Consensus not the same as doing the right thing
Assessing Ed Balls' speech on economic policy
Though it is the call for a temporary cut in VAT making the headlines, Ed Balls' thoughtful speech today will reward more attention. It was welcome in that it addressed the differences in policy between Labour and the Conservatives.
His points about economic policy and his references to examples from the past echoed his Bloomberg leadership election speech last August. Indeed, Balls referred back to that speech as he sought to explain his thinking.
One of Balls' clear messages today was that following consensus about economic policy is not the same thing as doing the right thing. Here he referred to the UK's participation in the European Exchange Rate Mechanism, a system of managed exchange rates in Europe. There was a strong cross-party consensus that going in to the ERM was the right thing to do and most economists thought so too. It was thought that the exchange rate discipline would help control inflation. However, it proved a disaster and, as the UK economy suffered another recession, we had to bail out of the ERM ignominiously. Balls was working for the Financial Times at the time; David Cameron was Norman Lamont's special adviser. Today's political leaders have been here before; the more Osborne insists there is no alternative (as did Major and Lamont in 1992), the harder changing direction becomes even if the economy does not respond to Osborne's 'plan A'. The current plans put jobs and growth at risk.
Balls was also keen to emphasise that Labour made tough decisions on the economy and government finances when in government. The Darling Plan was demanding. Way before that, Labour paid down debt with proceeds from the 3G mobile phone licence auction. We stayed out of the euro. Going into the financial crisis, spending was not out of control, Balls stated, with net debt relatively low by international standards.
Should Balls' analysis prove correct, that will go some way to helping restore Labour's economic reputation. We could then see a scenario in which the chancellor is playing catch-up to Labour policy recommendations. However, we need to look ahead too, because Osborne's current fiscal rules allow some degree of flexibility should the economy continue to stumble. He is targeting the structural (non-cyclical) deficit, as well as aiming to put net debt/GDP on a downward track (where there appears less wriggle room).
This speech was important because we saw criticism of Labour's position on the economy over the past few days. It will work best if it is one stepping stone along the long road towards re-established economic credibility for Labour. It will be wasted if it sits in isolation. Labour needs to do a lot more work on linking discussions about deficits, and debt-to-GDP ratios, to the experience of households (that is different to ignoring the deficits and debt). It also needs to think ahead. There is still more work to be done.
This article was first published on the Progress website, on 16 June 2011.
Progress, 16 June 2011, 17/06/2011