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Where does government fit into economics now?

The next government will face important economic challenges. The Coalition government had a golden opportunity to rebalance the economy and set the UK up for a prosperous future following the financial crisis. Yet this opportunity was squandered. Instead both Conservatives and LibDems talked down the economy and talked loosely about threats of market turmoil. They did this to justify harsh spending cuts. We are now fighting an election campaign, during which we are debating policies that should have been implemented years ago.

The UK economy did not behave as the Conservatives and Liberal Democrats had hoped. Growth faltered and borrowing ballooned. Eventually growth returned, but the recovery has been highly dependent on household consumption. This has been fuelled by an increase in borrowing, with demand for credit card and other unsecured debt rising. The good news has been the significant increase in jobs but many of these have been in part time, low paid, and self-employed work.

The government has been helped by the dramatic fall in the oil price since the summer and also by a supermarket price war. This will be taking some pressure off household budgets because it means fuel and food costs have been falling. That leaves more income available to spend on other things and is comparable to a tax cut. As long as people do not become more anxious about the future they are likely to spend rather than save the extra cash. Some may have little choice, because they have been struggling for years to get by as it is. Either way, other sectors of the economy seem likely to benefit as they see demand rise. The problem is, petrol and food prices can rise as well as fall.

We need economic policies that meet the challenges people will face over the next few years. These include policies to raise productivity and help people find work. Labour fights this election with pledges to deliver on these aims. For example, a National Investment Bank should help channel funding to small businesses and help the UK economy grow faster. A guarantee of work for young people and those who have been unemployed for a long time is exactly what government should be doing. Our overall goal is not to promote some abstract concept of growth. It is to ensure everyone can have a good life, based on the fact we each have equal worth. Decent jobs that pay a living wage are therefore fundamental.

Whether or not it is made explicit, this election will be about what role we want government to play. The Conservatives intend to reduce the role of the state by cutting spending, locking in the change by cutting taxes. The Fabian view is that there are many things we should do together, through government. However, we have to revisit what that means. The economy is continually changing. Amongst the changes ahead, we shall have to adjust to an ageing population and we will need to limit the warming of our climate. In addition, we are likely to see further rapid developments in technology such that Apple’s new watch will be seen in the same way we now think of the digital watches of the 1980s. These changes will profoundly affect our society and economy both positively and negatively in ways we cannot predict. Localism, while important, will not be sufficient to help people manage change, to stay trained and in work, and able to fulfil their potential. For that, we need an active and progressive government, and one which recognises it needs to be as dynamic as we wish the economy. We need a Labour government.

This article was first published in Anticipations, the magazine of the Young Fabians, in April 2015.

Anticipations, April 2015, 21/04/2015

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.