Beyond false alternatives

Growth versus austerity is a tired debate. Labour must offer something better, argues Anthony Painter

Would you like cake or death? Er, cake please.’ This is Eddie Izzard’s take on the use of extreme alternatives in order to win an argument. So it has gone with much of the European discourse on the economy, including in the UK. Would you like austerity or growth? European electorates are responding, ‘er, growth please.’

The problem with the politics of false alternatives is that it catches up with you eventually. Feast on too much cake then, but, while you may not quite court death, you could become very ill. In these austere times, however, a slice of cake would be very welcome. Our choice, though, is not growth or austerity; it is a case of how to pursue growth while ensuring that the fiscal position is significantly improved. If we accept the very low-bar definition of austerity that has taken hold – cutting spending and increasing tax – the sensible course is growth and austerity.

Quite simply, there is not a likely pathway to fiscal balance by relying on growth alone. HM Treasury forecasts growth of 2.1 per cent from 2013 and yet, despite a discretionary fiscal consolidation of £147bn by 2016-17, only in that year will the cyclically adjusted current budget return to balance. It is perfectly reasonable to argue that a different set of policies would achieve more growth, earlier, but there will still be an enormous gap to fill.

So ‘austerity’ is with us for pretty much all of the rest of this decade whether we like it or not. It seems likely that the coalition will continue to fall short of its growth targets and so even hitting balance in the cyclically adjusted current budget by 2016-17 seems a tough ask. That means a Labour government elected in 2015 will be facing a series of tough choices. Growth eases these choices somewhat but does not eliminate them. ‘Let them eat cake’ is not a sustainable political argument – a reckoning will come sooner or later.

But austerity alone is a dismal political argument, devoid of all hope. Our collective future cannot just be about sorting the mess of the last economy. It has to be about building a new one. Labour has to offer hope of a better future or it has no point and no purpose.

Instead, there is a desperate need for a new national mission. The Tories for their part deploy the rhetoric of rebalancing while, in fact, simply wishing to return the UK to its pre-crash economy with all its imbalances. If they thought for a minute they could get away with implementing the agenda outlined in Adrian Beecroft’s report on ‘red tape’ they would. Such is the intellectual void at the heart of the Conservatives’ economic thinking they cannot seem to get beyond deregulation and tax. Meanwhile, Germany, China, South Korea, the USA, Brazil and India are building the economies of the future.

While the coalition’s deficit-reduction plan might well be too far, too fast, of greater concern is its general direction. In dealing with the fallout from the crisis, Labour can propose investment in the economy in a way that helps Britain avoid future calamities and creates more wealth. There is no reason why there cannot be a more sensible approach to borrowing in order to invest. The nature of investment deserves greater attention too – housing, skills and schemes to reduce youth unemployment all have investment characteristics and should be treated as such.

So it is not just about roads and the like; it is about marketable skills and jobs and homes too. The advantage of these investments is that the tap can be turned on relatively quickly. Increasing borrowing to finance investments by £10bn or so would not be expected to harm our medium-term fiscal position as the Institute for Fiscal Studies has demonstrated.

Additionally, fiscally neutral stimulus is also possible. The Social Market Foundation has, for example, made the case for reducing tax relief on pensions for higher-rate taxpayers and shifting those resources to investment. There are also investments that could be promoted by government without additional expenditure. Why on earth has the UK’s 4G spectrum auction not yet taken place? Billions are ready to be invested by private companies in this new network, which has all sorts of positive economic spin-offs.

Creating the platform for current and future growth is, though, not sufficient. How will people experience the benefits of growth? In this, wages are key. Better real wages mean more demand, a greater incentive for businesses to invest in people, less need for individuals to borrow and a better standard of living. Data from the Organisation for Economic Cooperation and Development has shown that one in five British workers is low paid – four per cent more than the OECD average. Over the last 30 years wages have fallen by around five per cent as a share of GDP.

Regional living wages are one way of reversing these trends. Research by the Resolution Foundation and IPPR has shown that the impact on the average wage bill ranges from 6.2 per cent for bars and restaurants to 0.2 per cent in banking. Bars and restaurants are pretty immune from international competition. What is more, their consumers are often their producers too – if people have more cash in their pocket, they may visit the pub or the local restaurant more regularly. There is a collective action problem. Labour should consult with employers about the pace and nature of implementation but wage levels should be addressed.

Outside traditional industries and the public sector, collective bargaining has collapsed. This is a major institutional change that occurred as the economy shifted from the industrial to the post-industrial age. This has left a structural imbalance between low and medium wage-earners who lack power and the highest paid who can extract ever-increasing market rents or rely on profits for their incomes. Better worker representation is fine but is likely to be only a weak countervailing force.

Labour could think about how a meaningful dialogue at a sector level can take place to readdress the balance in favour of wage-earners. New institutions to enable collective action on ages, skills, productivity and even welfare might form part of a capitalism with a better balance of power.

Finally, finance and high-growth potential business should be brought into closer proximity. There is a missing layer of institutions to supply debt and equity finance, often in partnership with the private sector, not simply to start-ups but to those firms which are entering a growth phase. The Breedon report recommended large firms financing their suppliers out of cash reserves, promotion of peer-to-peer lending and an agency to coordinate government lending to small- and medium-size enterprises. This seems sensible – creating institutions to underpin growth.

New investment, better wages, and new institutions to support growth are more than an economic programme. They constitute a national mission. It involves learning from the mistakes of the past, dealing with them but not sacrificing our future. This mission is to build a new middle class and support workers across the income spectrum. It will shift power away from those who have too much to those who are left without. Labour must show savvy in responding to crisis but also argue for something beyond. False choices will fool few; real change will benefit many.

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Anthony Painter is a contributing editor to Progress. His new book Left Without a Future? Social justice after the crash is published by Arcadia Books in July

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Photo: Eddie Izzard

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Comments: 2...

  1. On May 30, 2012 at 2:01 pm my little runway responded with... #

    is it a bird is it a plane is it a uturn ?

  2. On June 3, 2012 at 4:36 am mickelmas responded with... #

    What you are doing is presenting a “middle-of-the-road, non-commital, compromising” solution typical of bland journalists lacking both expertise and courage. The solution to our (and other nations’) economic ills is not “austerity v growth, heads v tails, state v private” etc: it is about pragmatism v ideology, financial master v servant. The “austerity” measures that lay at the heart of the thinking of Merkel, Osborne and Legarde have not only shown to be disastrous but, more importantly, they expose the ideology they share of using recession as an economic tool to oppress the working classes while empowering capitalism. One doesn’t have to be Einstein to see government initiatives to “ease” ‘firing rights’ as a move to re-introduce the Victorian “values” of serfdom so envied by Thatcher. Like Labour’s front bench you lack the backbone to condemn outright this government’s austerity programme. Claiming “we have to seriously cut public spending but at a slower rate than the coalition” is a pathetic political ploy and only buys into the “austerity ideology”. What Labour should be promoting and selling is the concept of “defence against an economic enemy”. Rather than sacrificing the innocent working class on the altar of financial markets we should advocating measures that first and foremost defend and protect our standards and rights and only when these have been guaranteed should we look to addressing international obligations.

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