Rewriting The Rules
Thank you very much for the opportunity to speak here at the RSA on Labour’s approach to the economy.
George Osborne will be presenting his Budget to Parliament next week. As is usual, much of its content has been trailed in the press.
Or, rather, much of what will not be in it has been trailed.
Osborne is not, we are told, now considering changes to pensions tax relief.
Osborne would like to, but will not, be cutting the top rate of income tax, we are told.
He is too scared about his future career prospects to risk it.
And then, in news he snuck out late on a Friday evening, Osborne announces that the “economy is smaller than we thought” and that as a result further spending cuts or tax rises may be needed to hit his own target for a surplus.
What an astonishing about-turn from a chancellor who had, just a few months before, declared that we had arrived at the sunlit uplands.
Osborne claimed at the time of the Autumn Statement his economic plan was producing “better results than expected”.
Now he has to admit, shamefaced, that the results are worse than he expected.
When George Osborne said the sun was shining, what did he do?
He cut flood defences.
He cut policing.
He decimated local authority spending.
Women in Britain are now facing, according to the Fawcett Society, the greatest threat to their financial security and livelihoods for a generation.
The truth is that George Osborne’s recovery is built on sand.
Business investment is falling.
Exports are falling.
The productivity gap between Britain and the rest of the G7 is the widest it has been for a generation.
Without productivity growth, we cannot hope, over the long term, to improve living standards for most people.
The truth is that we are failing to meet our potential. Failing to reach our potential means failing to meet the aspirations of our people.
It means a gender pay gap that is still wedged at 19 percent.
It means seeing a 22 percent fall in earnings for the self-employed in just a few years.
It means those wanting to grow their small businesses deprived of the loans they need by a failing banking system.
It means another 100,000 people pushed into the insecurity of zero-hours contracts.
It means a whole generation of our young people for whom the security of home ownership is rapidly becoming an impossible dream.
George Osborne will be presenting his Budget next week.
It could be an opportunity to begin to turn things round.
Instead, we can expect more of the same from this Chancellor.
More wheezes. More short-term political fixes.
And in defiance of the growing consensus in the economics profession he will continue to pursue spending cuts.
At a time when the IMF and the OECD are insisting on the need for increased government investment, George Osborne is planning for government investment spending to fall as a share of GDP.
He claims that a “cocktail of threats” elsewhere in the world means that now is the time to hunker down.
He couldn’t be more wrong. Now is the time to break with the failed approach he has taken that has left this economy more exposed to shocks elsewhere in the world.
George Osborne’s Budget should be about safeguarding the economy, and equipping it for the future.
Osborne’s policies do neither.
Austerity is a political choice
Austerity makes little sense in economics terms.
But it is a politically easy choice for the UK, since it works to the benefit of powerful vested interests.
Maurice Obstfeld, currently chief economist at the International Monetary Fund, wrote a fascinating paper on this back in 2013.
In it, he describes perfectly the logic driving Osborne’s cuts agenda.
When countries have very large financial systems, Obstfeld argues, they must have small governments.
This is because large financial systems are prone to spectacular collapse, as we saw in 2008.
When that happens, governments are expected to step in, arranging bailouts and propping up the economy.
So government must be small today in case of a major financial crisis tomorrow.
This is exactly what Osborne has aimed at since 2008. Cutting the state down to size, in case of a further financial risks.
Behind this is a limited, cramped vision of what this country could achieve. Instead of arguing for a financial sector that serves society, Osborne is arguing for a society that serves the financial sector.
That is his political choice.
His choice, and the choice of too many past governments, imposes a real cost.
The Bank of International Settlements have argued that these financial expansions have resulted in a serious misallocation of investment.
When capital is misallocated, it means that whilst giant chain stores can always grow, the small, family-owned business looking to expand can’t get the finance its needs.
Capital is flowing the wrong way.
We can see this today, after the crash.
Society’s resources have been diverted away from productive use, and into low-productivity investments.
The underlying economy was weakened by excessive financial expansion, even if, during the boom years, this was disguised by comparatively rapid economic growth.
We chased the illusory gains of financial expansion, and neglected real wealth creation.
Our boom was bigger, but our bust was all the greater.
Labour’s alternative in outline
Labour’s alternative has to be nothing less than a radical break with the past.
There can be no turning the clock back, whether to 1997 or 1945.
In the words of our Economic Advisory Council member Joseph Stiglitz, we must now “rewrite the rules” of how our economy operates.
The old rules have failed too many. They have meant extraordinary rises in inequality, and falling social mobility.
They have meant low investment, low productivity, and low pay, even as a lucky few have done extremely well.
Rewriting the rules today means three things.
First, an absolute commitment to responsible financing by a future Labour government.
The old rules meant relying too much on tax revenues from financial services, and too much on expensive funding schemes like PFI.
We didn’t do enough to clamp down on tax avoiders.
We should show how we can account for every penny in tax revenue raised, and every penny spent.
There is nothing left-wing about ever-increasing government debts, or borrowing to cover day-to-day expenses.
Borrowing today is money to be repaid tomorrow.
With a greater and greater portion of our government debt now held by those in the rest of the world, government borrowing increasingly represents a net loss for those of us living here.
The public, rightly, want a government that is responsible with its finances. We in the Labour Party have to show them how we will act as a responsible custodian.
We shouldn’t be the Party that only thinks how to spend money.
We are the Party that thinks about how to earn money.
The clue is in our name. We are the party of labour -; the party of the wealth creators, of technicians, designers, machinists, entrepreneurs -; the party of workers and small businesses.
We need to get back to the best of our own tradition.
Entrepreneurial state and the reviews
Second, we need to use government’s capacities wisely.
Another Economic Advisory Council member, Marianna Mazzucato, has written brilliantly about the role an “entrepreneurial state” can play in establishing new industries and driving innovation.
I can give you an example. Just last week it was announced that the United States’ Advanced Research Projects Agency-Energy, ARPA-E had made a major breakthrough in battery technology that could hugely accelerate the spread of renewable energy.
ARPA-E was established by Barack Obama as recently as 2009 to promote blue-sky research in new energy technologies. It is kind of innovative approach we could be drawing on here.
Britain has an extraordinary heritage of scientific research. We can and should be doing more to draw on this, and to improve the application of this research.
Instead, real spending on research and development has fallen by £1bn under George Osborne’s watch.
If we want to create the economy of the future, we cannot have a government that stands idly by.
The state should be making the long-term, patient investments that are the foundations of long-term prosperity.
That should be prosperity shared across the whole country. And it should be aligned to a functioning, twenty-first century industrial policy.
There’s a glimmer of what this might look like already, in the extraordinary turnaround of UK motor manufacturing.
Prompt action by Government and the Secretary of State for Business in the aftermath of the crash stabilised the industry and laid the foundations for its recovery.
Today, Britain’s car industry exports more than ever before. It is the most productive in Europe.
There are still problems here, of course. There is not a single domestically-owned motor manufacturer. Its supply lines, like those across much of manufacturing, are hugely internationalised.
But it is crucial example that effective government intervention, carefully applied, can produce results.
This is about more than a few policy changes. We need to take a close look at how the institutions charged with overseeing the economy function.
So we’ve launched reviews, led by experts, of the major institutions of economic governance.
Lord Kerslake, former head of the civil service, is reviewing the Treasury.
Accountancy expert Professor Prem Sikka is reviewing the role of HMRC.
Danny Blanchflower, former Monetary Policy Committee member, is reviewing the MPC itself.
In each case, we want to take a forensic approach to understanding how these core institutions can best deliver the prosperous, fair economy of the future.
This isn’t about making the state bigger or smaller. It’s about making it smarter.
Socialism from below
Third, we need to unlock the potential of the wider economy.
The figures are clear. The potential of this economy is being held back by the weakness of the supply-side.
George Osborne’s policies have held back demand. But it is on the supply-side that, it is now clear, we need the biggest shake-up. This is what the slump in productivity indicates.
There is a growing coalition of economists, unions, and businesses who will support government investment in infrastructure.
That is one part of the solution.
Another is in the provision of skills. Latest figures suggest that 22 percent of all jobs vacancies are going unfilled as a result of a lack of candidates with the right skills or experience.
Here, too, government can intervene directly. But it must do so effectively. The present Chancellor’s solutions are inadequate. Ofsted was damning in its report on the many new apprenticeships being offered. The surge in numbers had led to a slump in quality.
We’re not just failing our young people if we fail to provide them with the skills they need. The entire economy suffers as a result.
But government action alone is not enough.
I’ve said before that our watchwords on the economy will be democracy and decentralisation.
We need a far more sophisticated argument about ownership that does not just fall into the caricature of either pure privatisation, or monolithic state control.
Decentralised ownership of electricity production, as we see in Germany or Denmark, must play an important part in the shift to low-carbon production.
But we can go further than this. Government can clear the barriers that hold back entrepreneurship and innovation.
This doesn’t just mean blind deregulation. It means taking on the vested interests that hold back aspiration.
The potential is there. If we mobilise the potential of our small businesses, giving them the opportunity to match the productivity growth of small businesses across Europe, we can boost GDP by £140bn.
We need to clear barriers to their financing, and think creatively about how to fund their expansion.
For instance, Britain has an extraordinarily concentrated banking sector that is not serving customers properly, particularly small businesses.
We need a network of regional and local banks, in tune to the needs of their local businesses and communities.
A Labour government should not be afraid of taking on the big monopolies where they are failing the rest of us.
We are moving into a world in which more and more people are starting businesses, or becoming self-employed.
We must welcome genuine entrepreneurship, and extend employment protection to the self-employed.
And we should be unafraid to support new models of business ownership and management, like worker-owned enterprises and co-operatives.
Worker-owned and managed enterprises are typically more productive and are less likely to fail in a downturn than those in more conventional ownership.
I’ve spoken before about creating a Right to Own for employees, giving them first refusal on taking over a company when it changes hands.
Over the next few years, many small business owners will be looking to retire. Yet two-thirds of family businesses face being sold off for the lack of anyone to take over.
Employee ownership, supported by government where needed, can be an important part in safeguarding their future.
Fiscal Credibility Rule
I want now to return to my first point on sound finances. Sound finances are the foundations on which everything else is possible.
We know a rule for spending is needed. It should make clear the framework in which a future Labour government will make its spending decisions so that the public can trust those spending decisions.
We also know investment is needed.
Others in my party are in agreement with me on the case for investment and jobs, but the public need more than platitudes from our party.
At a time when major international organisations and central banks are calling for a rethink in how economic policy operates, we need clarity and a vision.
Following discussions with our Economic Advisory Council and expert advisors we have decided to recommend a Fiscal Credibility Rule which will underpin Labour’s fiscal position.
We believe that governments should not need to borrow to fund their day-to-day spending.
And that is why we would commit to always eliminating the deficit on current spending in five years, as part of a strategy to target balance on current spending over a target five-year period.
While there are exceptional times when shocks from the private sector mean that government has to step in to help, everybody knows that if you’re putting the rent on the credit card month after month, things needs to change.
Alongside this, we recognise the need for investment which raises the growth rate of our economy by increasing productivity as well as stimulating demand in the short term.
That is why our target for eliminating the deficit excludes investment.
And because we want to ensure that the Government’s debt is set on a sustainable path, we will commit to ensuring that, at the end of every Parliament, Government debt as a proportion of trend GDP is lower than it was at the start.
It is essential for our future prosperity that we retain the ability to borrow for investing in capital projects which over time will pay for themselves.
We owe that, at least, to those whose homes are endangered by flooding, many of whom suffered so much this winter.
But we also know that we are entering a period of great uncertainty for the world economy, which may put many existing economic structures under pressure.
Economists are debating secular stagnation, savings gluts, demographic transition and many other explanations.
Meanwhile inside central banks across the world policymakers are grappling with the concepts of negative interest rates, extended QE purchases, raising inflation targets, and even so-called helicopter money.
Only yesterday we saw the European Central Bank entering new territory with a new and broader programme of quantitative easing.
One thing is clear: we are in unprecedented times.
So it is right that, if conventional monetary again becomes constrained by hitting a lower bound as it did after the global financial crisis, we understand when fiscal policy has to take some responsibility.
And that is why we will reserve the right, for as long as monetary policy is unable to undertake its usual role due to the lower bound, to suspend our targets so that monetary and fiscal policy can work together.
Rather than an arbitrary cut off for GDP forecasts, we will suspend our rule in the circumstances when it is clear that fiscal policy needs to work together with monetary policy to get the economy moving again.
Taken together, these principles will underlie everything we say about fiscal policy.
We, as Party, as interested in how Government earns money as much as how it spends money.
I am making no announcements today about our spending commitments.
We will be discussing policies democratically across the Labour Party for the next few years, as we have pledged throughout and since Jeremy’s election campaign.
But I promise that, from now on, any potential commitments we do make will be judged on how they fit into our Fiscal Credibility Rule.
And to oversee all this we will make sure that the Office for Budget Responsibility is properly resourced and genuinely independent, reporting to Parliament.
Most important fight for a generation
Why have we been having this conversation now?
In my recent speech at the London School of Economics I said that Labour faces its most important fight in a generation.
It is clear that regaining the public’s trust with the public finances must happen before the electorate will consider trusting Labour with the keys to Government again.
There is no short cut to regaining fiscal credibility with the electorate.
We have a long way to go before we can regain the trust that was lost after the global financial crisis of 2008, which happened on Labour’s watch. There is no silver bullet.
But the first stage of that is to lay out our framework for overall fiscal policy. To show that we can be trusted, that we take seriously our responsibility as stewards of the nation’s finances.
In coming to this position we have consulted with some of the most eminent economists in the world.
This is in stark contrast to George Osborne’s own fiscal rules.
Since adopting an even stricter target than the one he repeatedly missed during the last Parliament, his approach has been savaged by economists on all sides.
The Financial Times and the Economist, every single economist who appeared in front of the Treasury Select Committee criticised Osborne’s new rule. Literally every single one, including those on the political right.
There is absolutely no economic case for Osborne’s fiscal rule. It is designed solely with the Tory leadership contest in mind.
It is time for him to put the national interest above his own political ambitions, and adopt a fiscal rule that can sustain shared prosperity.
We will take this rule through our party policy processes and on to Labour Party conference, where our overall economic strategy will be determined.
Fairness and the future
We have a huge potential in this country. But we have a Chancellor that is failing us.
He is sacrificing the bold, necessary action we need for the sake of his political career.
At a time when we should be looking forward, and setting down the solid foundations for secure future prosperity, we have a Chancellor who is too busy looking back.
Jeremy was elected on a promise of “straight talking, honest politics”. We need a bit of straight talking, honest economics if we want to realise our potential.
This means an end to the bluff and bluster.
We need a Budget that is about fairness, and about the future.
With that in mind, let me ask four things from the Chancellor for his Budget next week.
First, as Jeremy Corbyn called for last week, to jump start investment across the country we need a National Investment Bank, with the capacity to deliver investment funding where it is urgently needed.
Second, new infrastructure is welcome. But needs to be backed by real government commitment.
Our Fiscal Credibility Rule means that we can end the nonsensical situation in which George Osborne can make endless announcements on infrastructure projects, but then fail to find the means to finance them.
This is simply not serious when the UK is falling down the OECD’s infrastructure rankings.
His efforts at persuading the private sector to step in have flopped. His Pensions Infrastructure Platform to persuade pension providers to invest was expected to raise £20 billion. In fact it has raised just £1 billion.
Just 9 percent of the projects in his Infrastructure Pipeline are currently being built.
If the funding isn’t available, it means vital new projects like Swansea’s Tidal Lagoon are delayed, and delayed again.
Our Fiscal Credibility Rule will provide us with the means to finance vital infrastructure, whether it is high-speed broadband or new rail connections in the North.
Third, our housing crisis is a national disgrace.
We need bold action to address it. Housebuilding has slumped to the lowest level since the 1920s with George Osborne as Chancellor.
We are building around half the number of homes we need.
Wheezes and quick-fixes from the Chancellor won’t address this.
We know new homes alone won’t solve the problem. But we have to do better than this.
We are failing the aspiration of our young people to own their own homes.
We are failing too many to provide the most basic minimum a decent society demands.
Our Fiscal Credibility Rule can provide us with the secure, credible foundations to unlock the financing necessary to deliver the new homes we so urgently need.
We think a programme to build 100,000 new homes a year could begin to address the crisis. My colleague John Healey has offered furthers proposals here.
And finally on fairness, we will insist on wanting to see a Budget from George Osborne in which, unlike its predecessors, it is not the poorest who suffer the most.
Year in, year out, Osborne’s Budgets have leaned too hard on those least able to bear the burden.
We want to see a government and a Chancellor who does not just make noises about fairness, but who delivers. We will be looking closely at independent distributional analyses of his impact, to see that the poorest in society do not continue to bear the brunt.
In particular we will be monitoring the expected effect of his decisions on women, who have borne the brunt of 81 percent of his cuts.
George Osborne had the opportunity to deal with this. He still has, next week. But it will less thinking about his political career, and more thought about the future of this country. It will require boldness, and challenging some of the vested interests in his own party.
Labour will rewrite the rules to build a fairer, more prosperous economy.