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Labour • Fiscal Sense • Optimism

After the Coalition: Keeping the optimism

Dan Corry - 06 November 2012

Fiscal sense is a key tenet of centre-left political economy. But Labour must also focus on growth and above all, the re-creation of hope

The task for a Labour government elected in 2015 will be a tough one. The debt and deficit will still be high and so one old conception of social democracy - of spending more money - will not be available, and new approaches will be needed. However, that can quickly get one into a lot of discussion of how to make cuts, what must go, what must be switched. Of course a lot of that must happen, and my former Downing Street colleagues Nick Pearce and Gavin Kelly give a typically thorough and sensible version of that discussion in a recent article. But there are a number of reasons why we must not take it too far.

First, Labour has to win the next election, meaning it needs to find a strategy that has the current of realism running through it, but that also has an uplifting sense of optimism. Yes, economic credibility is crucial if an election victory is to come our way, but it cannot merely be built on a series of statements about what we would cut.  If the centre-left does not give people the hope that through purposeful action we can build growth and a better world, then our appeal will always be less than that of our opponents. Telling people that if they vote for us things will be a bit less bad than under the other lot will never do for social democrats; even when we are forced to be modest in our claims and offers in the short term, we must hold up a better Britain for the future. If the only choice is cuts, some people will shrug and say better the devil we know.

The big danger with real life swing voters is not of Labour being punished for being unclear on its spending cut priorities, but that it may still be held responsible for having presided over the economic collapse since 2008 and is therefore not fit to lift us out of it again. Being macho on cuts is not an answer to that. Yes, there will be a clamour from commentators (who have to write about something) arguing that Labour must be specific about what it would cut if in power, but that is an issue to be managed when necessary, not one around which to build a strategy.

Second, in terms of the country’s economic position, we do not know what the situation will be.  A possible scenario is that by 2015 we are starting to have a little growth (at last!) with forecasts starting to feel a bit less uncomfortable. But how quickly the deficit and debt will come down when UK and EU growth kicks in – which they will inevitably at some point – is very hard to say. Economists are hopeless at forecasting this sort of thing - historically they tend to severely underestimate how quickly deficits rise in a recession and how fast they fall in an upturn.ii So not only is there a lack of clarity around the mood and reality regarding the economic situation at the time of the next election, but the reality over the lifetime of the next government is completely unknown.

Third, fatalism is the wrong approach, and the search for realism and credibility can easily tip into it. One set of fatalistic views is that without massive cuts, the debt is going to stay high for years and that if we do not get it down fast, the markets will punish us. Well, over time the deficit needs to come down, but we have time. Markets are not itching to punish the UK for not severely going for austerity – as even the IMF now agrees - especially if the spending we are making is clearly investment with good supply side and ‘preventative’ features (i.e. that reduces spending in the future).

Another area where fatalism can take hold is on the issue of the ageing society. Of course there will be strains, but analysis of the OBR long term fiscal sustainability forecasts makes clear that the situation is not that grim, that much of the ‘problem’ is about health productivity as much as the age profile of the population – still a difficult issue to address, but one that is not inevitable. The Malthusian flavour of some of the doom and gloom (ageing society = we must cut things to show we get it) is often misconceived.

Fourth, growth and how we get it going is the number one thing to talk about. We must avoid transforming from social democrats who too often only wanted to talk about spending and not how to create wealth into social democrats who only talk about how to cut! Going forward, the route to growth must be about investment, industrial and labour market policy, competition policy and so on. These are the issues we need to talk about.

In many ways, the [awkwardly titled] ‘pre-distribution’ debate should get us talking about growth and the structure of our economy. It is clearly right to say that life would be much easier for social democrats if household incomes from market wages were more equal and so traditional redistribution did not have to do so much work.

However, a number of the options put forward are not only rather ‘small,’ but are in fact about redistribution and not about changing the structure of industry. Putting aside issues of employment, a more universal living wage would be useful (especially for the public sector and contracted out services) and getting more mums back to work to balance household incomes in the lower deciles is an important policy goal (see Resolution Foundation Living Standards report). But policies like these do not really address the major problem of Britain having far too many people employed in firms and sectors that have a low wage, low skills approaches to their activity. How we change that is tough indeed and is at the core of the growth and productivity agenda too.

My reading of the Labour government 1997-2010 is that there was a fair amount done to try and alter this – it was not all deregulation and tax credits as some argue – but that it proved to be hard both politically and in a globalised world with free movement of capital and high skilled labour.  The task now is to learn from that and to take advantage of the different mood in the country today to search for bolder approaches, and at the same time not be so critical of redistribution itself that we forget that we will always need it as an important tool in our armoury.

None of this means that tough decisions can or should be avoided on tax and spending. Given that money will be tight and the future uncertain, I would be surprised if Labour did not have to more or less embrace the government’s spending plans for at least the first year or two of a new Parliament – as it did in 1997. This makes political sense but is also practical since it is very hard to understand where the manoeuvre room is until you are in power. People will of course say what you will cut that is different from the Tories and some examples need to be found of switches. For some, including Kelly and Pearce, this means challenging the shibboleth of (progressive) universalism. There are, of course, other approaches to these issues, but the key is that they should express our values as ‘one nation’ social democrats just as the famous (albeit minor) switches of the 1997 Manifesto did.

In addition, we as social democrats need to widen the conversation way beyond spending (and tax) to a whole set of other issues that deliver for Britain, for everyone in Britain and that help produce more fairness. There are, and always have been, lots of them.

One issue is regulation – it is important to get it right so that banks, utilities and other companies act in ways that are more favourable to the national good and to equity. Corporate governance and competition reform come into this category, changing the way that people experience markets, and promoting social responsibility. Sensible labour market regulation and delivery of skills also alter the dynamics of the way the economy develops and the kind of jobs that are produced as a consequence of the interaction between supply and demand.

More generally, there are issues at the local level of reclaiming civil society. Public spending will play a smaller role in the next period than it has in the last decade or two. Yet, unlike the right that sees this as a chance to contract out to for profit providers, the centre-left can draw on its history of self-help, mutualism and voluntary action to make sure communities are cohesive, support each other, and do so in fair ways that avoid post-code lotteries. As Jon Cruddas has noted, there was something in the Big Society concept. But it failed not only because it was badly handled but because people know that the right wing version of this idea is a pot luck, inefficient and deeply unfair world. This is an area where Labour councils are already starting to move, and where the national party can tell a convincing story.

Another area we must push on in is our support for working closely with Europe. This would be a brave move – the British public are not keen. But we need to argue that to leave the EU would be madness (most agree), and that Tory policy leaving us out of all the key debates will harm British influence, jobs, and growth. There is a battle to be won there – and business will come on board if we make the argument properly.

These, then, are some ways of both delivering growth and using pre-distribution to bring us back towards our values and keep us away from merely focusing on spending (or taxation). These sort of ideas need to have as much prominence in any debate on growth and fairness, as supposing that the answer to our industrial and economic issues will revolve  around  more childcare, valuable as that would be.

I am not a tax and spend social democrat: far from it. ii But I have seen debates of doom and gloom take over the centre–left before. This gloomy introspection is a dead-end (not least because we have limited control over it). Instead we have to focus on other things, growth and above all, the re-creation of hope. Realism yes, but let’s keep our nerve, optimism, and our political sense too.

Dan Corry is an economist and public policy expert. He worked for the Labour Party 1989-92, was a special adviser in various departments during most of the Labour Government years, was Chair of the Council of Economic Advisers in the Treasury 2006-7 and Senior Economic Adviser to the PM 2007-2010.

An abridged version of this article was published in the New Statesman.

i Interestingly in 1993 when everyone was saying the deficit was out of control I wrote in the first issue of New Economy “Remember that only 5 years ago the budget was in surplus and City commentators vied with each other to predict when the government might have paid off the entire national debt!”.

ii No longer must there be “an intellectual auction in which the larger the budget deficit advocated the more automatically ‘Left’ the position is deemed to be” Dan Corry and Will Hutton, “New Labour, New Economy”, New Economy Autumn 1996.

This is a contribution to Policy Network's work on Globalisation and Governance.

Tags: Dan Corry , Opinion , Labour , Fiscal Sense , Optimism , UK , Britain , Conservatives , Tories , Tory , Liberal Democrats , Lib Dems , Public Sector , Deficit , Golden Rule , Recovery , Business , Economy , Finance , Economic , Financial , Crisis , In the black Labour , Election , Nick Pearce , Gavin Kelly , Gowth , Austerity , Recession , EU , European Union , IMF , International Monetary Fund , OBR , Office for Budget Responsibility , Pre-distribution ,

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