David Miliband, speaking on the Today Programme this morning, is right to draw attention to the youth unemployment emergency as one of the most pressing issues facing the UK writes Tess Lanning, research fellow at the Institute for Public Policy Research (IPPR)

Launching the final report of the commission on youth unemployment that the former Labour cabinet minister chairs, Mr Miliband importantly drew a distinction between the current lack of demand for young people’s labour, and the deeper, structural problems in the nature of the education system and the labour market that mean youth unemployment has not fallen below half a million since the 1980s.

The dramatic social and economic changes of the 1980s saw the transition from learning to earning become longer and riskier. Deindustrialisation led to a decline in the availability of routes into skilled work for young people, such as apprenticeships, making it more difficult to move straight from school into work.

Good jobs in manufacturing (albeit mainly for young men) have been replaced by low skilled jobs in the service sectors, many of which by their nature – casual, insecure – lead to a more protracted transition and offer few opportunities for progression.

The drop in demand for labour after the global financial crisis exacerbated these long term trends leading to high unemployment among university graduates as well as school leavers.

First in are often first out, and as a result young people were hit harder and faster than more experienced workers.

The pace of redundancies has slowed, but the deteriorating outlook for demand, reduced business confidence due to austerity at home and turmoil in Europe, and a reluctance to recruit new workers have all contributed to the continued upward curve in youth unemployment. Indeed the unsung difference between how European countries have fared since the downturn is not growth levels but unemployment.

Youth unemployment is most alarming in the Mediterranean states such as Spain, where over half of all young people are unemployed. But other northern European countries have long had lower rates of youth unemployment than the UK, and in Germany the proportion of young people out of work has actually fallen since the economic downturn.

The ‘chaotic’ landscape of support for those who do not choose the academic route is partly responsible for this difference, as Miliband’s commission argues.

The strong apprenticeship systems in the German-speaking countries and high quality vocational education in the Scandinavian countries play an important role in preparing young people for work and responsible adulthood, as well as providing them with broad qualifications that support mobility and progression in the labour market.

In contrast, most of the recent increases in apprenticeship numbers in England have occurred for older workers in the low-skilled sectors where concerns about quality are most acute.

The structural youth unemployment problem will remain unless employers’ enthusiasm for hiring and training the next generation of workers improves. Forthcoming research by IPPR calls for a radical new approach to skills and the labour market designed to raise employer commitment to skills and training.

The lesson from other northern European countries – where many firms train more, and to a higher standard, than comparable British firms and sectors – is that this requires far more than education or welfare reform.

Raising both the quantity and quality of jobs and apprenticeships available to young people requires a return to an active industrial policy, with a combination of hard and soft measures to help firms to rethink the low road competitive strategies that underpin weak demand for skills.

Until this is addressed the country’s increasingly well-qualified crop of young people will continue to compete for limited opportunities, with school leavers most likely to lose out.

While the short term priority must be to ensure a return to growth and rising demand for labour, we also need to think hard about those young people who won’t necessarily be lifted by a rising tide, or those whose prospects may have been permanently scarred by the recession.

The commission’s call for the public sector to fill the socialisation gap, offering more high quality apprenticeships and job guarantees for young people unemployed for more than two years, offers a useful starting point.

See also:

• Ken stays ahead as Boris doubles-down on blaming young people for youth unemployment – Alex Hern, January 23rd 2012

• 2012: The year ahead for young people – Alex Hern, January 7th 2012

• Unemployment: How Cameron and Clegg are letting the next generation down – Rachel Reeves MP and Stephen Timms MP, December 14th 2011

• Million young unemployed figure highlights enormity of the situation hitting our youth – Rory Weal, November 16th 2011

• Clegg under fire over voter registration, party funding and youth unemployment – Shamik Das, November 15th 2011

Ed Miliband will lay out his plans for a new era of responsibility at the top of society and outline his vision of “one nation banking” in a keynote speech to Reuters in Canary Wharf this morning.

The Leader of the Opposition will reflect on the scandals of the past week, which have included the row over RBS chief Stephen Hester’s million pound bonus; the de-knighting of former RBS boss Mr Fred Goodwin; and Network Rail’s moves to reward fat cats with bonus schemes that could double their salary over the next five years.

Looking ahead to how a better banking system should run, he will say:

“There are three principles to restore the link between banks and society.

“Transparency – so that banks publish the details of all their large bonuses. We have called on the government to implement rules we legislated for to make banks reveal how many employees are earning over one million pounds, so that consumers can take this into account when choosing where to bank.

“Accountability to employees so that companies put some of their ordinary employees – maybe a teller normally at high street bank window – on the committee which sets executives’ top pay. If you can’t look one of your own employees in the eye when you receive a huge bonus, you should not get it.

“And accountability to shareholders. When banks that are majority-owned by the taxpayer, David Cameron must exercise some shareholder oversight on top pay. He says he believes that shareholders should exert their influence over pay at the top. All I ask is that he should practice what he preaches.

“After transparency and accountability – is responsibility. That means ending the culture of excessive bonuses. It is corrosive. It enriches individual bankers, but weakens the banking sector as a whole.

“Nobody begrudges rewards for genuine risk-takers. Nobody begrudges exceptional rewards for exceptional performance. That is how capitalism should work. But exceptional rewards for exceptional performance means the kind of huge bonuses which have caused such controversy recently should not be handed out for just doing your job.

“They should not be a one-way bet.”

Reflecting further on the problems of the present, he will add:

“These are symbols – and symptoms – of public discontent with a system that is not working any more. Not for our economy. And not for our society. But these moments in our national life should not be the end of the debate. They should be the start.

“This is not about one man, one bonus, or one knighthood. Nor is this about the politics of envy. It is about a culture of responsibility.

“Labour has set out the case for new rules to tackle irresponsibility from the benefits office to the boardroom. Values of fairness matter more than ever when times are tough.

“The consequences of the financial crisis are felt every time a library closes, every time a school can’t afford a new book, and every time a policeman or policewoman is taken off the beat.

“The banking sector needs to understand this. People who did not cause the financial crisis are paying the price. Too many of those who did cause the financial crisis are not.

“Banking has a history of performing invaluable service to the economy which we do not celebrate enough: from Midland Bank’s role restructuring the cotton industry in the 1930s, to Barclays’ role in financing high tech startups in Cambridge in the seventies and eighties, or more recently, the way HSBC, Barclays, Lloyds, RBS and Standard Chartered put up £2.5 billion for a business growth fund focused on British firms.

“But this is a call for banking to recognise it has reached a crossroads. To recognise that continuing on its current path will lead to further isolation from society, greater public anger – and an economy which does not pay its way in the world.

“This is a call on banking to recognise that it should take the path of change. To recognise that it is not isolated from the economy or society. To recognise that we succeed or fail together.

“One nation banking recognises that banks must not be isolated from the rest of the economy. Because banks and small businesses must succeed or fail together, banks must lend to small businesses so we can get the growth and jobs we need for the future.”

And on the forthcoming Parliamentary vote on banking and bonuses, Miliband will say:

“This is about taking the first step away from bonus culture and towards one nation banking. It is about leadership to take the first step towards responsible capitalism. That is why we will have Commons vote on Tuesday.

“We will say that that too many are getting bonuses which are too big, too often. All companies must show responsibility but banks have a particular responsibility because they are either directly or indirectly supported by the taxpayer.

“We will give MPs the chance to vote on having another bank bonus tax to get 100,000 of our young people back to work. but we will also ask MPs to vote on ending a bonus culture based on one-way bets rather than genuine reward for exceptional performance.

“It will not be legislation and it will not be binding. But it will allow the voices of millions of people across our country to be heard. People who do a fair day’s work for a fair day’s pay, who wake up early to go to work and get home late just like you, who work hard just like you.

“Their voices which will be heard through our vote in Parliament on Tuesday. Because at the core of one nation Banking is the idea that as a country, we succeed or fail together.”

The challenge has been made – it’s now up to David Cameron and George Osborne to show they get it with their actions not merely their words.

Miliband has laid out a progressive path to deal with the problems the banking, bankers and bonuses have created, to instill fairness in the system and force responsibility at the top; it’s now time for the government to either back him or come up with something better. The ball’s in their court.

See also:

• The government has the power to stop Hester’s bonus, they just don’t want to – Ben Fox, January 27th 2012

• All in it together? RBS fat cat “in line for £7m payout”. Seven. Million – Shamik Das, January 27th 2012

• Implementing Vickers won’t stop the next crisis – Josh Ryan Collins, December 20th 2011

• How bankers’ bonuses are contributing to the new credit crunch – Cormac Hollingsworth, December 6th 2011

• The rotten borough of the City of London needs to be dragged into the 21st century – Jenny Jones AM, November 4th 2011

• As energy company buckles, Miliband needs to pick more battles – Alex Hern, October 12th 2011

• The fragmented society: How irresponsibility and inequality feed off each other – Duncan Exley, August 12th 2011

Economics Nobel Laureate Paul Krugman has attacked the “austerity debacle” taking place in Britain and elsewhere, pointing out the UK is “nowhere close” to regaining ground lost during the recession, with the country doing much worse than it had after the 1930s Depression and 1973, 79 and 90 recessions.

In his latest NY Times column, he notes:

Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart [see Chart 1 below] comparing the current slump with past recessions and recoveries.

It turns out that by one important measure – changes in real G.D.P. since the recession began – Britain is doing worse this time than it did during the Great Depression.

Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.

Nor is Britain unique. Italy is also doing worse than it did in the 1930s – and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.

And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.

Chart 1:

He goes on to take aim at British economic policy in particular, accusing the coalition of resorting to “ideologically convenient wishful thinking”, and throwing “hard-won knowledge” gleaned over the past 80 years “out the window”, mocking the idea of expansionary fiscal contraction:

Haven’t we learned a lot about economic management over the last 80 years? Yes, we have - but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.

Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead – and that this would lead to faster economic growth.

“Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.” How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further?

As Krugman concludes:

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist – or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” – could have told you that austerity in the face of depression was a very bad idea.

But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

See also:

• George Osborne is the downgraded chancellor of a deflationary government – William Bain MP, December 8th 2011

• Balls mocks “Panglossian” Osborne over Bullingdon, growth and Boris – Shamik Das, December 7th 2011

• Krugman: Coalition is “bleeding” Britain dry – Alex Hern, December 1st 2011

• Ex-Cabinet Office chief economist: slower cuts are “common sense” – Will Straw, August 25th 2011

• Coalition cuts are deeper and faster than Tea Party’s – Will Straw, August 2nd 2011

Lord Mandelson has put his support behind a new report (pdf) from the Institute for Public Policy Research (IPPR) which calls, amongst other things, for the coalition’s nascent green investment bank to be turned into a national investment bank, and put to work improving Britain’s infrastructure.

Writing in the foreward to the pamphlet, Lord Mandleson said:

“This report argues that in the increasingly multipolar world in which we live, it is arguable that no single world view will emerge to define the way we manage globalisation. But, while the end of a world in which the west dictated the terms of globalisation is not necessarily a tragedy, a world without a shared set of principles for managing globalisation would be.

“This report is not naïve about the prospects for global governance, but it argues for new rules accepted by developing and developed countries alike, because ‘no rules’ is not a sustainable option.

“All of the recommendations in this report are directed towards that set of principles.

On the topic of a national investment bank, the report concludes:

“The vision and scope of the nascent Green Investment Bank needs to be more ambitious.

“First, it should become a National Investment Bank with green characteristics, rather than an institution purely focused on green investments.

“The energy and transport sectors are two critical areas where Britain already has some comparative advantages, but it makes little sense to restrict such an important branch of industrial policy to these sectors in isolation.

“Second, this bank should be able to utilise the historically low yields on government borrowing with immediate effect. The chart below shows the interest rate on 10-year government bonds. Any investments with a rate of return greater than the current yield of around 2 per cent will generate a positive net impact on the government’s balance sheet.

“Investing in marketable services of this kind would turn the government’s private finance initiative on its head by allowing the public sector to borrow and then sell or lease back the service to the private sector, rather than the other way around.”

Introducing the idea on Left Foot Forward earlier this month, Will Straw wrote:

“Despite these low borrowing costs, it has rarely been harder to get credit in the private sector. The time is clearly right for a British Investment Bank set up on a strictly commercial basis and run by an independent board tasked with generating a long-term return across a diverse range of sectors.

“Any investments with a rate of return greater than the current yield will generate a positive net impact for the government’s balance sheet.

“Indeed, investing in marketable services like transport infrastructure, sources of renewable energy, or housing would turn the Private Finance Initiative policy on its head by allowing the public sector to borrow and then sell or lease back the service to the private sector, rather than the other way around.

With support from Lord Mandelson and Will Straw, is a national investment bank an idea whose time has come? We can but hope.

See also:

• The economy is crying out for more investment; we need a British Investment Bank – Will Straw, January 14th 2012

• George Osborne is the downgraded chancellor of a deflationary government – William Bain MP, December 8th 2011

• The coalition could end up borrowing more than Labour – Cormac Hollingsworth, July 27th 2011

• Wolf savages government’s approach to growth – Will Straw, February 11th 2011

• A middle way for economic recovery – Gerald Holtham, September 16th 2010

Paul Swinney is an economist for Centre for Cities

Centre for Cities launches Cities Outlook 2012 (pdf) today, which shows how cities are fairing against the backdrop of a sluggish national economy. This year the report focuses on unemployment in our largest urban areas.

Figures released last week reinforced the gloomy national economic outlook, showing that unemployment in the UK continues to rise and now stands at 8.4 per cent – but unemployment is not evenly spread across the UK. While some cities, such as Cambridge and York, have many fewer job seekers than the national average, others, such as Birmingham and Hull (see Figure 7) have very high levels of people claiming jobseeker’s allowance (JSA).

Figure 7:

For this reason both the government and the work programme providers must take a varied response to the UK’s unemployment problem. The report, sponsored by IBM and the LGA, shows that not only is there a big difference in the number of job seekers between cities but the gap between them has also increased in recent years.

While the number of people in Cambridge claiming jobseeker’s allowance (JSA) is just 1.8 per cent of the total working age population, the number of people claiming JSA in Hull stands at 8.0 per cent.

And the gap between the two cities has more than doubled since the onset of the recession; it has widened from 3.1 percentage points in February 2008 to 6.2 percentage points in November 2011.

Similar patterns are seen for youth and long term job seekers. In Grimsby around one in 10 people aged under 25 claims JSA. This is in clear contrast to York where just one young person in 40 claims unemployment benefit.

Hull in particular has a large concentration of people who have been claiming JSA for more than one year. Although this amounts to only 2.1 percent of the total working age population it is well above not only second placed Liverpool (1.7 percent) but also, three times the UK average (0.7 percent). This is in stark contrast to Aberdeen, where only 0.3 percent have been claiming JSA for over 12 months.

These trends could have worrying consequences – previous research has shown the long term ‘scarring’ effects that youth and long term unemployment can have on future employment prospects.

In responding to the growing unemployment challenge, the government’s approach to tackling rising unemployment to date has largely ignored geography, despite it being a key component of the problem.

Nick Clegg recently announced the ‘youth contract’ as a response to youth unemployment exceeding one million. Unfortunately the national approach of this policy does not account for the greater difficulty that a young person in Grimsby faces in finding a job than one in York (see Figure 9). And yet this is a key dimension of the unemployment problem and one that future policy will need to address.

Figure 9:

The economic geography of the UK is highly uneven, and economic policy should acknowledge this unevenness. What is right for Bournemouth or Aberdeen isn’t necessarily right for Grimsby or Liverpool. Any future unemployment policies in particular should reflect this.

See also:

• Cameron needs to start backing our young people and universities - Sally Hunt, January 18th 2012

• Grim economic week: 128,000 more people jobless at Christmas - Alex Hern, December 14th 2011

• Unemployment: Plan A isn’t working - Richard Exell, December 14th 2011

• George Osborne is the downgraded chancellor of a deflationary government - William Bain MP, December 8th 2011

• Unemployment hits 17-year high – record number of young people out of work - Shamik Das, October 12th 2011

The UK needs a new manufacturing eco-system, bringing together policies on skills, procurement, growing small firms and identifying strategic sectors, if we are to rebalance the economy and compete in the global age – so says a new report by the TUC.

The report ‘German Lessons’ (doc) is a new major study which looks at what the UK can learn from Germany, the most successful manufacturing nation in Europe. The study and report was carried out with the support of Unite and IG Metall in Germany.

The TUC interviewed senior managers, German works council representatives and union officials as well as Unite union shop stewards and reps in a range of world class companies, including Volkswagen, Siemens, Bentley, ThyssenKrupp, BASF, Airbus and BMW.

‘German Lessons’ calls for an economic model that is widely seen as fair among employers and trade unions.

It’s hard to imagine Germany putting up with the social divisions that the UK has endured since the 1980s. The study also calls for a major role for strong, well-organised trade unions and strong employers’ organisations.

In Germany, strong unions were able to support both their companies and their members when it mattered most – during the worst economic crisis since the 1930s.

If relationships are tested most in times of difficulty, the relationship between German manufacturing companies and their unions including IG Metall passed the test with flying colours.

The report echoes Unite’s campaign for manufacturing contained in its policy document ‘2020 Vision’ (pdf) for UK to specialise in a number of targeted, high skill, high value manufacturing sectors, rather than try to be a ‘jack of all trades, but master of none’.

We also need to support key industries in the context of tackling climate change and where small companies can grow into medium sized manufacturing companies, supplying large exporters and becoming a British version of the German ‘Mittelstand‘ they must be supported to do so through government policy.

Procurement policy must be guided by the principle that every pound of taxpayers’ money must contribute to jobs, skills and the strength of the British economy.

A procurement policy that is simply based on ‘cheap and cheerful’, lowest cost, offering nothing to the long-term development of the British economy, has no place if our industries are to reach new levels of competitiveness.

But as well as setting out policy details, ‘German Lessons’ shows what a positive attitude to manufacturing looks like.

None of the companies the TUC interviewed feared the growth of the BRIC countries especially the powerhouses of China and India.

Instead, they saw it as an opportunity for their businesses.

Of course, those new markets require tough decisions about future investment, but trade union members on works councils in Germany fight hard to defend their members at home, while also supporting their companies growth.

There has been a lot of talk in by the Government about rebalancing the economy.

British manufacturing has fallen more sharply than its competitors.

That didn’t happen by accident, it was allowed to happen by those in charge. It is time to turn the tide. We can’t do it quickly, and it won’t be easy, but the prize is worth it.

The government, and indeed the Labour opposition, should hear this message.

See also:

• We need to save manufacturing, but manufacturing won’t save us – Daniel Elton, January 13th 2012

• Manufacturing’s recovery ends before it starts – Tony Burke, January 10th 2012

• Cameron sells out UK manufacturing for his loony backbenchers – Tony Burke, December 12th 2011

• CBI survey shows glimmer of hope in UK manufacturing – Tony Dolphin, August 24th 2011

• McFadden turns on Tory manufacturing policy – Jacob Lister, January 26th 2010

Ed Balls defended Labour’s new direction on the deficit last night, saying he would not make promises he couldn’t keep, stressing the need for pay restraint and insisting Labour could be trusted to make the big decisions.

The shadow chancellor reiterated the line from his Fabian speech on Saturday and Ed Miliband’s comments in a series of interviews yesterday, and also attacked George Osborne’s failure to deal with the deficit and the lack of jobs and growth.

Watch the interview in full:

Balls said:

“We can’t now make commitments on spending, on tax rises, to reverse what the Conservatives are doing, but nor can we say with any credibility, in the next two years, we think that higher pay for public sector workers should come before jobs, we can’t make that argument… I’m afraid there is now no choice, if we’re gonna keep unemployment down in the future, that jobs should come over pay…

“Labour cannot from opposition change that till we’re in government, and to be in government we’ve got to set out an alternative, but it’s got to be a credible alternative… what we’ve got to do is say there is a better way, a fairer way, to get the deficit down, to get the economy moving, to get growth and jobs back, our five-point plan for jobs and growth, tough decisions on pay, but also doing it in a fair way…

“We can’t make our policy on the basis of now, we’ve got to make our policy on what will be the best way forward for the country, and what could show Labour, in a credible way, can make the difficult decisions when we will be faced with clearing up a very difficult Tory economic mess, which we see all around Britain at the moment…

“I am saying today, as I said a year ago and two years ago, the deficit must come down, there have to be hard choices on tax and spend, but if you go too far and too fast, as I warned consistently over the last year-and-a-half, the danger was it wouldn’t work, the economy would flatline, unemployment would go up, and in the autumn statement George Osborne had to admit, not only all that, that he’s borrowing £158bn more.

“The problem I’ve got is that I can’t wave a magic wand, and sort of just blow away that inheritance, our task as Labour will be to clear up George Osborne’s economic mess…”

He was then asked:

“You’re adopting the view that there is no alternative to these cuts?

Replying:

“That is 100 per cent, emphatically, wrong. I think George Osborne should change course now, his cuts are too far and too fast, he’s crushing growth. The reason our interest rates are so low is cos he’s getting it wrong. Unemployment is going up. He should have now as we’ve advocated, a temporary cut in VAT, increased public investment, repeat the bank bonus tax…

“Len McCluskey is plain wrong. I argued for action now to boost growth and jobs, and I argued for long term reform to make our economy stronger and fairer…

“What I can’t do is make a commitment now that I will know how much money we have, when there will be less money in three years’ time…

“George Osborne is doggedly sticking with a plan that is failing, he should have changed course six months ago, he still can today, he still can in the run-up to the budget and I will say to him, day-by-day, week-by-week, the approach he is taking, too far and too fast, is unfair and is not working. The longer he persists, the bigger the pain, the bigger the damage and the greater the damage in inheritance we will face because of his mistakes…

“The VAT rise last year to 20 per cent was an unfair tax rise which choked off the recovery and has flatlined the recovery, will probably lead to, has led to more borrowing in the economy. It was the wrong thing to do, they shouldn’t have done it, we’re calling for a temporary VAT cut now, but can I say to you today and to your viewers, “I promise as shadow chancellor, in three years’ time, we can definitely reverse that”?

“I will not make uncosted commitments I can’t afford until I know the state of the economy…

“As the shadow chancellor, I’ve got to know that our manifesto is being properly costed in the context of the times and can be paid for…

“I think what they’re doing on disability allowance is a big mistake and it’s unfair, the benefits cap will lead to more homelessness the way it’s been designed, I think the abolition of the Future Jobs Fund will make youth unemployment higher, the taking tax credits away from families on £25,000, hitting women harder, is unfair, wrong and damaging, but the question you’re asking me is can I, to your viewers, make promises now, about three years’ time.

“Nick Clegg made promises, remember that promises not to raise VAT, he broke his promises straight after the election. I’m not going to make that mistake cos that is wrong, and not the right way to do politics, I won’t make that mistake.”

Meanwhile, in today’s Guardian, Balls’s predecessor Alan Johnson hits back against the trade union leaders who have criticised the new direction, saying the union movement is at risk of plunging back to the “fantasy utopias” of the 1970s, and calling the likes of Unite general secretary Len McCluskey and GMB boss Paul Kenny the “delusional left”.

He writes:

“McCluskey’s article in the Guardian reminded me of the ‘culture of betrayal’ that I thought the movement had escaped. According to Len, by trying to position Labour as a credible alternative to the coalition, Ed Miliband has set it on a path to ‘destruction’.

“Stuck in a familiar groove, Len goes on to suggest that all the ills that he claims are befalling Labour are because of actions of so called ‘Blairites’ – those terrible people who introduced the minimum wage and increased the number, the stature and indeed the pay of public sector workers across the country.”

Adding:

“Ed has stated a simple fact; that a Labour government will not be able to reverse as many of the cuts the current government is making unless it can show where the money is to come from.

“The difference between Len’s position and Ed’s is that Len believes a political party can win an election on a platform of promising no cuts, no job losses and continued levels of public expenditure. That is the policy of the delusional left who will never again win the public’s trust.”

“The trade union movement lost its way in the late 1970s when it opposed the minimum wage and supported the closed shop. It needs to recognise that Ed Miliband’s vision of a better future requires a change of mindset throughout the party if we’re to spend one term in opposition rather than a decade.”

Miliband is expected to face further scrutiny of his position today from David Cameron and his Tory backbenchers at Prime Minister’s Questions.

See also:

• Memo to Osborne: Jobs and growth will cut the deficit. Please listen – Cormac Hollingsworth, January 17th 2012

• Balls throws down the gauntlet: “We are going to have to keep all these cuts” – Shamik Das, January 14th 2012

• Economic update, December 2011 – UK teeters on brink of recession – Tony Dolphin, December 5th 2011

• Commons to vote today on Labour’s five-point plan for jobs – Shamik Das, October 12th 2011

• Vindicated Balls gives absent Osborne an economics lesson – Shamik Das, September 15th 2011

Rising unemployment and recession are increasing the deficit. In the fiscal year 2011-12 the government’s policy measures of £19 billion have only cut the deficit by £ 9 billion. Ed Balls has been arguing a very simple point that government action to reverse the slump would reduce the deficit.

Here we present Left Foot Forward’s own research that shows Labour’s five-point plan would cut the deficit by £16 billion.

Within a football idiom government spending is equivalent to the decision of the football board on how much to allow the manager to spend on players. And just like a government, the club’s borrowing is only revealed at the end of the season because club revenues are gathered during the course of the year.

Whether the club qualified for a European place, whether it got relegated to a lower division… it’s only then that the club’s borrowing will be revealed.

So perhaps it’s helpful to describe the argument between George Osborne and Mr Balls in this way:

“George Osborne, as chair of the current board, told the club manager at the start of the season ‘there’s no money to be put into buying players for the team, but as a result of this prudence, the club will break even at the end of the season’.

“Unfortunately the lack of investment is now showing, and the club is currently languishing at the bottom of the table, and the pundits are expecting the club to end the season with a balanced book.

“As a result, Ed Balls, another board member, speaks up arguing the club needs to spend in the mid-season transfer window, because good players will allow the club to finish higher in the table.

“‘It’s only through spending in the mid-season transfer window that the club can have the players to perform well enough to break even,’ says Ed Balls (if only Ed Balls could convince the terraces that there was some hope)…” (etc.)

With their football team languishing at the bottom of the league, there are few football fans that don’t want their board to allow the manager to invest in the team.

Fans don’t believe this spending must lead to wasteful borrowing. On the contrary, they believe spending is the best chance the club has of not going bust. So it is with government spending.

While of course Mr Osborne will say Labour’s five-point plan for increasing spending would increase the deficit, that’s because he is not taking into account the effect on growth on decreasing the deficit, which is what we’ve calculated here.

How government spending affects growth is what economists call the multiplier, and the OBR gave us their estimate (in Table C8 below) of what the multipliers are for various policies in the June 2010 commentary.

Tim Harford explains of multipliers:

“If the fiscal multiplier is 0.5, we’re getting the government project for half price: the government draws half its resources away from private sector activity but other half is just soaking up the slack.”

Table C8:

How growth affects borrowing is a little harder, however we’ve been drawing graphs for the past six months. Left Foot Forward, illustrating how growth and borrowing interact (as revealed by the OBR’s Treasury model), and the slope of that relationship between the two gives us the effect. It turns out that an increase in growth of 1.5 percentage points decreases borrowing by 1 percentage point.

Labour’s five-point plan has two large expenditure items, a VAT cut and infrastructure expenditure. The IPPR thinks it’s possible for the UK government to spend £10 billion on infrastructure, so this is the number we’ve used. The VAT cut is estimated to cost £12bn.  he spending cost of these policies is therefore £22bn.

However by the end of the parliament, GDP will be four percentage points higher, and unemployment two percentage points lower (Okun’s law) and together increases receipts and reduces welfare spending by £38 billion. Putting these together, spending £22 billion reduces borrowing by £16 billion.

Within our core simulation, the effect of the stimulus from Labour’s five-point plan is only to increase 2012 growth (by 0.7% we calculated above to 1.4%) and then this stimulus guarantees the OBR’s forecasted growth is achieved for 2013, and 2014.

In particular, the merit of the VAT cut, while having a much lower multiplier effect on growth is that, as it did in 2008/9, it puts desperately needed cash in the hands of small businesses so they don’t go bust.

However, as we saw with the ITEM-club downgrade to growth yesterday, if the economy continues on the austerity policy without a stimulus for the rest of 2012 we can’t avoid a second dip, and so our austerity forecast is to follow Standard Chartered’s growth prediction for 2012 of a recessionary -1.3%, and the shock means growth in 2013 and 2014 is reduced to the lowest forecasts for growth over the life of this parliament from the Treasury collection of economic forecasts.

The two forecasts are shown in Chart 1 below and the OBR’s current forecast is shown for comparison.

Chart 1:

Labour’s five-point plan should be implemented in 2012 because UK output would be four percentage points higher in 2015, which lowers unemployment by two percentage points, but most importantly lowers borrowing by £16 billion.

So the next time a Liberal Democrat tells you Ed Balls would increase spending by £22 billion, you can calmly look them in the eye and say “yes, and it would also cut the deficit by £16 billion”.

See also:

• Balls throws down the gauntlet: “We are going to have to keep all these cuts” – Shamik Das, January 14th 2012

• Growth revision shows economic recovery is off track – Tony Dolphin, January 9th 2012

• “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – Ann Pettifor, January 6th 2012

• Commons to vote today on Labour’s five-point plan for jobs – Shamik Das, October 12th 2011

• Growth cut the 2010-11 deficit as fast as cuts – Cormac Hollingsworth, September 22nd 2011

Will Straw is IPPR’s Associate Director for Globalisation and Climate Change; he will be pitching the idea of a British Investment Bank to the Fabian Society’s New Year Conference today

The UK’s low investment levels are well documented but worth repeating.

Research (pdf) by Adam Lent and David Nash for the Institute for Public Policy Research shows that for years Britain has been outperformed by Germany, the US, Japan and others, as Graph 1 below shows.

Average annual investment, expressed in terms of gross fixed capital formation, which encompasses business, government and household investment, from 1980 to 2010 was 17.5 per cent of GDP in the UK, 20.1 per cent in France, and 27.2 per cent in Japan. It is currently barely above 15 per cent.

Graph 1 (p22, pdf):

Business investment reached 12.8 per cent of GDP in 1998 but fell to a low of 9.7 per cent in 2006 and only recovered to reach 10.2 per cent in 2008. By contrast, the US, Germany and France saw business investment rates rise to 11.7 per cent, 12.3 per cent and 12.7 per cent percent respectively in 2008.

In the UK, as part of the government’s programme of austerity, capital expenditure by government departments is projected to fall 29 per cent between 2010-11 and 2014-15. This includes cuts to school and other education building projects of 60 per cent, 34 per cent for environment, food and rural affairs, and of 17 per cent for the NHS.

Despite these low levels of investment, the cost of borrowing has rarely been cheaper. On Tuesday, for only the second time ever, the Treasury sold £700 million of government bonds that will pay returns below the level of inflation. Nominal par yields on 10-year bonds were at 2.06 per cent this week – the lowest level since they were first introduced in the 1950s.

Despite these low borrowing costs, it has rarely been harder to get credit in the private sector. The time is clearly right for a British Investment Bank set up on a strictly commercial basis and run by an independent board tasked with generating a long-term return across a diverse range of sectors.

Any investments with a rate of return greater than the current yield will generate a positive net impact for the government’s balance sheet.

Indeed, investing in marketable services like transport infrastructure, sources of renewable energy, or housing would turn the Private Finance Initiative policy on its head by allowing the public sector to borrow and then sell or lease back the service to the private sector, rather than the other way around.

This need not disrupt the government’s fiscal rules as Gerry Holtham has outlined. If Britain brought its accounting rules into line with the rest of Europe, this kind of borrowing could be treated similarly to the investments in banks like RBS and not score against the Public Sector Borrowing Requirement.

The coalition government plans to launch a Green Investment Bank, which will start investing in low-carbon energy and infrastructure projects in April 2012. But initial funds will only amount to £3 billion and are unlikely to leverage more than £15 billion over the next four years. Indeed, the Bank will only be able to borrow on the capital markets from April 2017 and that is subject to the government meeting its own debt target. In short, it will be too little too late.

Several other countries operate forms of national investment bank that Britain should look to emulate. The German KfW Bank lends to German companies that are passed onto it by private banks, but only if their investment plans are in line with the government’s priorities. The KfW is able to raise funds and make loans at a favourable rate because it is backed by the government. Importantly, although some of its board members are politicians, the management are all banking executives and they make the lending decisions.

Other examples include the Brazilian Development Bank, which has regional policy as a key remit, the Nordic Investment Bank based in Finland, the European Investment Bank and the US Small Business Administration.

Britain’s economy is crying out for greater levels of investment. Future generations will look back in astonishment if we fail to take this historic opportunity to utilise the low cost of borrowing.

See also:

• “We are spiralling into a prolonged and ghastly depression”: The economy in 2012 – Ann Pettifor, January 6th 2012

• Osborne has put Britain in an economic death spiral: Here’s how to break out – William Bain MP, November 14th 2011

• With Plan B, we can have a good economy for a good society – Howard Reed, October 31st 2011

• Will Osborne alter course? And how should Labour respond? – Matthew Pitt, September 15th 2011

• The government is failing to lay the foundations for long-term growth – Dr David Nash, August 22nd 2011

Ed Balls seized the initiative on the economy last night by announcing that Labour, if elected, couldn’t commit to reversing the coalition’s cuts and would maintain the public sector pay freeze, saying the party ”cannot duck that reality and won’t”.

The bold move, in an interview in The Guardian and column on LabourList, comes ahead of his keynote speech on the “economic alternative” to the Fabian Society in central London this morning.

In a move that will wrong-foot the Right and enrage sections of the Left, the shadow chancellor asserts:

“My starting point is, I am afraid, we are going to have keep all these cuts. There is a big squeeze happening on budgets across the piece. The squeeze on defence spending, for instance, is £15bn by 2015. We are going to have to start from that being the baseline.

“At this stage, we can make no commitments to reverse any of that, on spending or on tax. So I am being absolutely clear about that.”

While on the need for pay restraint, Balls adds:

“It is now inevitable that public sector pay restraint will have to continue through this parliament. Labour cannot duck that reality and won’t. There is no way we should be arguing for higher pay when the choice is between higher pay and bringing unemployment down.

“I know there will be some people in the trade union movement and the Labour party who will think, of course, Labour has got to oppose that pay restraint in 2014 and 2015. That’s something we cannot do, should not do and will not do.

“It is true to say public and private sector workers are paying the price for the mistakes of the past 18 months, but we cannot promise higher wages for public sector workers when public spending is tight. When the cost of rising unemployment is pushing up borrowing, we had to make a tough choice.”

Balls says it is as a result of George Osborne’s failure to bring down the deficit and deliver growth that Labour has to accept the restraint of what Ed Miliband called the “new reality” of “difficult times when there is not much money around” in his speech to London Citizens on Tuesday.

He explains:

“Even if Osborne took our advice to kickstart the recovery, there are still going to be difficult choices to make. Jobs have to come before higher pay and that is why that restraint on spending and on pay is important for Labour.”

Adding of the need for Labour to demonstrate credibility:

“I admit that we have a big task ahead for the future to show that we are the people to take the tough decisions… If we are seen as the people that are short-term, soft touch, give into vested interests, throw money at every problem of course we are never going to succeed.”

Patrick Wintour, who interviewed Balls, reveals:

Balls is determined to show everything about his pedigree, and current strategic thinking shows he gets the political challenges facing the party on trust, credibility and the economy… Balls says he has had shadow cabinet members asking for permission to promise to reverse a specific cut, and that they have all been spurned.

With the FT’s Jim Pickard noting (£):

An aide to Mr Balls said that it had not been easy for him to commit to spending reductions, given that “as a constituency MP, he has seen the damage done to communities” by the ruling coalition’s cuts. Yet given the tough times, Labour will have “no choice” other than to make difficult decisions, the shadow chancellor will say…

Mr Balls has faced frustration from some Blairite MPs within his party about an apparent reluctance to flesh out how Labour would tackle the national deficit. Yet he will insist that the coalition’s “public retrenchment” has worsened Britain’s vulnerable economic situation.

Meanwhile on LabourList, Balls, insisting jobs “must be our priority”, goes into more detail about his pledge to maintain the coalition’s pay freeze:

“Public as well as private sector workers are paying the price for David Cameron and George Osborne’s mistakes. But Ed Miliband and I cannot just promise public sector workers higher wages when public spending is so tight and the costs of rising unemployment are pushing up borrowing projections so massively.

“The fact is that in 2012 – apart from those at the very top – everyone in work, in the public and private sector, is going to experience a real incomes crisis: the combination of higher inflation and the rising cost of living, wage freezes, cuts in tax credits, overtime and bonuses withdrawn, some full-timers being asked to work part time and for thousands losing their jobs entirely.

“It was always going to be hard, but it is much tougher because of George Osborne’s mistakes. And we cannot reverse all that damage.

“Even if George Osborne acts now, as he should, to kick start the recovery and get unemployment falling, as we and the IMF have advised, Labour will have to make difficult choices, as Ed Miliband set out in his speech earlier this week. And jobs must be our priority before higher pay.”

Concluding:

“Pay restraint in the public sector in this parliament would have been necessary whoever was in government. But George Osborne’s economic mistakes mean more difficult decisions on tax, spending and pay. It is now inevitable that public sector pay restraint will have to continue for longer. Labour cannot duck that reality. And we won’t.”

In his speech to the Fabians today, Balls will flesh out in more detail where he stands, forensically taking apart the government’s failings and outlining the challenges ahead.

On the big challenges, he will say:

“If Britain and the world are to avoid repeating the mistakes of that 1930s ‘lost decade’ and the 2008 global crisis, then we badly needs political leadership in Britain, Europe and the world to meet two great challenges.

“The Growth Challenge – to stop the aftermath of the financial crisis turning into years of slow growth, high unemployment and rising debts – leaving a permanent dent in our nation’s prosperity; and

“The Reform Challenge – long-term reform to make sure such a financial crisis on this scale cannot happen again and to build a stronger and fairer economic model for the future – what Ed Miliband has called a more responsible capitalism – which can, even in tougher times, meet our aspirations for social justice and strong public services.”

On the government’s failures, he will say:

“Every time George Osborne revises down his growth forecast, he has to revise down tax revenues and increase the benefits bill.

“And what is the long-term cost? How much more will it cost our society and our economy to leave those young people long-term unemployed and unproductive; they and their children receiving benefits rather than paying taxes and contributing to the national wealth?

“If we do not invest now in jobs and growth, if we let a year of economic flat-lining become a decade of stagnation, what price will our country pay in the long-term?

“That is why to meet the Growth Challenge and get the deficit down we are right, as we have set out in the five point plan for jobs, to call for temporary tax cuts and investment in jobs and growth – to stop a decade of slow growth and higher debts becoming a self-fulfilling prophecy.

“In short, action now for growth, jobs and reform does not conflict with the need for a credible medium term plan on the deficit, it reinforces it.”

On the need for discipline, he will say:

“However difficult this is for me, for some of my colleagues and for our wider supporters, we cannot make any commitments now that the next Labour government will reverse tax rises or spending cuts. And we will not.

“But we now know the next Labour government will have to sort out the deficit where this government failed and deliver social justice with less money.

“And as we make the argument that cutting spending and raising taxes too far and too fast risks making the economy and the deficit worse not better, it is right that we set out where we do support cuts and where we would be making the tough but necessary decisions…

“Times will be tough – we will have no choice but to make difficult choices.”

And on the political challenge for Labour, the shadow chancellor will say:

“As a party and a leadership, I said then and I still believe now, that Labour should have been clearer before the election that if we had been re-elected there would have been spending cuts as well as tax rises.

“And I have no illusions that there is a big task to turn round Labour’s economic credibility and show that – even as unemployment rises, growth stagnates and long-term reform stalls – Labour can be trusted again.

“It is not enough simply to be right in our diagnosis of the Coalition’s failures and unfairness…

“The challenge we face is both to set out a radical and credible alternative; and to win public trust for that alternative vision.”

As Anthony Painter, author of ‘In the black Labour’, says, this could well be “a potential game-changer”; Balls’s “tough but sensible messages”, as Peter Watt calls them, will have the effect of blunting the Tories’ biggest line of attack, save for some short-term discomfort, and, in time, may lead to an upturn in Labour’s poll ratings on the economy, and the public’s willingness to trust Balls and Miliband as much as they do Osborne and Cameron – the ‘credibility deficit’.

This is not the position Labour will have wanted to be in – they’ve been proved right on the dangers of cutting too far and too fast, but cut far and fast the coalition have, this is the reality of where we are and where we’ll be in 2015. Only by looking to the future can Labour hope to win that election, and by accepting the reality of how that future will look, Ed Miliband and Ed Balls have made that eventuality look that little bit more likely.

See also:

• How can we have fairer capitalism? – Sara Ibrahim, January 13th 2012

• Politics vs Economics: setting the scene for the Fabian’s Next Economy conference – Marcus Roberts, January 13th 2012

• Inequality must be ended to prevent another financial crisis – Stewart Lansley, January 11th 2012

• “Delivering fairness in difficult times”: Miliband outlines the “new reality” – Shamik Das, January 10th 2012

• Growth revision shows economic recovery is off track – Tony Dolphin, January 9th 2012