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5 myths preventing a progressive growth strategy

Labour must talk about investment in terms of being a responsible steward of the public’s money

Developing a credible economic strategy is the most important task facing progressive parties today.  We need policy rooted in the real world, relevant to the majority of voters and reassuring to financial markets.  We need also to appreciate the scale of the task and the measures required. The evidence suggests that we are only part way through an extended period of low or no growth, persistent deficit problems, and stubborn unemployment levels.

The Left first needs to face up to five myths, belief in which will lead us astray in our quest for growth.

Further recession will destroy the Right’s economic credibility and lead voters back to Labour. To re-establish economic credibility on the Left we simply need to repeat the approach of the 1990s.
The financial crisis boosted support for right wing parties in rich countries.  The UK has a Coalition government dominated by the Conservative Party, with an economic strategy focused on severe spending cuts, most of which have yet to kick in.  Yet the UK is experiencing a second recession and output is well below pre-crisis levels.  Surely this will lead people to return to Labour?

There is little evidence that is yet the case.  While polls suggest Conservative economic credibility has been damaged, belief in Labour’s abilities has not increased.  We can have the right policies but people remain unconvinced we can deliver.

In the late 1990s Labour finally convinced the electorate it would be sound on the economy.  It embraced much of the prevailing economic consensus, and pledged to reduce the deficit and adopt strict Conservative spending plans in its first two years of office.  The strategy worked.  It will be tempting to do the same next time, pledging to match whatever further spending cuts the Coalition proposes.

That will not be sufficient.  The Labour Party has fewer ‘easy wins’ available this time (unlike its continental counterparts).  Many voters still blame it for large deficits; they may not like ‘austerity’ measures but there is a prevailing sense they are necessary.  So Labour needs to go the extra mile.  It must offer an effective spending guarantee and talk about spending in terms of being a steward of the public’s money and have a solution to the ongoing squeeze in living standards.

We can get away with being generally silent about the deficit
An attractive strategy is to let the Coalition take the flak for the hard work of deficit reduction, while reaping the rewards of public discomfort at the next election.  Even if this worked, it would paint Labour as the spending party, only to be trusted when others have fixed the finances (in contrast to its achievement after 1997).  So while the Left must avoid traps set by its opponents, it must show it takes deficit reduction seriously and will keep public finances sustainable.

Our focus on macroeconomic policy means we can avoid radical reform of public services, at least for now
We are talking now about macroeconomic themes: how to promote investment and restore growth.  It is tempting therefore to push thought about public sector reform into the long grass and wait to repair them later.  This is too simple.  At a time when people are facing stretched finances and an uncertain future, it is our national duty to emphasise a commitment to public services that are good value for taxpayers’ money.  Thinking on this is woeful at present, apart from a few exceptions.  We must not abandon the debate and let the Right argue that growth can be promoted by shrinking the state.

Progressives were right on economic policy before the financial crisis
It is still a common myth on the Left that we had it right before the crisis and it was the banks that torpedoed our economic policy.  Yet Ed Miliband and Ed Balls have already admitted that lighter regulation was wrong and that Labour could have done more to prevent falling in living standards.  The Left could also have retained its prudent approach to public finances.  A long boom with apparently benign conditions beguiled the entire political class.  Regaining credibility is not about going back in time but about remaking policy and changing attitudes now.  The electorate is looking at Labour for evidence it gets this.

A few key policies will show people Labour means business
There will be no end of ideas for how to stimulate growth but the task is enormous.  A classic mistake both governments and oppositions make is to compromise between radicalism and ‘managerialism’.  That leads to commitments to look at radical ideas and a focus on temporary measures.  The Coalition is caught in this bind, with its anti-state ideology making the position more acute.

We do not live in a Neo-Keynesian world in which we just need to get beyond a short downturn before normal economic service is resumed.  The economy faces a crisis of debt and economic confidence.  The solution may be a cocktail of innovative policies but the overall theme must be that Labour will commit for the next decade to promote growth.  That will mean hard choices, prioritising some capital spending over current for example.  It will also mean going beyond bank bashing to being pro a reformed City.  If we want to transform our economy, half-hearted measures will not work.

In its quest for growth Labour’s belief in a role for government frees it to be radical but carries great responsibility too.  At the next election, Labour must offer a vision of credible hope.  There must be no Coalition-style flailing around.  Backed by an effective spending guarantee, its theme should be, in its broadest sense, investment.  Investment in our children, through first class education; in our citizens, through an employment guarantee and rebooted training opportunities; in business, with a simple tax system and a national investment bank standing behind small business loans; and in infrastructure, so we will have the best in Europe, if not the world. Such should be the chapter headings of the next Labour manifesto.

This article was first published by Policy Network on 5 September for its Quest for Growth conference.
Policy Network, 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.