Jonathan Todd

This is my contribution to the new Pragmatic Radicalism publication.

Politicians of all parties claim to favour rebalancing the economy; whether this is rebalancing from the public sector towards the private sector; from domestic consumption to exports; from finance towards manufacturing; or from London and the South towards the North and Midlands. These various kinds of rebalancing all enjoy broad political support but these consensuses risk being as glib as saying that all mainstream British politicians believe in, say, liberty. They mask deeper complexities and challenges, which must be overcome to achieve meaningful economic rebalancing. Labour should seek policies which will enable this, as well as language and demeanour that will allow us to reap the political benefit of tapping into the popular desire for a less financial-centric society and economy. We should, however, focus on the substantive issues and avoid puerile bashing of bankers. Let’s consider in turn each kind of rebalancing.

Rebalancing from the public to the private sector

The Office of Budget Responsibility (OBR) predicts that by the end of this parliament there will be 1.5 million more people working in the private sector and 400,000 fewer in the public sector. The political and economic strategy of the Government largely depends upon something of this order coming about. While their cuts are faster and deeper than is prudent, it is not inconceivable that extremely lax monetary conditions – rock bottom interest rates and quantitative easing – and a low pound allow something approximating to the OBR prediction to become real. Equally, there are many reasons why it may not; not least on-going instability in the eurozone.

It would be as unwise for Labour to be wholly pessimistic about the prospects for private sector recovery as it would be for the UK to gloat about troubles in the eurozone. Labour has to be the party of optimism, which should include being optimistic about the ingenuity of business, particularly if the Bank of England contains its fear of inflation and doesn’t raise interest rates too rapidly. Labour must avoid the perception that we see fiscal stimuli as the only motor of growth and monetary and exchange rate conditions as irrelevant. We should also acknowledge, through a credible deficit reduction programme, that a key reason for deficit reduction being important is that it reduces upward pressure on interest rates.

Part of this programme should involve a shift in the tax base to sharpen incentives towards hard work. This means less tax on income and more on wealth. A land tax could form part of this transition. It would do something to dampen the British tendencies towards property speculation and bubbles. It might also form part of a Labour drive towards tax simplification. Because taxation of land is simple it would be difficult to avoid. Labour could win friends from UK Uncut to the CBI with a considered drive towards tax simplification. UK Uncut should appreciate simplifications that make tax harder to avoid and the CBI should value simplifications that support economic growth. A land tax offset by reductions in taxation on employment would reduce the capacity of the rich to avoid taxation and increase the extent to which everyone keeps the fruits of their hard work. Tax simplification should not be owned by the right. It should be part of Labour’s arguments for rebalancing from the public and private sectors.   

Rebalancing from domestic consumption to exports

The global recession has demonstrated the utility of exchange rate and monetary flexibility and vindicated the decision to keep the UK out of the Euro. It is far from certain, however, that policy thus far has successfully contained the banking and fiscal crisis in the eurozone. Given the importance of eurozone growth to UK growth, the UK should play a constructive role in arriving at such policy, while not confusing our responsibilities with those which properly belong with eurozone members. As debates about the future of the Euro and the EU are disentangled – or, as has been more the case to date, conflated – British interests are ill-served by the chair left vacant at the negotiating table by David Cameron.

The prime minister has been eager to champion trade with the BRICs (Brazil, Russia, India and China) and bored by Europe. Not realising the connection between the BRICs and the EU. In 2009 Ireland’s 4.5 million people accounted for more UK exports than the BRIC countries combined. It should be an economic priority for the UK to deepen our comparative advantages with the expanding middles classes of the BRICs. The development of these countries does much to explain the expectation of Gerard Lyons, chief economist at Standard Chartered, that the global economy will at least double in size between now and 2030.[1] However, the extent to which the UK benefits from this development depends on how quickly we advance trade with the BRICs. We need an EU that is recalibrated towards adaptation to a global economy that is increasingly driven by Asia. Cameron is too scared of Bill Cash to properly work towards such an EU. His carpet bagging of UK PLC to the BRICs counts for little next to this.

Rebalancing from finance to manufacturing    

We need to be realistic about employment prospects in manufacturing. The UK’s manufacturing sector remains the sixth largest in the world by output but no manufacturing sector in the developed world, even in Germany, a country with a stronger modern manufacturing reputation than us, has been able to avoid a considerable long-term decline in manufacturing employment.

We should not give in to the presumption that finance and manufacturing cannot be complements. We should be asking: what kind of financial sector would be most complementary to manufacturing in particular and the wider economy in general? And how can public policy best encourage such a financial sector?

The objectives set for the Independent Commission on Banking – minimise systematic risk and moral hazard; promote competition in both retail and investment banking – are vital. George Osborne won’t hold the Commission to these objectives. But Labour should. We should also be advocating a financial sector that is as complementary as possible to the wider economy. This argument probably goes beyond the remit of the Commission but the work of the Commission gives Labour a chance to firmly place it within the national debate.

Alongside rock-solid retail banks we need a flourishing of nimble financial services firms that are prepared to provide capital to enterprising SMEs. Such firms must be developed in green manufacturing but they will be more likely to do so if a credible price for carbon can be established. At the moment the carbon price comes from the ineffective EU-ETS. This carbon trading scheme either needs meaningful reform or replacement by a carbon tax. Either approach should be taken forward at the EU level, rather than in the form of the cack-handed move towards a carbon price contained in Budget 2011. Again Cash haunts Cameron.   

Rebalancing from London and the South towards the North and Midlands

As well as having sharp economic disparities between our regions the UK has one of the most centralised political systems in the democratic world. Labour should take ownership of the localism debate with the intention of creating forms of localism that reduce these disparities. This means holding localism proposals to the real localism standards proposed by IPPR – localism be effective and efficient; properly funded; at the heart of a drive for social justice; accompanied by a step-change in the transparency and accountability of local decision-making; and framed within a constitutional settlement between central and local government.[2]

Local government should be where the next generation of Labour leaders and ideas emerge. When we were last in opposition Lambeth was ill governed by Red Ted Knight. Now it pioneers the ground-breaking co-operative model. Liverpool was once troubled by Militant. It should soon have a resonant voice in national policy debates in the form of a Labour mayor. That Andrew Adonis, as Transport Secretary, reports battling to identify the views of great regional cities like Liverpool, while Transport for London made constant demands of him, is indicative of how skewed our national conversation has been.[3]

Regional cities haven’t only lacked voice in national debates. They have also lacked private sector employment. While Brighton and Milton Keynes both grew their private sector jobs bases by 25 per cent between 1998 and 2008, some cities slipped backwards: Stoke (-16 per cent), Blackburn (-12 per cent), Blackpool (-6 per cent).[4] The Government’s response – Enterprise Zones, Local Enterprise Partnerships (LEPs) and the Regional Growth Fund – is inadequate. The Regional Growth Fund is one quarter the size of the budget for the (now abolished) Regional Development Agencies (RDAs) in 2009/10.

The future of funds previously allocated by RDAs has been keenly debated. But these funds account for less than one per cent of total government spending in the regions.[5] Mainstream budgets, such as transport, skills and housing, are much larger. The principles of real localism should be applied to these budgets. The interface between LEPs and mayors remains to be worked out but the real localism case for devolving mainstream budgets to mayors, given their transparency and accountability, seems stronger than to LEPs.

Irrespective of whether it is to mayors or LEPs that mainstream budgets are devolved it is imperative that these resources are allocated to maximum incremental impact. This means working with the grain of markets, ironing out market failures and only intervening where there is a clear rationale for doing so. That many of these markets are global, both underlines the interconnectedness between the domestic and global economies and the scale of the challenge facing policy makers who are seeking to achieve on much reduced resources objectives that often proved sadly illusive during the New Labour boom. Yes, the resources available in the boom years were not always as well targeted as they could have been. Yes, real localism hasn’t been applied before and should enable better targeting. Nonetheless, it remains the case that politicians eulogise economic rebalancing, due to its popularity with voters, without acknowledging that it often runs contrary to the underlying drivers of our economy or facing up to the tough policy choices that will be required to make it more of a reality.

Conclusion

Voters are strikingly confused as to what Labour stands for.[6] Economic rebalancing, in every sense, given the ineffectual policy, lip service and lack of resources provided by the Government, can be a policy area commanded by Labour, in which we find new expression of our values of equality and fairness. But it raises many challenges, which the party’s policy review should seek to navigate. Only by rising to these challenges will Labour be able to move beyond the dismal record of politicians over-promising and under-delivering on economic rebalancing.

While the country almost aches for politicians capable of doing better than this, Labour will need to be bold reformers of both state and market to be these politicians. Applying real localism principles to mainstream budgets and fully realising the promise of mayors would, for example, be profound reforms of the state. Reforming the financial sector to make it as complementary as possible to the wider economy is as far reaching a reform of the market. Nothing less than such thoroughgoing state and market transformations will be needed for the UK to prosper in an increasingly Asian age.

I had this on Labour Uncut a few weeks ago. I think events since have justified my argument.

Public debt, said to be the consequence of Labour largesse, is the problem for the governing parties, and aggressive cutting the medicine. Labour contends that this remedy is too tough to close the deficit. As we recover from a global shock of 1929 proportions, slower cuts are required for strong enough growth to generate the tax revenues needed to achieve deficit closure. Lack of growth, as well as the deficit, is the problem targeted by Labour.

Are these well-established positions shifting?

Not as far as Labour is concerned. Some twitching can, however, be detected on the government side.

First, John Redwood wants an improved growth strategy. This is echoed by Liberal Democrat Mark Littlewood. This doesn’t mean the Tories and Liberal Democrats are about to concede, as Labour has protested, that they have no growth strategy. Since the formation of the government they have argued that the deficit needs to be addressed to retain the favour of bond markets and so control upward pressure on interest rates. They prefer this monetary stimulus to greater fiscal support. Yet the comments of Redwood and Littlewood are not insignificant. They acknowledge that the resources of the shrunken state could better target growth.

Second, Norman Lamont has stressed that the government is battling the headwinds of a global crisis. Osborne has long sought to frame our economic problems as being wholly the consequence of Labour profligacy. Lamont may have carelessly forgotten this script or his comments might indicate that the Tories want to start to get some excuses in.

Third, George Osborne has flagged the “flexibility” in his plans. This isn’t a policy shift, but a change of emphasis. The automatic stabilisers of tax and benefits were never removed by him. The treasury might also define “trend growth” to create wriggle room on the extent of cuts needed to eliminate the structural deficit.

Osborne’s commitment that Ireland would be the only eurozone member he would bail out was shattered, as was always probable, in Portugal. His officials must have briefed him that Greek default now seems inescapable. Fireworks will follow, probably knocking our economy still further off course. So much so that Osborne may resort to the Lamont defence.

With this, the chancellor’s pretence that the deficit is entirely caused by excessive Labour spending and nothing to do with global conditions would be nakedly exposed. While this would be a significant concession to Labour, half of voters now blame Labour for the cuts, as compared with a quarter attributing them to the government implementing them. Osborne’s acknowledgement that the UK is not an island would help. But probably wouldn’t be enough in itself to reverse these numbers – especially if Osborne gets traction behind a subtler Lamont defence.

The simple version of this defence is a global crisis. The more subtle and accurate one is a European malaise. The euro’s principles “have proved unworkable at the first contact with a financial and fiscal crisis” (Martin Wolf) and the currency zone “is looking very much like a system that amplifies shocks rather than absorbs them” (Ken Rogoff). Swathes of southern Europe are unable to generate the growth they require to manage their debts within the eurozone. This isn’t sustainable. Either consolidation into a currency and fiscal union occurs or bits of the struggling south must break away.

Eurozone leaders have not confronted this choice squarely. The economic interests of the UK are best served by having them do so before this dilemma overcomes them. However, Osborne potentially has a tenable political position even if our economic interests are not so protected. While the shocks triggered by Greek default may destroy his economic projections, he will shift his account of the economic problem to the European variant of the Lamont defence. It won’t have worked. It will have hurt. But it will be Europe’s fault as well as Labour’s.

The bond markets and the polls will then give their verdicts on this argument. The markets will want Osborne to hold fast to plan A. As the pain accompanying this plan deepens, the polls instead might indicate an increased sympathy for Labour’s slower cuts. Labour should not, however, seem to be willing this grim scenario.

Labour should be building on the criticisms of Redwood and Littlewood and spelling out how smart policy can secure faster growth. We should also be getting ahead of the debate on the euro. Ed Balls ought to demonstrate that he is capable of leading in Europe in a way that Osborne has not. Then any deployment of a European-flavoured Lamont defence would be followed by Labour contrasting the paucity of Osborne’s response to that of Balls.

I wrote this for Labour Uncut today.

The financial crisis was unprecedented and complex. But the left’s interpretation of it tended to be straight-forward. Banks and bankers were bad. Government and politicians were good. Government saved the banks from themselves and would stimulate economies. This enlarged role for government made a “progressive moment” inevitable. Yet government is now being scaled back and the left is out of power across Europe.

The left must move beyond its misconceptions to recover. While Labour’s plans to close the deficit concede limits to government’s size, George Osborne was much quicker than Gordon Brown to acknowledge such limits. The lesson of the debate on the deficit during and after the general election is that the left cannot be abashed by fiscal reality. It must confront it squarely. This is a lesson that Barack Obama might now reflect upon as debate in the US on the size of government moves to a similar place to that in the UK in the six months or so prior to the general election.

Reluctance to acknowledge limits on government’s size indicate how little the third way shifted the left’s gut instincts. The girth of government is still too readily taken as a virility symbol of leftism. This is in spite of government sometimes being a shackle upon the people the left exists to empower. Of course, government isn’t always so. Often it is a saviour and liberator. But to only see these aspects of government is not to see the full picture.

Jim Larkin, a pioneer of the Irish trade union movement, said: “The great only appear great because we are on our knees. Let us rise”. Government keeps people on their knees when it pays people to do nothing while others work ever harder, penalises people for its mistakes in miscalculating tax credits and loses personal data on a grand scale. From the rural payments agency, characterised by late payments, to the learning and skills council, with its abrupt termination of 144 college building contracts, the catalogue of failing public institutions is considerable. It hasn’t gone unnoticed. Almost half the voters in the south believe that public spending under Labour was largely wasted and did not improve services.

They may not be wholly justified in this view, but it forms an important part of the present context. Within which, the notion, taken as given by much of the left, that the public would welcome an expansion of government in a “progressive moment”, was always flawed. The failings of the public sector under the last government, whether perceived or genuine, rolled the pitch for the aggressive bowling with which Osborne has dismissed the “progressive moment”.

The MPs expenses scandal, by encouraging cynicism about public service, also assisted this pitch rolling. No appeal to a revitalised Keynesianism or other reasoned argument could hope to override the emotional resistance to an argument from politicians in the aftermath of this scandal, and the long-term decline in trust that the scandal compounded, that said “let us have more of your money and control of your lives”. Which is what the argument for a bigger role for government within the “progressive moment” amounted to.

This isn’t to say that the public didn’t feel, and do feel, disgusted by bankers and let down by banks. It is to say that the left needs to acknowledge that people feel similarly about politicians and government. And understand why people feel so and act upon this understanding.

These feelings about banks and government seem consistent with the argument of a Labour party discussion booklet, Small Man, Big World, written by Michael Young in 1949. This was, as his later collaborator Peter Willmott summarised, that the large institutions of modern society tended to ignore the interests of ordinary people, who suffered collectively as a result. Ordinary people see banks and government, for the most part, as such large institutions. Fred the shed and an MP’s subsidised moat are closer in the public mind than the political class might like to admit.

The left’s recovery in the UK depends upon Labour’s ability to disassociate ourselves with these large institutions and to become realigned with ordinary people. This emphasis should be central to our attitude to banking reform. It should also be so fundamental to our approach to government that Labour comes to be synonymous not with more government, as in the flawed “progressive moment” thesis, but with a wholly different kind of government. This requires, as Patrick Diamond argues, moving beyond the Westminster model to change the state and citizenship.

Young wrote his pamphlet four years after drafting the most celebrated manifesto in Labour’s history. However, the enactment of this manifesto made him concerned about the implications of a centralising bureaucratic state. The left’s failure to grasp this insight, even after 60 years, explains the faulty expectation of a “progressive moment”. Our ability to now run with this insight will determine the strength and speed of our recovery.

Here is something I had on Labour Uncut about banking reform.

It’s only when politicians have bored themselves through repetition that their message begins to hit home with their audience. I’ve heard this dictum attributed to both Gordon Brown and Peter Mandelson. Its genesis is of less practical consequence than the reality that Labour’s message of too deep, too fast is now hitting home.

The debates around the causes and management of the deficit are complex. The simplicity of Labour’s message overcomes this. The arguments to which today’s publication of the interim report from the independent commission on banking will contribute are also highly technical. Labour requires a straightforward, powerful line that resonates amid this detail.

This should be that we are for the whole country, not just the city. We’re not banker bashers. We’re with Kitty Ussher on the short-sightedness of that. But the financial sector isn’t presently delivering to the extent that it could for the rest of the country. It’s one of the few sectors in which the UK can claim true global leadership. Labour recognises and celebrates this success.

However, unlike George Osborne, we do not interpret this prowess as a carte blanche for the sector. What is in the best interests of the city of London is not always in the best interests of the UK economy. The flawed assumption that these interests are aligned has driven policy since Margaret Thatcher and Osborne cannot see beyond this.

President Eisenhower asked the president of General Motors, “Engine Charlie” Wilson, to become secretary of defence in 1953. At his senate confirmation hearing he was asked whether he could make a decision in the interest of the US that was adverse to the interest of GM. Wilson reassured that no such conflict could arise.

“I cannot conceive of one because for years I thought what was good for our country was good for General Motors, and vice versa”.

Osborne is a later day Wilson. Blind to competing interests between one sector and the country as a whole. Of course, for the most part, but not always, what was good for GM was good for the US. Profits for GM meant jobs and wages for Americans. At the same time, finance does many things that are in the interests of the UK. Dorset, for example, is very grateful for J P Morgan, its largest private sector employer.

Labour doesn’t deny these benefits. Likewise we don’t deny the need for public sector cuts. But there is a world of difference between prudent fiscal management and an ideological assault on the state. Similarly, acknowledging the benefits of finance is quite different from not asking the questions that Osborne doesn’t want to ask: have our banks both ceased to be too big to fail and been reformed such that they will not again need state bailouts? Are large bonuses indicative of excellence or a lack of competition? Is competition adequate to ensure the best service to households and businesses? Are we maximising the extent to which the banking sector complements the rest of the economy?

It is this final question that allows us to pivot from today’s report to the growth debate. Both the banker-bashers and Osborne offer different kinds of either/or approach. Either we bash the banks to pieces or they will eat us, in the first case. Either we leave the banks alone or we’ll kill the goose that laid the golden egg, in the latter.

Both these extremes are false choices. The golden egg, for one thing, isn’t so golden when the goose can only be sustained by enormous subsidy. For another, the goose will stop laying any eggs if it is bashed to smithereens. The eggs on which we are keenest are those in the form of industries able to be new sources of comparative advantage in our Asian century. Little will be more important to our long-term growth prospects than our development of firms able to trade with and tap into the rapidly increasing wealth of Asia.

We need to stop thinking of Asia as somewhere that we outsource to and start seeing it as somewhere that we sell to. UK PLC needs a major reorientation. The financial sector should be greasing the wheels of this transition to the fullest extent possible. For government, out of deference to the city, to fail to apply whatever policies best encourages this would be for government to succumb to producer capture. Exactly the same vice as bedevils Andrew Lansley’s NHS reforms.

We want to put the patient, not the doctors, first in the NHS. Equally, the interests of the bank’s customers should always be a higher policy priority than those of the banks themselves. Only then will government be acting for the whole country and not just a sectional interest.

Truth is finally beginning to be told to the Murdoch empire. To which Jeremy Hunt will doubtless remain tone deaf. Another set of vested interests and concentrated power may have also reduced Osborne. But today we demonstrate that we are neither producer-captured nor bank bashers, but in touch with the real needs of households and business.

I had this on Labour Uncut on the day of the Budget.

The current Spectator cover story claims that Conservatives are as struck by panic as they were in the autumn of 2007 when Gordon Brown seemed set to crush them by calling an election. George Osborne saved their bacon then and they look to him to revive them now. Everyone else is looking at Libya. Hence, the impact of the budget will be dimmed. But Osborne will try to pull a big enough rabbit out of his hat to wrest attention away from the middle east.

Osborne doesn’t begrudge Libya coverage, obviously; particularly not if it leads to his boss being seen as a competent and brave war leader. If – and clearly this is a massive if – a stable post-Gaddafi Libya emerges, then the earlier shambles will be largely forgotten and David Cameron will gain kudos, which will make him harder to dislodge from Downing Street. The resignation of Lord Carrington did little to dent the boost that the Falklands war gave Margaret Thatcher at the 1983 general election.

Osborne’s rabbit isn’t intended to divert eyes from Libya or the spotlight from Cameron. It will seek to disorientate Labour and have our leaders confuse tactics with strategy. Fiscal constraints limit the cards in play, but the cards available are all held by Osborne. He knows that he can use them to establish dividing lines that will set the terms of debate. He was as keen a student of Gordon Brown as either Ed Balls or Ed Miliband.

Both of whom will know that the biggest sting is likely to come in the tail of Osborne’s delivery. That’s how Brown used to do it. This way the respondent has least time to calibrate his rebuttal. Osborne pulled this trick last October when his concluding remarks on the spending review contained these words:

“The average saving in departmental budgets will be lower than the previous Government implied in its March budget. Instead of cuts of 20 per cent there will be cuts of 19 per cent over four years”.

This is an eye-catching claim. David Cameron subsequently went on a similar manoeuvre at PMQs. Both were too clever by half.

First, it undermines the strongest Tory attack line: Labour created the deficit and has no plan for addressing it. Labour must have a plan if Osborne is cutting departmental budgets by less than our plan. Shadow ministers should jump at the chance to forcefully make this point whenever ministers afford them the opportunity.

Second, like many eye-catching claims, it is too good to be true. “Gord bless him” was the response immediately after the 2007 budget. But the more the details were picked through, especially the abolition of the 10p tax rate, the less this was the case. The lesson: play it straight. Don’t let your rhetoric outpace the reality. Be open about the trade-offs and the reasoning driving how they have been approached. All of this is especially true in our post-expenses, hyper-cynical times. And it is as important for oppositions as it is for governments.

Cameron has already stupidly supersized his rhetoric: “the most pro-growth budget in a generation”. Such bluster from a prime minister is as much use to a chancellor as Ricky Hatton’s mum shouting “hit him, Ricky” at the ringside. “I never thought of that, Mum”, Ricky later reflected. Osborne may now think similar of Cameron and ruefully so, given that his ability to impact growth is closer to that shown by Hatton when knocked out by Manny Pacquiao than in securing a famous victory against Kostya Tszyu.

Balls might have out-boxed the Hatton beaten by Pacquiao, but we shouldn’t mistake Osborne for such a reduced opponent. Osborne is a smarter operator than Michael Gove, whom Balls so pummelled as shadow education secretary. There will be no missteps. Only precision targeted hits. Irrespective of the current Spectator cover story, the next edition, along with much of the rest of the press, will eulogise him. The rabbit will entice.

The trick for Labour will be to not let it distract. Chasing the rabbit is mere tactics. We should be all strategy. Both Douglas Alexander and Jim Murphy define our strategic objectives as a draw on the deficit and a win on growth. I would go further: securing a draw on the deficit is a precondition of avoiding defeat on growth.

Osborne thinks he has won the deficit debate, wants to close it and shift the focus to growth. He declares his actions last year a “rescue mission”, which necessitate no further cuts or tax rises this year. Yet the cuts largely haven’t hit. And it will be more redundancy than rescue when they do.

We can’t let Osborne have a win on the deficit. He pretends that the only choice is his approach to tackling the deficit or not tackling the deficit at all. We only defeat this by having a credible alternative. This demands unflinching straight-forwardness from us that, while they can be better managed than they are being by Osborne, cuts are unavoidable.

Effectively neutralising the deficit debate requires that we don’t go into the growth debate pushing more government as the answer. We need something more nuanced. This might mean a national investment bank or other carefully argued reforms. But it has to be about good Labour reform versus bad Tory reform, not unaffordable Labour spending versus Tory reform.