From the TUC

The Political Debate on the Economy

21 Aug 2013, by Guest in Economics

I sometimes struggle to make sense of much of the political debate around the economy – ahead of the 2010 election much of the ‘economic debate’ was in reality a debate about the deficit and what combination of cuts and tax rises would be required to close it over what time period.

This all spectacularly missed the point. The deficit was a symptom of wider economic problems not their cause – the real question should have been, why did we end with such a large deficit in the first place and what can be done to address that?

As the IMF has very clear shown, the UK deficit originated not from excessive public spending but from a collapse in tax revenues. And the reason the drop in taxation was so acute, was that it had become reliant on frothy asset markets and too few sectors.

But anyone following much of the political commentary in this country would have entirely missed this.

For much of the period since the election the debate has seemingly been characterised as ‘growth vs the deficit’. Whilst this debate represents a set forward from the ‘what cuts/tax rises would you do’ distraction, it has again managed to miss the key issues.

In reality the UK faces three key problems – a problem of jobs and their quality, a problem of wages and a lack of investment.

Much of the macroeconomic analysis of the UK over the past year has basically come down to a debate as to whether the UK faces a demand problem or a supply problem. As far as I can see it faces both.

The demand problem has been somewhat alleviated over the past year through a decline in the household savings ratio and a rise in house prices. We still face a large output gap and much more could be done on this front. Equally there are big question marks over how sustainable this kind of demand boost actually will prove to be.

There is still a strong case for capital spending intensive, borrowing funded stimulus which would not only boost growth in the short run but could easily lead to lower debt/GDP ratio in the medium run.

The recent pick-up in growth cannot be seen as a confirmation that the government were right all along. They aimed for a rebalanced, steady and smooth recovery. Instead we had the best part of three years of economic stagnation followed by a recovery which is just as unbalanced as the growth we experienced pre-crash.

Earlier this week, I tried to explain the recession and recovery using a motoring analogy. I concluded that the crash was not caused by reckless driving but by problems with the car itself.

Our economy has serious problems – it is too dependent on consumer spending that is often debt funded, investment is too low, growth is too concentrated in too small an area and in too few sectors, the rewards from growth have increasingly been captured by those at the top, decision making is too short term and for too long the state has been left to pick up the pieces and paper over the cracks.

The symptoms of these problems can be found in the current squeeze on living standards. Growth and living standards appear to have disconnected with the macroeconomy picking up but real household disposable income per head continuing to fall or flat line.

We should always remember that the great wage stagnation began a good five years before the crash.

So where does this all leave policymakers?

The Government currently have no real answer to the living standards squeeze. In effect they are still papering over the cracks rather than tackling the problem, but whereas the last government tried this through targeted tax credits they simply cut or freeze a few token taxes (whilst also undoing much of this by raising VAT).

By contrast the opposition at least seem to understand that we face bigger problems than simply boosting growth or reducing the deficit.

Whether one calls it ‘responsible capitalism’, ‘predistribution’, ‘economic reform’ or ‘rebalancing’, they are outlining an agenda that is about fundamentally shifting our national business model towards a higher waged, higher skilled, higher productivity path.

This is an ambitious agenda but perhaps a much harder to explain one.

The tools used – whether through spreading the living wage, reforming training, reforming banking, industrial policy, changes to corporate governance arrangements, better use if public procurement or rebuilding some sector machinery – are more about building institutions than direct intervention. You don’t reverse 30 year trends in one parliament nor can you fundamentally alter how an economy works in one Budget.

Some people seem not to grasp this.

In February this year, Ed Miliband made one of the most thoughtful speeches on the economy I have heard from any major politician.  At its core was an argument about changing the way our economy works but what grabbed people’s attention was some fiscal tinkering around the 10p tax rate.

We seem so used to politicians, of all parties, simply papering over the cracks that when one argues we need much bigger reforms then most of us just ignore that.

For what it’s worth I think the economic reform agenda represents the surest, most sustainable way to generate steady growth, to protect and increase living standards and ultimately to deal with the deficit.

The big idea here is the direction of travel and the ambition not the individual policies. Each alone (whether extending training levies across sectors that want them, setting up a proper well capitalised SME and infrastructure bank, extending the living wage, changing corporate governance as outlined in the Cox Review, establishing regional banks, etc, etc) might not sound like much, but this a case of the total being more than the sum of its parts.

Take as an example the UK’s low level of investment. Setting up a British Investment Bank would help, setting up regional banks would also help, as would corporate governance reform to encourage more long-termism. There is a role for the government to directly fund more capital spending. Each of these by itself is a small step in the right direction, taken together they are a serious plan to increase investment levels.

Too many people seem to be focussing on the trees and completely missing the woods.

3 Responses to The Political Debate on the Economy

  1. Jayarava
    Aug 21st 2013, 2:42 pm

    Well, that about covers what the issues really are. I think the debate is simplified to the point of idiocy by the role of spin doctors communicating with punters/voters. The voters want a simple black and white choice which the spin doctors provide. Clearly in the last election they were not entirely convinced. But the same strategy still applies.

    Good news about Ed Milliband’s pre-election speech. However, as Ann Pettifor recently reminded us, George Osborne made a similar speech in 2010, just before he got elected.

    “Before becoming chancellor, George Osborne provided a sound analysis of the British economy. In his Mais Lecture of February 2010, he said: “The overhang of private debt in our banking system and our households weighs heavy on future prosperity.” A new model, he announced, rooted in more investment, more savings and higher exports, would require “new policies and new institutions”.

    And what we got was… well, what we got, not what he said we needed.

  2. Andrew
    Aug 22nd 2013, 10:57 pm

    Jayarava I’d absolutely right. EM has to work out how to break away from the highly polished but highly wrong PR nonsense that gets spun out of the coalition’s media machine and excitedly given additional momentum by the right wing press. I’m not at all sure how you do that and how you avoid being dragged down to the level of the Daily Mail while at the same time explaining what is really going on and what really needs to happen. An impossible task? I hope not.