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Progressive growth

As Labour politicians debate growth strategies, the challenge is to meet the scale of the task.

From my perspective as a City investment manager, I have watched as the mood in markets has shifted over the past few months.  Back in 2010, following a period of stimulus, investors focused on the size of public sector deficits and the amount of net debt governments had outstanding.  The pressure was on to get deficits down.  Now, debt remains a concern but the focus is on growth.  An economy which cannot grow, or which is actually shrinking, will struggle to pay off its debt anyway.  So it is that both markets and political leaders are looking for measures that will boost growth.

We should not forget why, on the left, we actually want growth.  We need it to increase employment opportunities and reduce unemployment, to pay for our public services, to provide a better future for our children and tackle poverty, as well as reduce our annual deficits.

The coalition government has so far failed to promote growth. It has faced two obstacles.  The first has been its own ideology.  Ostensibly established to deal with the large deficits caused by the financial crisis, the Coalition is heavily influenced by a non-interventionist and anti-state thinking. The solution to recession is therefore seen as a smaller state and a removal of regulations regarded as unnecessarily restrictive.  Social policy must emphasise mobility.  Growth will occur spontaneously, it is believed.  The problem with free market economic models is that, even if they work, they do not predict the extent or longevity of the period of adjustment from one state to another.  Adjustment can mean hardship, higher deficits and lower growth in the short term, and higher unemployment, all for a gain (a growing economy) which is not guaranteed.  It would take a strong government indeed to see such a policy through without caving.

The second obstacle is that the coalition is not yet prepared to adjust policy to meet the scale of the problem.  Various excuses for growth plans have been launched over the past couple of years.  There have been the usual half-hearted policies that government departments tend to produce.  Yet facing us could be years of low or no growth, persistent deficits and stubborn unemployment and underemployment levels.  Business confidence remains low and is being hit by each subsequent phase of the eurozone crisis.  This is why economic abdication by government will not work and neither are half-hearted halfway measures sufficient.  The news that the government is planning to launch a small business investment bank is welcome.  However, it does not appear it will really be a bank.  What is really needed is a fundamental commitment to boost the productive potential of the economy over a period of years.

Labour needs to get this too.  As we explore ideas that will help us in our quest for growth, we need to appreciate the scale of the problem.  There are various ideas out there for how to promote growth.  The challenge is to have a strategy that is progressive in nature rather than have social policy bolted onto a growth plan.  The growth emphasis has to come from our values.  Central is our vision of a society in which everyone is included.  We need to look ahead, beyond arguments about spending cuts (important though they are) to the next general election.  Our theme then must be investment, in a broad sense.  Labour should commit to a decade-long programme of infrastructure spending and a genuine national investment bank independent of government that will support business investment.  It should support living standards by guaranteeing training and employment, at the least for young people.  Alongside that should be a renewed commitment to first-class education for every student.  These would be only the building blocks of a growth strategy sufficient to meet the scale of the crisis and rooted in our progressive values.

This article was first published by Progress on 5 September 2012.
Progress, 5 September 2012, 06/09/2012

Not an easy task given uncertainties, especially if energy and commodity prices do fall later in the year. Ultimately, radical economic reform required.
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.
The Bank of England has raised interest rates, but that does not mean it has been most effectively managing inflation risks.
The Bank should signal it will act if higher prices look likely to translate to higher inflation rate.
The IMF's Fiscal Monitor is actually quite radical.
Spare a thought for finance ministers, and the opposition counterparts who aspire to replace them. The conventional wisdom was that they should at least make an attempt to follow fiscal rules. Now, there are no rules.
My letter in the Financial Times on the need for a framework for economic policy decision-making.
Responding to Brian Griffiths' article in The Article on the risks of inflation.