Jonathan Todd – Addressing the challenges of rebalancing the economy

Politicians of all parties claim to favour rebalancing the economy; whether this is rebalancing from the public sector towards the private sector; from domestic consumption to exports; from finance towards manufacturing; or from London and the South towards the North and Midlands. These various kinds of rebalancing all enjoy broad political support but these consensuses risk being as glib as saying that all mainstream British politicians believe in, say, liberty. They mask deeper complexities and challenges, which must be overcome to achieve meaningful economic rebalancing. Labour should seek policies which will enable this, as well as language and demeanour that will allow us to reap the political benefit of tapping into the popular desire for a less financial-centric society and economy. We should, however, focus on the substantive issues and avoid puerile bashing of bankers. Let’s consider in turn each kind of rebalancing.

Rebalancing from the public to the private sector

The Office of Budget Responsibility (OBR) predicts that by the end of this parliament there will be 1.5 million more people working in the private sector and 400,000 fewer in the public sector. The political and economic strategy of the Government largely depends upon something of this order coming about. While their cuts are faster and deeper than is prudent, it is not inconceivable that extremely lax monetary conditions – rock bottom interest rates and quantitative easing – and a low pound allow something approximating to the OBR prediction to become real. Equally, there are many reasons why it may not; not least on-going instability in the eurozone.

It would be as unwise for Labour to be wholly pessimistic about the prospects for private sector recovery as it would be for the UK to gloat about troubles in the eurozone. Labour has to be the party of optimism, which should include being optimistic about the ingenuity of business, particularly if the Bank of England contains its fear of inflation and doesn’t raise interest rates too rapidly. Labour must avoid the perception that we see fiscal stimuli as the only motor of growth and monetary and exchange rate conditions as irrelevant. We should also acknowledge, through a credible deficit reduction programme, that a key reason for deficit reduction being important is that it reduces upward pressure on interest rates.

Part of this programme should involve a shift in the tax base to sharpen incentives towards hard work. This means less tax on income and more on wealth. A land tax could form part of this transition. It would do something to dampen the British tendencies towards property speculation and bubbles. It might also form part of a Labour drive towards tax simplification. Because taxation of land is simple it would be difficult to avoid. Labour could win friends from UK Uncut to the CBI with a considered drive towards tax simplification. UK Uncut should appreciate simplifications that make tax harder to avoid and the CBI should value simplifications that support economic growth. A land tax offset by reductions in taxation on employment would reduce the capacity of the rich to avoid taxation and increase the extent to which everyone keeps the fruits of their hard work. Tax simplification should not be owned by the right. It should be part of Labour’s arguments for rebalancing from the public and private sectors.   

Rebalancing from domestic consumption to exports

The global recession has demonstrated the utility of exchange rate and monetary flexibility and vindicated the decision to keep the UK out of the Euro. It is far from certain, however, that policy thus far has successfully contained the banking and fiscal crisis in the eurozone. Given the importance of eurozone growth to UK growth, the UK should play a constructive role in arriving at such policy, while not confusing our responsibilities with those which properly belong with eurozone members. As debates about the future of the Euro and the EU are disentangled – or, as has been more the case to date, conflated – British interests are ill-served by the chair left vacant at the negotiating table by David Cameron.

The prime minister has been eager to champion trade with the BRICs (Brazil, Russia, India and China) and bored by Europe. Not realising the connection between the BRICs and the EU. In 2009 Ireland’s 4.5 million people accounted for more UK exports than the BRIC countries combined. It should be an economic priority for the UK to deepen our comparative advantages with the expanding middles classes of the BRICs. The development of these countries does much to explain the expectation of Gerard Lyons, chief economist at Standard Chartered, that the global economy will at least double in size between now and 2030.[1] However, the extent to which the UK benefits from this development depends on how quickly we advance trade with the BRICs. We need an EU that is recalibrated towards adaptation to a global economy that is increasingly driven by Asia. Cameron is too scared of Bill Cash to properly work towards such an EU. His carpet bagging of UK PLC to the BRICs counts for little next to this.

Rebalancing from finance to manufacturing    

We need to be realistic about employment prospects in manufacturing. The UK’s manufacturing sector remains the sixth largest in the world by output but no manufacturing sector in the developed world, even in Germany, a country with a stronger modern manufacturing reputation than us, has been able to avoid a considerable long-term decline in manufacturing employment.

We should not give in to the presumption that finance and manufacturing cannot be complements. We should be asking: what kind of financial sector would be most complementary to manufacturing in particular and the wider economy in general? And how can public policy best encourage such a financial sector?

The objectives set for the Independent Commission on Banking – minimise systematic risk and moral hazard; promote competition in both retail and investment banking – are vital. George Osborne won’t hold the Commission to these objectives. But Labour should. We should also be advocating a financial sector that is as complementary as possible to the wider economy. This argument probably goes beyond the remit of the Commission but the work of the Commission gives Labour a chance to firmly place it within the national debate.

Alongside rock-solid retail banks we need a flourishing of nimble financial services firms that are prepared to provide capital to enterprising SMEs. Such firms must be developed in green manufacturing but they will be more likely to do so if a credible price for carbon can be established. At the moment the carbon price comes from the ineffective EU-ETS. This carbon trading scheme either needs meaningful reform or replacement by a carbon tax. Either approach should be taken forward at the EU level, rather than in the form of the cack-handed move towards a carbon price contained in Budget 2011. Again Cash haunts Cameron.   

Rebalancing from London and the South towards the North and Midlands

As well as having sharp economic disparities between our regions the UK has one of the most centralised political systems in the democratic world. Labour should take ownership of the localism debate with the intention of creating forms of localism that reduce these disparities. This means holding localism proposals to the real localism standards proposed by IPPR – localism be effective and efficient; properly funded; at the heart of a drive for social justice; accompanied by a step-change in the transparency and accountability of local decision-making; and framed within a constitutional settlement between central and local government.[2]

Local government should be where the next generation of Labour leaders and ideas emerge. When we were last in opposition Lambeth was ill governed by Red Ted Knight. Now it pioneers the ground-breaking co-operative model. Liverpool was once troubled by Militant. It should soon have a resonant voice in national policy debates in the form of a Labour mayor. That Andrew Adonis, as Transport Secretary, reports battling to identify the views of great regional cities like Liverpool, while Transport for London made constant demands of him, is indicative of how skewed our national conversation has been.[3]

Regional cities haven’t only lacked voice in national debates. They have also lacked private sector employment. While Brighton and Milton Keynes both grew their private sector jobs bases by 25 per cent between 1998 and 2008, some cities slipped backwards: Stoke (-16 per cent), Blackburn (-12 per cent), Blackpool (-6 per cent).[4] The Government’s response – Enterprise Zones, Local Enterprise Partnerships (LEPs) and the Regional Growth Fund – is inadequate. The Regional Growth Fund is one quarter the size of the budget for the (now abolished) Regional Development Agencies (RDAs) in 2009/10.

The future of funds previously allocated by RDAs has been keenly debated. But these funds account for less than one per cent of total government spending in the regions.[5] Mainstream budgets, such as transport, skills and housing, are much larger. The principles of real localism should be applied to these budgets. The interface between LEPs and mayors remains to be worked out but the real localism case for devolving mainstream budgets to mayors, given their transparency and accountability, seems stronger than to LEPs.

Irrespective of whether it is to mayors or LEPs that mainstream budgets are devolved it is imperative that these resources are allocated to maximum incremental impact. This means working with the grain of markets, ironing out market failures and only intervening where there is a clear rationale for doing so. That many of these markets are global, both underlines the interconnectedness between the domestic and global economies and the scale of the challenge facing policy makers who are seeking to achieve on much reduced resources objectives that often proved sadly illusive during the New Labour boom. Yes, the resources available in the boom years were not always as well targeted as they could have been. Yes, real localism hasn’t been applied before and should enable better targeting. Nonetheless, it remains the case that politicians eulogise economic rebalancing, due to its popularity with voters, without acknowledging that it often runs contrary to the underlying drivers of our economy or facing up to the tough policy choices that will be required to make it more of a reality.

Conclusion

Voters are strikingly confused as to what Labour stands for.[6] Economic rebalancing, in every sense, given the ineffectual policy, lip service and lack of resources provided by the Government, can be a policy area commanded by Labour, in which we find new expression of our values of equality and fairness. But it raises many challenges, which the party’s policy review should seek to navigate. Only by rising to these challenges will Labour be able to move beyond the dismal record of politicians over-promising and under-delivering on economic rebalancing.

While the country almost aches for politicians capable of doing better than this, Labour will need to be bold reformers of both state and market to be these politicians. Applying real localism principles to mainstream budgets and fully realising the promise of mayors would, for example, be profound reforms of the state. Reforming the financial sector to make it as complementary as possible to the wider economy is as far reaching a reform of the market. Nothing less than such thoroughgoing state and market transformations will be needed for the UK to prosper in an increasingly Asian age.