If anyone can be expected to know the price of things, it is of course Andrew Bailey. You may recognise him from your wallet or purse – as the Bank of England’s Chief Cashier, his signature is on all of our banknotes. But Bailey’s advocacy of fee-charging accounts seems to be based on some rather dubious logic. And it seems certain that any such move would reverse some of the successes of the financial inclusion agenda in recent years.

In fairness to Bailey, his objective is to enhance the stability, transparency and honesty of financial transactions. We already pay for current accounts, argues Bailey, through a series of more discrete charges. But if we started to pay a small, monthly fee up-front, would banks reduce, for instance, the high penalty payments that can result from going overdrawn? We also pay, in a more roundabout way, through the higher cost of other services, like bank loans, which is used to ‘subsidise’ free banking – Bailey thinks this kind of service might also be discounted following the introduction of monthly fees. On both counts, it remains to be seen.

The most direct way in which we pay for current accounts is of course through ‘interest foregone’. Interest is technically what the banks pay us, for lending them our money, but by offering lower interest rates on current accounts than on most other forms of banking, they are taking a bit of a rebate in order to cover their cost. In fact, the Vickers Commission recommended that banks explicitly tell us about the amount of interest we are hypothetically forgoing in this way. Andrew Bailey’s proposal goes much, much further.

Perhaps his most controversial argument is that, free from the burden of subsidising current accounts, banks would no longer feel the need to mis-sell products – Payment Protection Insurance being the best recent example – in order to make a profit. This has angered some commentators, such as The Guardian’s Phillip Inman:

Maybe he should explain his thinking to a judge. His defence of banks would be like a pickpocket saying he was forced to steal wallets because he was denied other sources of income. In his speech, Bailey seems to accept the industry argument that they should make mega-profits. He just wants them to do it in a more legitimate and sustainable fashion. Yet they should forget about mega-profits. Never again should they be seen as vehicles for shareholders to make their fortunes.

Inman’s reference to banks’ profits points towards another highly controversial aspect of Bailey’s argument, especially in the current political climate; that is, that we should simply accept that banks can and should make significant profits. If so, then he is probably right to say that the way in which they make profits should be as transparent as possible. But it is equally plausible to argue that financial products like current accounts are, in a financialised society, a basic need that it would be virtually impossible to function without. According to this alternative argument, although financial institutions like banks of course have to be sustainably financed, it should not be forgotten that they are the servants of the ‘real’ economy, and therefore duty-bound to offer things like current accounts for free (more or less). That this bargain does not quite work perfectly in practice does not mean we should rip it up entirely.

The status of financial institutions as our servants was underlined by the introduction of basic bank accounts (BBAs) in 2003, as part of the financial inclusion agenda. BBAs allow the deposit of wages and benefit payments automatically, direct debits to pay bills, and withdrawals at cash machines. But they have no overdraft facilities or cheque books, and limited debit card facilities. They were designed to help very low income customers, who banks were traditionally reluctant to offer services to. BBAs have already been undermined by branch closures, the growth of fee-charging cash machines, and the withdrawal of some providers from the BBA market. Would BBAs be exempt from monthly charges? It seems unlikely the banks would agree to this, in fear of customers (perhaps irrationally) switching to BBAs as a result. The introduction of charges could therefore leave accessible banking in a perilous state.

Specifically, three hours ago, Faisal tweeted:

“lessons from Germany” debate is hilarious. TUC came out with report on Deutsche social dem heaven. The IEA portrayed it as Beecroftland

— Faisal Islam (@faisalislam) May 24, 2012

I’m not sure we quite described the German model as heaven but, to be fair to Faisal, it’s hard to be nuanced in 140 characters. Our report was a snapshot based on visits to some major companies, in Germany and the UK. Those companies were Volkswagen, Siemens, ThyssenKrupp, BASF, Airbus, Bentley (which is owned by VW),  BMW and Roballo Engineering (which is owned by ThyssenKrupp). All but one were large companies, they all took on apprentices and they were all in those particular industries that Germany does well. So it was no surprise that Germany came out of the report very well. However, after our recommendations, we endorsed the German union IG Metall’s call for a minimum wage in Germany, because whilst 20% of German workers are union members and 60% are covered by collective agreements, that means that 40 per cent have no union defending their pay and, surprise, surprise, some of the most vulnerable in German society are among that 40%.

But what really impressed us about Germany was the Social Market economic model. Employers and unions that we spoke to in Germany defended it and it did seem to be a model that bound the company together. Where it operates (and it doesn’t operate everywhere) it creates a climate of fairness and trust. Workers voices are deemed welcome and necessary and, whilst unions and management still know how to have a fight when they feel the need, they have a joint commitment to the success of the company. As Martin Rosik from Volkswagen told us: “Here you don’t have the classic understanding of what is whose role in the game”.

Compare that with the UK. Earlier this week, both Ed Miliband and Nick Clegg addressed the Sutton Trust. At the forefront of both their minds was the issue of social mobility. The difference between the two, according to Andrew Grice in the Independent, was that whilst Nick Clegg rejected the idea that the solution was to redistribute income, Ed Milband said government could not improve social mobility without tackling inequality. There was no denying the inequality, simply a difference of opinion about how important it is to social mobility. I think inequality is very important, both to social mobility and because I think inequality is bad in and of itself. I’m not sure this would even be a debating point in Germany.

I haven’t read the IEA report that Faisal mentions, but if works council members on supervisory boards, influencing company strategy, is Beecroftland, I’d happily sign up for some of that.

As Fact Check has noted, this is a claim the Prime Minister likes to repeat, even though it has been disproved a number of times; today’s figure simply updates similar data he quoted last year. This is surprising, because a closer look at the relevant statistics reveals a story that is less flattering to the government.

The Office for National Statistics publishes employment figures broken down by sector – the Public Sector Employment Statistics – quarterly, not monthly. The election took place in the middle of the second quarter of 2010, which ran from April to June. And it is true that in latest figures – for the final quarter of 2011 – private sector employment was 634,000 higher than it had been in the first quarter of 2010. Public sector employment was 381,000 lower.

But let’s look at the figures for each quarter and how they change:

That extra 314,000 private sector jobs in the second quarter of 2010 is important to the argument here. Without it, the government’s private sector job creation total falls to 320,000 – less than the 350,000 public sector jobs lost.

Fact Check have had a great deal of fun with a straight face, trying to work out how many of the 314,000 jobs were created in April and early May of 2010 and how many in late May and June. But of course, the government cannot plausibly claim responsibility for any of the increase that took place that quarter – if the change had been in the other direction we can be sure they’d have blamed it on Gordon Brown.

Why does the PM continue to draw our attention to figures that actually highlight one of his government’s failures? It’s a bit of a conundrum – any suggestions?

Each month, the Bank of England publishes a summary of the reports on business conditions from their agents in the regions and nations of the UK (more on the agents here). There are dozens of business and economic surveys these days, but this is one of just two or three that cannot be ignored because they tend to be proved right. (Or, as the Bank puts it, they often “have a high correlation with subsequently published ONS data”.)

As is often the case, today’s Agents’ Summary  is a bit of a mixed bag, but some of the measures I pay particular attention to look pretty dull. One is investment intentions (planned and possible spending over the next 12 months) which are important because investment is such a key influence on the economic cycle. Today’s report shows that the agents expect investment only to grow slowly, and it looks as though the improvement earlier in the year may have been cut off:

The summary characterises this as “further modest increases in capital spending over the coming year”, which sounds fair enough. Its yet another indication that we’re unlikely to see an investment-led recovery this year.

The other element I pay particular attention to is what the agents tell us about businesses and employment. The headline employment statistics have been looking good for six months, with employment rising and unemployment gradually coming down. But, as Duncan has pointed out, if the labour market was really tightening you’d expect to see real wages rising, when in fact they’ve been headed in the opposite direction. You’d also expect to see more employers having difficulty recruiting the right staff, but there’s no sign of that:

The run of better employment results may be short lived in any case, going by the survey’s results for employment intentions:

As the summary puts it, private sector employment looks likely to be “broadly unchanged over the next six months.” Given that the OBR expects public sector employment to fall 110,000 between the first quarter of 2012 and the first quarter of 2013 it would be brave to forecast anything other than a return to rising unemployment.

The Agents’ reports may err on the optimistic side. Today’s Industrial Trends survey from the CBI reports that manufacturers’  total order books are down with firms “anticipating that production will be broadly unchanged over the coming three months (a balance of -3%)” – which would represent a slowing down from recent results. The Markit Purchasing Managers’ Index for manufacturing results at the start of the month also showed manufacturing growth slowing down; (but the Index was still positive, and it is worth noting that the Services PMI results showed “solid growth“.)

Pat neatly sums up the state of British manufacturing. He says: “If we want a basic scorecard on manufacturing it would be that we make less than we once did, but more than we think we do.” Why do we make less? Pat correctly highlights the biggest wave of globalisation in human history and is right to point out that, with the exception of Germany, almost all other developed countries have lost some manufacturing capacity to Asian tigers to the East and to China in particular. What he doesn’t say is that during this time (and, sadly, on his government’s watch) the rate of job losses in manufacturing was much sharper in the UK than in comparative European countries. France, Spain and Italy all lost fewer manufacturing jobs than we did. I recognise that Italy and Spain have problems at the moment, so I understand that my last sentence may be interpreted as saying that the UK should have taken decisions which could have caused us similar difficulties. But the problems of Italy and Spain are complex and I don’t think it could be argued  that if the UK had pursued a more balanced economic policy, with less emphasis on the City and more on industry, we’d have a weaker economy than we have now.

Pat correctly points out that as productivity grows, employment per product will fall. This explains the continuing success of the UK automotive industry, even though it employs far fewer people than it did in the 1960s and 1970s. But whilst that provides an explanation, it leaves us with a problem, which Pat doesn’t tackle. How do we create jobs for the group of people that sociologists used to call the “skilled working class”? I think a modern manufacturing policy must focus on specific industrial sectors and there are ways that we could identify those sectors. I’ll say more about that below but, in the meantime, I think we should specifically focus on those technologies and industries that could provide decent, well-paid jobs to those youngsters who leave school but do not, for whatever reason, go to university. Economic and industrial policy must be for a purpose, or a number of purposes: this is surely one of them.

Pat talks about the specific issues affecting energy intensive industries, which the TUC has also done a lot of work on. He discusses the role of SMEs and mid-caps. The TUC talked about small and medium sized companies in our recent report, ‘German Lessons’. We made the case for a British version of the German mittelstand, acting as suppliers to large, world-class, exporters. That’s an ambitious target, but we are struck that UK policy debate focuses on either small, often micro-companies, or on large companies such as Rolls Royce. Medium sized firms barely get a mention and the need to grow small firms into medium sized companies even less so. Some firms are naturally small, but where a company could grow into a medium sized player, it should be encouraged to do so. I think Britain has indulged a “small is beautiful” mentality in this debate, seeing small firms as a good in themselves, as if they are a testament to a healthy capitalism. We need to be more ambitious here.

Pat discusses Sheffield Forgemasters and (quite rightly) resists the temptation to take a cheap shot at the Lib Dems, instead making, for me, one of the most important points of his report: the relationship between government and risk. On the issue of specific financial support for certain companies, in this case in the form of a loan, Pat says: “the least risky response would be to say no every time”. He points out the inevitable, that not every decision taken to support a company will work out, before adding: “But it is better to be trying to do so, succeeding sometimes and perhaps not at other times, than not be trying at all and letting key opportunities pass Britain by.” A few years ago, I wrote a report for the TUC about industrial policy in France. I was told that the French expect their government to support industry and recognise that, whilst this will fail sometimes, leading to a waste of taxpayers money, it is better to try overall. This is surely correct. Of course, government should not be frittering taxpayers’ money around, but there is role for reasonable risk in the industrial policy debate.

 Pat makes common sense points about skills and the image of manufacturing. He goes on to say – and is absolutely right to do so – that government needs to be an active player. Taking on the tired argument about picking winners, he says: “Picking winners isn’t the problem. It’s backing lots of losers which is the potential problem.” As he says, there must be conditions which determine how and when government intervenes. The TUC has long argued that the UK needs to focus on those strategic sectors which are or could become world leaders, capable of competiting in the age of globalisation, for years to come. That begs the question: how do we identify such sectors? ‘German Lessons’ suggested that we look at the work of the engineering giant Siemens and its focus on global mega-trends. We can try to match the way the world is going with the UK’s capacity to build the products that will be needed in the process, whilst always recognising that there are wider issues affecting industrial policy, including the need for job creation. However, whilst we must be as scientific as possible about identifying our strategic sectors, this will be, in part, a political decision. Germany is successful in the automotive sector because its government has focused on that as a key sector. I know the free-marketeers don’t like this, but there is a role for politics in industrial policy too.

Pat is correct to defend the need for a Department of Business (although I would still prefer a Department of Industry: sometimes, the name matters!). I also agree with his call for a British Investment Bank; expect to see more from the TUC on this issue later in the year.

I have saved the bit I didn’t like until the end. Discussing Jaguar Land Rover, Pat mentions the “appalling industrial relations” of the motor industry in the 1970s, before adding: “If there was an image that defined the industry then it would probably be a factory car park with thousands of workers putting their hands in the air to vote to go on strike”. That’s certainly one image, although there are others. But if 1970s industrial relations were the finest hour of none of us, then perhaps Pat could have balanced this with a mention of the very constructive work unions have been doing to underpin and strengthen so many manufacturing sectors since then, especially during the economic downturn. Pay freezes and shift closures caused real hardship to many of our members, yet they endured that hardship to protect their jobs and the jobs of their colleagues. Just last week, when Vauxhall committed to the future of car production at Ellesmere Port, the Business Secretary, Vince Cable, had the grace to say: “The unions and the Government … played a significant role in demonstrating to GM’s board that Vauxhall has a very flexible workforce…”

In ‘German Lessons’, the TUC makes the case for a Social Market Economy in the UK. We highlight the positive role that German unions play on works councils and supervisory boards, protecting their independence and defending their members, but working for the good of the company. We believe the UK could learn from this model, which is part of a more balanced, more equal, fairer and more prosperous economy. Sometimes in the UK, we talk as if the only stakeholders in industry are the management and the shareholders. The TUC rejects this approach. In our view, just as important are the workforce and the wider community, in areas such as Pat’s constituency of Wolverhampton. Unions have a positive role to play in the future of manufacturing. It would have been good if Pat’s report had said as much.

The IMF says plan B should involve the Bank of England cutting interest rates from their already record-low level of 0.5% and chucking some more newly minted money at the economy through the process known as quantitative easing. Only if that fails to do the trick does the Fund think the chancellor should resort to fiscal policy – decisions affecting tax and spending – to boost demand. As far as the Fund is concerned, deliberately increasing borrowing in an attempt to stimulate demand is plan C not plan B.

The IMF is advocating a monetary stimulus first, followed by (if that doesn’t do the trick) a fiscal stimulus.  And their preferred form of fiscal stimulus would be an increase in investment funded by cuts/tax rises elsewhere. In other words, the balanced budget multiplier championed in the States by Robert Shiller and in the UK by the SMF’s Ian Mulheirn.

All very interesting, but I was somewhat surprised that the IMF argued for monetary stimulus first over a fiscal stimulus.

I’d argue that a monetary stimulus can certainly be helpful but at a time when the banks aren’t lending and the monetary transmission mechanism is broken there is always the worry that it fails to address the challenges in the real economy whilst boosting activity and profits in the financial sector (Aditya Chakrabortty’s column in today’s G2 is very good on this phenomenon).

But at least the IMF has implicitly, by recommending one over the other, recognised that monetary and fiscal stimulus are not the same thing (even if I disagree with them on which is more useful in the short term). This recognition is sadly lacking from much of the current government’s rhetoric.

David Cameron for example, speaking in Davos earlier this year argued that:

while we may be fiscal conservatives, we are monetary radicals injecting cash into the banking system and introducing credit easing measures to make it easier for small businesses to access finance.

George Osborne is equally fond of arguing that his tight fiscal policy allows the Bank of England room for monetary stimulus. The government seem, again implicitly, to argue that monetary and fiscal stimulus are close substitutes for each other. It doesn’t matter if the government is cutting back as the Bank can extend support.

I’m afraid I don’t really agree with this. Leaving aside my doubts on the effectiveness of a conventional (and QE is the ‘new’ conventional) monetary stimulus at a time when the financial system’s operations are impaired, fiscal and monetary stimulus impact upon the economy in different ways.

As Philippe Aghion (a Harvard professor and advisor to President Hollande) has recently argued the two are not really substitutes, drawing on work he has carried out for both the OECD and the Bank of International Settlements . He notes that:   

Countercyclical fiscal policy enhances growth more in sectors that are more dependent on external finance or in sectors with lower asset tangibility

…

Countercyclical monetary policy enhances growth more in industries that are more dependent on finance and in industries that are more dependent on liquidity

In other words, even in ‘normal’ times fiscal and monetary policy will impact upon different sectors in a different way.

Yes, any active policy to increase demand is to be welcomed at the moment – but we shouldn’t pretend that monetary easing will automatically offset fiscal tightening.

(And this is before we start talking about different types of fiscal stimulus such as investment, VAT cuts, etc, etc)

As previously noted, the TUC has started tracking the different rates of inflation faced by the poorest 10% of households and the richest 10%. (The post linked to explains the methodology).

As can be seen in the chart below, the poorest 10% have faced higher inflation than the richest since August 2011. This is because they spend a greater proportion of their income on essentials such as food and utility bills, items where prices have been rising faster.

As headline CPI has now fallen back to 3.0%, the Bank of England is once again meeting its target of keeping inflation within 1% of 2.0%. This means there is no need for letter from the Governor to the Chancellor explaining what has gone wrong and what steps will be taken to address this.

But as our analysis shows, the inflation rate for the poorest 10% is still running at  3.7%. Maybe Sir Mervyn should write them a letter to tell them what he plans to do about this?

Then, in the ‘Comment and Debate’ section of the Guardian, the always-impressive Mariana Mazzucato debunks the argument that growth can be brought about by “structural reforms”, such as cutting red tape or making it easer to hire and fire workers. Mariana points out that those companies which invest in new technology, human capital and R&D, and are located in countries where public spending in these areas is high, are able to produce more competitive and better value products. She also highlights that Scandinavia, with its large welfare state and stringent labour laws, has been crisis-resilient because it invests in innovation. Mariana laments the irony that German pressure for austerity, which prevents weaker eurozone nations from investing, stops those nations from doing the very things, like supporting R&D, vocational training and “greening” the economy, that have made Germany so successful.

A head of steam is developing, against austerity and in favour of growth, and it couldn’t have come too soon. The TUC will be debating this issue at our conference, ‘After Austerity, on 26th June and we are delighted that Mariana Mazzucato, along with such speakers as Dean Baker, Ha-Joon Chang, Robert Skidelsky and our own Brendan Barber, will be contributing. Register here and join the debate 

The NAO queried the cost-effectiveness of a tenth of the 219 projects endorsed by Ministers. However, the £33K average was in line with similar government schemes, and the RGF awards were appropriately targeted at vulnerable regions.

1,000 firms applied for funds, promising 328,000 jobs. A fifth succeeded. It’s worth looking at the NAO report, released on 11 May and buried under the day’s anti-austerity headlines in France, Greece and elsewhere.

The Coalition set up the £2.4bn Regional Growth Fund to encourage private sector enterprise focussing on “those areas and communities that are currently dependent on the public sector make the transition to sustainable private sector led growth and prosperity.”  The RGF was intended to help the private sector fill the gap left by public sector job cuts. The Office for Budget responsibility forecast that 710,000 jobs in the public sector could be lost between 2011 and 2017.

The Fund’s initial £1.4bn pot was allocated in two funding rounds (see table). A further £1bn was provided for in the 2011 Autumn Statement, with a third bidding round closing in June 2012. The £2.4bn budget is split between DCLG (80%) and BIS.

Bidders estimated that 64,000 of the jobs, around 20%, would be created or safeguarded directly, with the remaining 264,000, or 80 per cent, being indirect.

The government expects to agree final offer letters securing about 117,000 full
time equivalent jobs (providing work for at least 30 hours a week). However, the NAO says not all the jobs created or safeguarded, whether direct or indirect, will be ‘additional’. “Some would probably have been created or safeguarded anyway, because there is always a possibility that firms might have made the investment without public support, or would have found alternative support. Also, assisting one firm could generate a competitive advantage over its rivals, decreasing competition in the wider market.”

Taking these factors into account, the NAO concludes that the first £1.4bn of the RGF could “create, safeguard or support” the equivalent of 41,000 additional full time private sector jobs in the economy for seven years, including 13,000 direct jobs from
supported projects and 28,000 “indirect” jobs through supply chains and “knock-on effects in the wider economy”.

The Fund supports a wide range of projects, from automotive and business support and finance initiatives to ports, waste and energy infrastructure. Overall, the projects were more likely to be located in vulnerable areas of high unemployment and
“vulnerable to public sector job losses”, principally the North and Midlands.

£33K average cost per job. The average cost of each of the expected 41,000 net jobs created or safeguarded is £33,000 (range £4,000 to over £200,000). This is significantly higher than the £28,000 cost per job achieved by the Regional Development Agencies. The NAO is critical of the poor value for money of about a tenth of the approved schemes. The 27 least cost effective projects will average £106,000 per additional job. No Ministerial limit was placed on the cost per job.  “Making a significant number of less cost-effective awards reduced the cost-effectiveness of the Fund overall.”

Leverage. The ratio of private-to-public investment averaged around £6 of private investment expected for every £1 of public investment from the Fund. This ‘leverage’ ranged from similarly varies between individual projects and programmes, from less than £1 of private investment expected per £1 from the Fund, to over £19.

It’s too soon to say what the Fund’s overall contribution will be to rebalancing the economy in any particular region. If Minister’s heed the NAO advice on value for money, the combined £2.4bn RGF, including round 3, could eventually support 70,000 jobs. This assumes the Ministers sustain an average cost of £33K per job. The Fund could also leverage say six times that amount or around £14bn.

Green Investment Bank. It’s worth comparing the RGF’s achievements with the Green Investment Bank. The GIB has an initial £3bn capitalisation which, according to Budget 2011, will leverage an extra £15bn of private sector investment over the course of the parliament. This 5:1 ratio seems consistent with the leverage achieved by the RGF. However, the GIB is likely to lean towards capital intensive investments; for example, the first £100m tranche of its funds will be available to support bids for low carbon technologies from the energy intensive industries.

Welcome though the GIB’s £3bn contribution will be for the green economy, it is unlikely to match the RGF for jobs created.

A variety of factors both domestic (such as the hike in VAT) and global (a rising oil price following the Arab Spring) pushed inflation higher in 2011, but as different households spend a  differing proportion of their income on different items, the impact of rising prices has been far from uniform.

This means that as the poorest 10% of households spent a much greater proportion of their income on items such as food and utility bills which were bigger drivers of inflation in 2011, they experienced  inflation rates well above the published headline level.

As the graph above makes clear, since June 2011 the poorest decile of earners have been the hardest hit. By contrast in 2010 it was the higher earners who were most affected by rising prices.

Whereas the poorest 10% of households spent 43% of their income on household utility bills and food, the richest 10% spent just 20%.

It was been widely reported that the UK is going through a squeeze on living standards of historical proportions – the worst since the 1920s according to Sir Mervyn King – but what is less appreciated is how this has affected different family types.

Real wages have been falling for two years and are not expected by the OBR to start growing again until mid 2013. The fact that prices are rising faster than earnings has cost the median worker an annual £727 in real terms since January 2010 – 3.4% of their wages. And that’s before we take account of things such as changes to tax credits.

The Chancellor might like to say ‘we’re all in this together’ but the data is saying something quite different.

We’ll be updating these series throughout the year as the data becomes available.

Methodology: the inflation series were worked by using the Family Resources Survey to see how households spend their income and then comparing the ten expenditure categories to the published breakdowns of CPI. All of the data is available here.

Even those proposals that go in the right direction have too often been watered down so we have a green investment bank that is not a real bank and executive pay curbs that lack teeth.

What is worst is that ministers are wrapping up a real attack on rights at work as good for growth and employment. Those who opposed the minimum wage and rights for paid holidays are using the recession as a cover to introduce policies that they know have little support and that will be seen as nasty by most. There is no actual evidence that making work insecure does anything for the economy – easy fire will not lead to new hires.

This is no more than a bad boss’s charter that will make people insecure at work and will feed straight into lower consumer confidence.

Even where legal protections remain, the government is to undermine them by reducing inspections or making it far more difficult to take tribunal cases – which have been falling over the past year, contrary to claims from some business organisations.

The UK already has the second lowest level of worker protection among the 36 rich countries in the OECD, and the government has made it possible for employers to sack staff for no reason for up to two years from when they start. The government’s own surveys show that excess regulation is cited by only six per cent of small and medium sized businesses as a big barrier to growth. Their real problems are the depressed economy and difficulties with bank lending. 

This agenda is likely to be controversial within government. The lack of evidence that it will help the economy shows that this is driven by the hard-right agenda set out in the secret report by Wonga owner and Tory donor Adrian Beecroft. Those who opposed the minimum wage are using the economic crisis as an excuse to roll back modest employee protection.

In particular we will oppose lump-sum benefits in lieu of maternity pay and cuts to maternity rights that will particularly hit poorer mothers. ‘Protected conversations’ in which employers are free from legal constraints are deeply unfair to employees and likely to be unworkable in practice. Removing rights from staff in small businesses will turn them into second class citizens at work, and make it harder for smaller firms to recruit good staff.

Of course any modest increase in rights to request flexible working is welcome, but this should not obscure the fact that this government is taking the workplace backwards

Let’s get out there and enjoy this holiday, which we richly deserve. Perhaps the weather may not be the best ever, but if we are going to get depressed by the odd shower then we are probably living in the wrong country. There are plenty of things that we could this weekend indoors and outdoors, including visiting a number of local trade union festivals  (this is not just being “worthy”, the one taking place in Dorchester on Sunday afternoon is basically a mini rock festival) – and more traditional May Day events.

Turning back to those 1970s negotiations for a moment , one part of the May Day deal that has largely become lost in the mists of history was that 1978 was the first year when compensatory days were given when the Christmas and boxing day bank holidays fell at the weekend. This was  an important gain for working people. I can recall being quite disappointed soon after I started work when we knocked off on Friday on Christmas Eve and clocked on again at 8 pm on Monday morning. For those who are not abstemious, imagine having to get up at 6.30 AM after boxing day!

Because we are human our efforts at work will always ebb and flow. The restorative effect of time off  helps to explain why the extra bank holidays of the 1970s had no measurable effect whatsoever on the UK economy.

Most of the papers from Beyond Austerity are available here and are well worth a look.

I can’t really do justice to two days of discussions in one blog post (and another post specifically on banking and financial regulation will follow next week) but I thought it might be interesting to try and summarise the key points of what a European growth agenda might look like.

The general view (no longer at all controversial) was that austerity has failed in Europe – austerity kills growth, throws people out of work, drains confidence from the private sector, retards investment and often leads to higher not lower deficits. The social costs are often tragic and the political impact can be extremely severe.

There was widespread recognition that the main driver of the Eurozone crisis had been a balance of payments problem rather than a problem of excessive public spending/deficits. Indeed one participant remarked that it was tragedy that Greece had been the first country to run into serious problems – had it instead been Spain or Ireland (where public finances were in excellent health before 2008) then the causes of the crisis would have been much clearer. The narrative of ‘profligate periphery’ countries would have been harder to form and austerity would not have been the default cure.

The plight of the periphery countries (and in particular Spain, Portugal and Greece) was widely recognised. Austerity is killing their economies but they have little room for a fiscal expansion given the bond market’s concerns.

Given this situation the immediate short term steps required are:

Fiscal expansion where there is room: In a Eurozone context the key country here is obviously Germany. But Eurozone countries faced with low bond yields, external surpluses and relatively low debt/GDP ratios should be launching targeted, timely and temporary fiscal expansions aimed at boosting domestic demand. This would have important spill over effects into the Eurozone periphery boosting their exports.

Wage growth where there is room: Given the inability of countries to externally devalue by allowing their currency to depreciate then the burden of restoring competiveness falls on ‘internal devaluation’. Stripping away the econo-speak this means cutting real wages in the periphery. Leaving aside the social consequences the economic impact is also very damaging. The burden should instead be shared more symmetrically – rather than just hoping for falling real wages in deficit countries, Europe should be arguing for rising real wages in surplus countries – both to help expand domestic demand there and to provide a boost to the competiveness of deficit countries.

Balanced budget expansions everywhere. Even in countries without the fiscal space for a debt financed expansion, fiscal policy is not useless. Countries should launch taxation funded increases in public investment. If these taxes are levied on the better off with lower marginal propensities to consume then the multiplier of this expansion could be reasonably high.

ECB action. The ECB should act decisively in the short term to end soaring yields in periphery countries by intervening in the bond markets and placing a ‘yield ceiling’ on periphery debts. A credible commitment to act from the ECB could end the problem of soaring yields in hours. This isn’t a long term solution to the underlying balance of payments issues but is an important step in stopping contagion.

Expansion of the European Investment Bank.  The EIB should have its capital at least doubled (relatively cheap in the context of the current ‘bailouts’ of Greece, Portugal, Ireland, etc). This would allow around an additional €60bn annually of new lending. This should be concentrated in infrastructure investments and export industries in the periphery aimed at raising their competiveness  and supporting their balance of payments.

Eurobonds. In the medium term Eurobonds of some sort (pooling of Sovereign debt so that all members stand behind each other’s liabilities) are probably required but in the short run there maybe problems with implementation.  As a first step the EC should issue its own bonds (backed by all EU or Eurozone member states collectively) and use the proceeds to fund major investment and infrastructure problems. This would also have the effect of providing a new source of ‘safe’ assets to the markets.

Taken together this package has the real potential to stop the rot in Europe and allow people to start to look towards a recovery.

The ILO’s social unrest index is based on research showing that people care more about jobs and incomes than growth per se. Torres’ own analysis of the report lists the following points about the current employment outlook:

• the current mix of tight fiscal austerity and tough labour market reforms is not having the desired effect, but actually making matters worse in terms of jobs and incomes. In over 90% of countries that have implemented austerity, unemployment is above its 2007 level;
• austerity cannot succeed in creating employment in the short term. Real investment is being hit by the lack of demand, limited credit access and confidence is ebbing away;
• austerity has failed to reduce fiscal deficits significantly. Despite aggressive cuts, Southern European countries face roughly the same fiscal deficits as before, unemployment has increased disproportionately and thousands of small businesses have closed;
• ill-conceived labour market reforms carried out in some advanced economies – particularly in Europe – have exacerbated precariousness and inequalities, while failing to generate new jobs.

Torres says:

“It is simply unreasonable to carry on down a path that is so evidently failing to heal the economy and create employment. Labour markets worldwide are still in intensive care … there are some 50 million fewer jobs now than at the start of the crisis. In the meantime, around 40 million people enter the global labour market each year.

“To insist on a cure that is killing the patient is a folly we can no longer indulge in. Europe could take a more balanced approach which – unlike austerity pure and simple – has proven to work. … The mood in the streets is becoming increasingly hostile to the austerity approach.”

But the ILO report, subtitled Better Jobs for a Better Economy, maintains that there is an alternative: a strategy focused on growth and jobs, including reform of the financial sector so that it supports the real economy rather than vice versa, progressive taxation and public investment. The ILO estimates that with just a moderate stimulus, 1.8-2.1 million jobs could be created in just one year in the advanced economies. The ’job-rich growth’ that the ILO maintain would result would eventually deal with deficits without huge social dislocation and unrest.

Some commentators are loath to blame the government’s austerity programme for the stagnation of the economy over the past 15 months. Instead they point to factors such as the Eurozone crisis and an external inflation shock that depressed household incomes. Now of course the Eurozone crisis will have impact on UK exports – but there was little evidence of this in 2011 where net trade actually added to growth whilst the domestic economy contracted. Equally the inflation shock has certainly had an impact, but it seems clear to me that the government’s fiscal policies have also been a drag on growth.

Adam Posen recently argued that:

Fiscal policy, however, played an important role as well. Cumulatively, the UK government tightened fiscal policy by 3% more than the US government did – taking local governments and automatic stabilizers into account – and this had a material impact on consumption. This was particularly the case because a large chunk of the fiscal consolidation in 2010 and in 2011 took the form of a VAT increase, which has a high multiplier for households.

Some people seem to doubt this. They argue that UK government spending continued to rise in absolute terms in 2010 and 2011 and point that that there have been large cuts in state level spending across the United States. In effect they argue that UK and US policy was similar.

This is to miss the point. As Posen argued the UK tightened by 3% of GDP more than the US did. Fiscal policy is about more than just government spending and what has been key in 2010 and 2011 is tax policy. Austerity in the UK in this period mainly took the form of a rise in VAT, whilst in the US the ‘second stimulus’ pursed by Obama took the form of a cut in pay-roll taxes that boosted demand and put money back in workers pockets.

The results are seen not so much in the contribution of government spending to GDP growth but in consumption.

The chart below presents an interesting picture – a rebound in the US and a collapse in the UK.

It is certainly true that next year US fiscal policy is due to tighten sharply (although obviously this might be changed).  But in 2010 and 2011 there is no doubt that the UK and US were pursuing very different policies – one tightening fiscal policy and one stimulating the economy. The results are pretty clear.

This morning I mentioned the need for the economy to grow at about 0.8 per cent a year to keep up with population growth, otherwise per capita GDP will fall. The other issue is that we’re used to a certain rate of growth to pay for a gradually rising standard of living and to maintain employment. In the twenty years before the recession growth averaged slightly over half a per cent per quarter – even if we always avoided negative growth, sustained growth below this level will feel pretty cruddy. This afternoon’s chart tries to measure these gaps: imagine that the economy had continued to grow at 0.2 per cent a quarter, enough to maintain per capita GDP; the blue line measures how far short of that we’ve actually been. Imagine that the economy had grown at 0.5 per cent per quarter, the red dotted line measures how far short of that we’ve actually been.

The lower the line the worse our position. There’s nothing particularly original about this, its simply an attempt to show that just avoiding recession isn’t OK. There’s a strong chance next month’s revisions of the GDP figures will show that actually we managed to avoid a double-dip recession. If that happens, the usual suspects in the media will trumpet this as tremendous news for the government and a blow to all their critics.

It won’t be. Low growth may not be as bad as a reduction in GDP but it is still bad news. 

“Normal” growth for our economy is about 2 – 2.5 per cent a year and coming out of a recession we should be looking for about one percentage point more than that. As Duncan has pointed out, we need economic growth of about 0.2 per cent a quarter just to keep up with population growth: the last year and a half on this chart looks like stagnation but it feels like decline.

2011 is widely accepted as a bad year for the UK economy – it was characterised by low growth overall, falling domestic demand, a squeeze on living standards and rising unemployment.

But in many ways it was actually even worse than is widely acknowledge – GDP per capita (i.e. growth once we account for population change) actually fell.

The chart below shows the level of GDP per capita over the past decade and how it looks set to pan out (using the ONS population growth forecast of 0.8% per year and the OBR’s most recent GDP forecasts):

A few points leap out:

• GDP Per capita fell in 2008 and 2009 before recovery a bit in 2010 and then contracting again in 2011.
• GDP per capita is forecast to be flat in 2012. The OBR’s growth forecast of 0.8% is equal to expected population growth.
• GDP per capita will not reach 2007 levels until 2016 on the current forecasts.

To me, that last point really is crucial – in terms of national income per head we are already in a lot decade.

All of this helps but the weakness of the UK’s ‘recovery’ into perspective and raises interesting questions about what pace of growth should be regarded as a ‘success’.

GDP per capita grew at an annual average rate of 2.8% from 1993 to 2007 (i.e. between the 1990s recession and the Great Recession). To be on track to match that we’d need a quarterly figure around 0.7% tomorrow, a pace of growth the economy which would then have to match for the rest of the year.

If the economy could match the pre-recession rate of growth of GDP per capita, the impact would be dramatic.

As the chart makes clear, if the economy could experience ‘normal’ rates of growth rather the low ones forecast by the OBR then income per head would regain 2007 levels in 2014 – two year ahead of what we currently expect.  By 2016, income per head would be £1,607 higher than what the OBR currently forecasts.

Sadly achieving this growth at the moment seems unlikely, but the government shouldn’t be allowed to celebrate any weak growth we do get as a sign of ‘success’.

Mr Deputy Speaker, our commitment to reduce the deficit is keeping interest rates low.

In this Budget, we take measures to ensure that the benefits of those low market interest rates are felt across our economy.

And his Autumn Statement:

Those who would put all that at risk by deliberately adding to our deficit must explain this.       

 Just a one per cent rise in our market interest rates would add £10 billion to mortgage bills every year.       

 One per cent would mean the average family with a mortgage would have to pay £1,000 more.       

The BBC today:

Mortgage rates for new borrowers are continuing to rise.

At least 10 lenders, including some of the UK’s biggest, have announced rate rises in the past week for people taking out new deals.

Also, Bank of England figures show that the average two-year fixed rate deal,  with a 25% deposit, has risen from 2.9% last September to 3.45% in March.

I thought keeping interest rates down as the central aim of Treasury policy?