the crisis has underlined the need for fresh thinking and novel ideas. Previous crises have been accompanied by radical questioning of existing political and economic orthodoxies. Since 2008-9, however, most political debate has focused on restoring the UK economy to ‘business as usual’: Although the power of government was used to stabilise the financial system through bailouts and nationalisations, in stark contrast to the 1930s New Deal era, there is no apparent enthusiasm for entrusting the state with new powers and responsibilities.
What is clear is that a radical programme for British and continental European social democracy is unlikely to emerge from ‘ivory tower’ blueprints, rather through a constant process of ‘bold, persistent experimentation’, in FDR’s memorable phrase.
For the British Labour party, several key priorities for growth are taking shape, but sharper definition is now required. The first pillar of a national growth strategy ought to be a state-driven national house-building programme, enabling local authorities to borrow against their assets, and issuing government-backed bonds to raise finance through capital markets. A clear, politically feasible target of one million affordable homes within the lifetime of a single parliament (a third of which would be homes for families) would capture the imagination of the electorate, and project a clear sense of Labour’s post-crisis economic and social priorities.
Second is re-nationalisation of the Royal Bank of Scotland (RBS), creating a public interest bank focused on business investment, channelling credit to fledgling businesses and SME’s. Britain lacks an equivalent of the German Mittelstand, attracting private capital for major public infrastructure projects to tackle the chronic short-termism of the capital markets, while providing a much needed boost to economic growth. There is a strong case for such a bank to have a regional mandate, with a proportion of funds directed towards UK regions with persistent structural weaknesses, in particular the north-east and north-west of England.
Thirdly, is using the proceeds of the bank-bailout to create local community investment funds: 1% of the total bailout ought to be re-invested in credit unions and building societies that support local businesses, while enabling people in disadvantaged areas to borrow without resorting to usurious rates of interest. It is vital to restore the connection between finance and the common good.
Of course, there are other necessary elements including an innovation strategy, policies to boost human capital giving employees a stake and voice in the firm as well as upgrading skills, more investment in science and R&D, and more risk capital for firms in export-led sectors. Nonetheless, a domestic agenda for growth alone will be insufficient given the exposure of the British economy to European and international markets. The UK must therefore play a role in brokering a decisive end to the turmoil in the eurozone. The most plausible approach so far proposed requires the creation of Euro-bonds, such as the proposal for ‘blue bonds’ advocated by the Bruegel think-tank in 2010. There has been criticism of this proposal for avoiding issues of moral hazard in debtor countries. Nonetheless, the idea is plausible, and has traction among key European decision-makers.
Whatever reforms are undertaken to avert catastrophe in the eurozone, it is clear that sustainable, long-term growth will only be created if there is a systemic shift of wealth and power within the global system. This still requires some form of global polity rather than a fragmented structure of nation-states. Despite the deep disconnect between European elites and citizens, the European Union (EU) is an association of constitutional, democratic states that has numerous advantages. That the UK remains part of an interdependent European and global economy, able to influence and shape the international system, will be essential for future prosperity and growth. The idea that Britain can act unilaterally as a ‘great power’ state has long appeared illusory. A constructive, engaged partnership with the European Union surely remains non-negotiable.
Patrick Diamond is senior research fellow at Policy Network, and Nuffield College, Oxford
This article originally appeared on Policy Network on the 5th September. It is republished here with the permission of Policy Network and the author.