Miliband & Osborne’s Competing Visions
Most of the responses to Ed Miliband’s speech today will probably focus on his call for more competition in the banking sector (the broad outline of this policy was first announced in July 2012) but I think the introduction and sections before the actual policy call were more interesting.
Whilst a call to break up the big high street banks will generate headlines it was presented by Miliband as merely one example of a wider set of policies. The earlier sections of the speech fleshed out what a ‘one nation economy’ means in practice and repeatedly stressed Miliband’s desire for a ‘new economy’.
Reading through the text it brought to mind Osborne’s Mais Lecture of February 2010*. That speech too was about the need to move on from an ‘old’ and ‘broken’ economic model to a ‘new economy’. Like Miliband’s speech today it set out the broad aims of policy and gave a few practical examples.
I suspect today’s speech is best understood as his equivalent of Osborne’s 2010 efforts – it sets out the framework in which the opposition views the economy, the goals they want to achieve and starts to map out the path to getting to them.
What is rather striking is that many of the goals set out by Miliband in 2014 are rather similar to those of Osborne in 2010. But whilst the desired outcomes might seem broadly in line, the policy suggestions are very different.
In 2010 Osborne argued that the economic model of the past decade was broken. What was needed was a fundamental rebalancing of the UK economy – growth was to be driven by business investment and exports rather than consumption or government spending. Household debt was seen as a source of vulnerability that had to be lowered. Financial regulation needed to be tightened.
(Of course the recovery that we’ve got isn’t the one the Chancellor wanted. In many regards it looks more like his ‘old’ model than his ‘new’ one).
Most of these macroeconomic goals appear to be shared by Miliband – and indeed by the majority of economists.
The difference is in how the two think this can be achieved. Osborne thought that his new model would be built on the back of cutting the deficit, lowering the cost of capital to firms, a better set of ‘macroprudential’ regulations to control the credit cycle and supply side reforms that aimed to increase productivity.
In effect it was a conventional free market approach. The unbalancing of the UK economy (according to this analysis) was a result of the state being too large and corporate taxes being too high.
The idea was straight forward. Cutting the deficit (mainly through spending cuts rather than tax rises) would have two impacts. First it would free up resources for the private sector and second it would allow the Bank of England to keep interest rates low. Macroprudential regulation would prevent low rates from pumping up asset bubbles and instead help to ensure that we saw a rise in business investment.
Miliband’s approach is rather different. Whilst he also wants higher investment, better exports and less reliance on household debt he doesn’t thinking getting the state out of the way is the path to prosperity.
Instead he believes the economy needs structural reforms – more completion in some markets (energy and banking), more house building, an industrial policy, a new skills system, changes in corporate governance to encourage long-termism.
For Miliabnd achieving these aims means institutional reform of the way the eocnomy works.
Whilst Osborne could point to economists such as Reinhart and Rogoff who inspired his agenda, Miliband turns instead to the ‘varieties of capitalism’ school.
These are very different inspirations which point to different policy conclusions.
For Osborne, deficit reduction is the core of economic policy. Even if he no longer believes in ‘expansionary fiscal contraction’ (the notion that spending cuts would lead to faster growth in the short term) he still argues that it brings clear economic benefits in the form of lower interest rates which support the recovery.
To Miliband by contrast the deficit is a merely a symptom of wider economic problems. As he put it today “deficit reduction alone can’t fix our economy.”
I suspect this will be one of the core political battle grounds of the next 16 months. The Chancellor thinks that reducing the deficit (and actively shrinking the size of the state) is the best way to secure growth and lift living standards. The Leader of the Opposition thinks the economy needs wider reform.
*A speech that is really worth reading by the way. Whether you agree or disagree with the conclusions and analysis it was a very clear exposition of the then Shadow Chancellor’s thinking.