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Making Labour the voters' choice on the economy

As we head deeper into 2014 it is vital that Labour improves its standing on economic policy. It is no surprise we have struggled to do this while in opposition, whatever policy errors this government has made (and they have been substantial in economic terms). Opposition is often a thankless task and it was always likely the economy would recover during this parliament. That this is happening should be no surprise – indeed, even the fact that growth is surprising on the upside should be no surprise to us, if that makes sense. Opinion polls point to rising confidence in the economic outlook and in government policy and with Labour still blamed for spending cuts. Of course we can and do argue that the recovery is imbalanced (it is) and relies too much on asset price inflation especially in housing (it does). We can also argue that the cost of living has risen for a large proportion of the population in recent years (it has). However, what we need to do over the next few months is demonstrate not simply that we are right about the economy, but that we are the right choice for voters for the years after 2015. Ed Miliband has the opportunity to do this by building on recent progress in his speech on economic policy tomorrow.

The UK economy continued to grow in December, according to survey data, with the Purchasing Managers Indices still signalling expansion. While industrial production data for November indicates that the pace of growth may have fallen slightly in the last quarter of 2013, forecasts of economic growth for this year are still rising. Unemployment is falling, with the headline rate at 7.4 per cent and the unofficial (though probably volatile) monthly rate at 7.1 per cent. Despite some uncertainty about interest rates, the overall picture at present is of continuing recovery. In fact the UK economy has been growing faster than we thought. Data revisions now show GDP growing 0.3 per cent rather than 0.1 per cent in 2012 and 2.1 per cent rather than 1.8 per cent in 2013, to the third quarter. Moreover, it now appears the savings ratio fell significantly last year as households increased spending. Overall, by September last year the UK economy was 2.0 per cent smaller than its pre-recession peak, but this was 0.5 per cent larger than previous estimates. The PMI survey data suggests too that recovery is being seen across most sectors in the economy.

Many people have not been feeling this, especially those on low incomes. Wage growth below inflation means real incomes have fallen. Yet the picture for discretionary spending might be a little different for some: mortgage costs have fallen, food and fuel inflation rates are lower than they were, and the personal tax allowance is higher. That means income that can be spent on discretionary items (things we don’t absolutely have to buy) has risen for many people. With inflation lower than last year and with rising optimism about the future, the perception is growing in households that things are improving. We can see this in opinion polling. This is the case even if the fall in real incomes has set us back many years. It is why the cost of living debate must not be solely about policies which deal with the situation as it is now. Labour’s campaigning on living standards is resonating with people, but to have durable credibility we must now say more about how we will raise productivity across our economy.

We need to be in government to do something about this, to ensure it is not only the already-wealthy who benefit from growth. To get there, we need to win the election and to do that we need a wide appeal. Ultimately, the party with the answers for the future is the one which knows how to improve the productive potential of the economy, can commit to substantially increasing investment to do so, and can show people how this will work for them. Investment in people, via education and training, and in infrastructure, and on a scale much larger than yet considered, should be the centrepiece of Labour’s economic policy.

This article was first published by Progress, on 16 January 2013.
Progress, 16 January 2016, 24/01/2014

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.