It’s now two years since the chancellor promised an ‘enterprise led recovery’ that would ‘rise from the ruins of an economy built on debt – a new, balanced economy where we save, invest and export’.
He was keen to highlight the 2.8 per cent growth that we were set to experience in 2012, and the consequent falling unemployment that Britain’s jobseekers would benefit from.
We have ended up in a very different place. So far this year the economy has shrunk, and independent forecasters assess that by December the economy will have expanded by only 0.4 per cent.
The number of unemployed is 172,000 higher than when the chancellor first gave his speech, the public sector is still losing jobs faster than the private sector is creating them and there are 300,000 more workers in part-time work seeking full-time jobs than was the case two years ago.
The IMF have called for policies to boost demand but instead the government is pursuing a deficit reduction strategy designed for an economy performing seven times more strongly. And while the impending crisis in the Eurozone continues to provide a convenient excuse, it isn’t (as the TUC has repeatedly shown) responsible for our current economic predicament.
Falling real wages, cuts to tax credits and benefits and a significant fall in public investment (where a 41% fall in orders for public housing and new work is driving a significant fall in construction output) have helped create a crisis that is far more home grown than the chancellor wants to believe. The case for stimulus is now irrefutable and is acknowledged by a growing number of voices from across the political spectrum.
But, crucial though it is, the austerity argument isn’t where economic debate should end. Even with a vital boost to demand and a deficit reduction strategy driven by growth, would our economy automatically bounce back into perfect shape? Or has the downturn revealed fundamental problems with the sustainability of our previous model of growth?
We know that in the decade before the recession, manufacturing lost 1.4 million jobs, our rates of business investment remained far below those of our competitors, our trade deficit persistently worsened, living standards for those on middle incomes stagnated or fell (while those at the top experienced runaway rewards), in-work poverty continued to rise, bank lending to non-financial firms was low and housing equity and unsecured credit drove much consumer spending. While employment soared and the economy grew, all was not as well as it appeared on the surface.
So while the austerity debate will (rightly) continue, there are still far wider economic questions that need to be answered. That doesn’t mean that nothing was right before the crash (as respected economists have shown, on many measures our performance was good) but that the sustainability of our previous growth model can’t be taken for granted – and that even if we could replicate it, it wouldn’t be enough to meet the concerns that many progressives share.
There has been some government recognition of this state of play – not least in the chancellor’s 2010 Budget speech which recognised the need to boost our exports, reduce our dependence on private debt and increase investment. But to date little that could have any impact on these issues has been done.
While public investment continues to fall off a cliff, the Green Investment Bank remains a poorly capitalised fund and tax incentives to invest have been removed. The industrial policy that could make a significant difference to our trading potential remains under discussion with little apparent Treasury support and as living standards continue to decline, low interest rates appear to be the main factor preventing consumer debt from soaring.
The government will soon be passing new legislation on executive pay but given the policy is now on its third and weakest iteration, its chances of achieving any significant impact appear slim. Hamstrung by a right-wing vanguard who continues to maintain that all we need is even more of the same deregulatory approach that helped create the current crisis (step forward Mr Beecroft), the Government’s efforts are subject to inevitable limitations.
Labour’s policy positions are also starting to address wider concerns about our economic model. In Ed Miliband’s most recent article on responsible capitalism, he spells out support for an economy that is no longer based on ‘predatory, short-term speculation’, advocating a state investment bank and new policies to boost industry and increase employees’ skills, accompanied by reforms of UK equity markets to engender a longer-term focus.
Emphasising similar themes, shadow chief secretary to the Treasury Rachel Reeves has spoken of the need to better regulate our finance system and to restore the link between growth and wages, as well as the ‘damage that an unfair and unbalanced economy can do to the quality of our lives and the relationships that should bind us together’.
Labour’s commitment to the implementation of the High Pay Commission’s recommendations marks a significant step change in the executive remuneration debate – and their commitment to the introduction of a state investment bank provides welcome recognition of the need for banks to better serve the real economy.
But while debate and discussion is emerging around how a new economy could work, it remains far from centre stage – and the speed of policy development and change is incremental. As the five year anniversary of Northern Rock’s implosion nears we need more solutions, and a stronger debate about how our future economy could and should look. #