From the TUC

The IoD should be careful what it wishes for

11 May 2011, by Guest in Economics

I’ve been at the O2 in Greenwich today, to speak to the Insitute of Directors (IoD) annual convention.

I always admire the way the IoD doesn’t pussy-foot around. They’re very clear that they don’t just back the spending cuts, but want more of them – and want them more quickly. But in their desire to see the deficit tackled in this way, they should be very careful what they’re wishing for.

The deep and rapid spending cuts are not just slicing away at the public sector, but doing big damage to the private sector too. The medicine doesn’t just taste nasty, its side-effects are making the disease worse too.

Public sector workers and their families are the IoD’s customers too. With incomes frozen and fears for their jobs they’re cutting back. It’s no wonder consumer confidence is collapsing – Just look at how the retail sector sees its prospects.

And we shouldn’t forget that one of the biggest customers for Britain’s private sector is the public sector itself. The state spends £236 billion on goods and services from British business – more than the entire public sector wage bill. As this is slashed, good companies in every part of the economy are suffering the consequences. In turn their staff feel the squeeze, and this does even more damage to consumer confidence.

For the government’s plans to work, the private sector needs to generate jobs faster than it has done in living memory to absorb the million or so jobs likely to be lost from the direct effects of spending cuts.

Yet one good thing about this recession was that fewer jobs were lost than might have been expected from the GDP figures. This is because many companies – often working closely with their unions – decided to try and hold on to skilled staff to make recovery quicker and easier. That was undoubtedly good news, but it means that many companies can grow without taking on much in the way of new staff.

If we look at the small print of the Office for Budget Responsibility’s report on the budget its figures for employment growth depend on households taking on more debt and borrowing more. Frankly I simply don’t see that happening. But it also says something rather profound about the direction of government policy. I don’t see large scale debt as a good thing in itself. But simply transferring it from state to household is a conjuring trick, not an economic reform.

What’s worse is that the net result of all this pain looks less and less like a cure for the deficit. The National Institute now say that weak growth will hit the tax take and public sector net borrowing will fall only to 3.6% of GDP in 2015-16, rather than the 1.5% the government has pledged.

So it’s beginning to look very much like the government has taken a kill or cure gamble with the odds increasingly against recovery.

Instead we all need to talk about how we get our economy moving again. Sometimes we in the trade union movement don’t say it often enough or loud enough, but Britain needs a thriving, successful private sector. What the IoD’s member companies do creates the wealth that pays for our public services – an economic fact of life we forget at our peril.

So what’s the alternative? I want to make one thing perfectly clear – the TUC aren’t ‘deficit deniers’. We know that borrowing £400 million a day is not sustainable. For us, what matters is what works. That’s why we need a Plan B based on jobs and growth, keeping people in work and keeping tax revenues flowing. As economic history has shown, that’s the best way to get deficits down in the long run.

First, we need a more sensible timetable for deficit reduction, because Britain can currently finance its debt at affordable rates. Second, we need a greater role for fair taxes, because those who caused this mess should make a proper contribution to clearing it up. And third, we need a new financial transactions tax on the banks, because we need to curb excessive speculation in the City.

None of this will hinder our competitiveness. It’s not about putting burdens on ordinary businesses or raising costs for UK plc. It’s about fairness. Ensuring the banks and bankers who caused this crisis cannot escape its consequences.

And there’s one key change that the IoD probably won’t immediately identify with. It may sound counter-intuitive to company directors, but I believe it is in the long-term interests of their businesses. And that’s to pay their workers more.

Over the past three decades, the share of GDP going to workers’ wages has fallen from 65% to 53%, with those in the middle and at the bottom hit hardest. At the same time, the proportion going to profits has risen sharply.

So what, directors might well say – that’s what every business leader would want. But think about it this way. As wages have stagnated, debt has soared. And that’s bad for all of us.

In Britain, household debt more than trebled between 1980 and 2005. As incomes are squeezed further, household debt in this country is predicted to reach over £2 trillion by 2015 – an albatross around the neck of our economic future. Unless workers see their pay packets growing, we won’t be able to build sustainable consumer demand.

And it’s not just unions who are sounding the alarm. Ben Bernanke, the chairman of the Federal Reserve, has urged corporations “to meet demands for higher wages from workers”. And former IMF chief economist Raghuran Rajan has said the primary cause of the global financial crisis was the growing wealth gap between a tiny financial elite and everybody else – with ordinary workers forced to borrow dangerous amounts to maintain living standards.

So rather than wishing for sharp spending cuts, now is surely the time for a fundamental change of direction. To build a fairer, stronger economy, to nurture demand based on wages not debt and to get the incomes of ordinary workers rising again. Only that will let us make the decisive break we need from the catastrophic failures of the recent past.