John McDonnell MP, Labour’s Shadow Chancellor, speaking at the Resolution Foundation this morning, said:
Thank you for the invite to say a few words here today, and for the work of the team at Resolution Foundation in preparing and presenting this research.
It confirms what some of us, frankly, have argued for most of this decade, but whose truth I think is now unavoidable.
The austerity measures pursued by successive governments have been an economic disaster, not only for the performance of the whole economy but – and this should be our primary concern – people’s real living standards.
The analysis presented here confirms that working people, and those on low to middle incomes especially, have suffered the worst decade for living standards for generations – perhaps as far back as the Napoleonic Wars.
The prognosis for the future is similarly bleak, with (at best) a marginal recovery. For many, stagnating living standards
But Resolution Foundation set the title for the discussion of “beating the forecasts”.
In some ways it shouldn’t be too hard to get the better of an economic forecast.
As the great liberal economist JK Galbraith once said, “economic forecasting exists to make astrology look good”. But the argument presented here by the Resolution Foundation, based on the official Office for Budget Responsibility forecasts, is of a different kind.
We’re not dealing here with a short, sharp shock of a recession, or a sudden financial crisis. It’s more like a long-term, chronic illness that the British economy suffers from.
And this illness pre-dates the decision to leave the European Union, although the lack of direction and political uncertainty the Tories’ have brought to that process have unquestionably exacerbated these issues.
Even this Government has managed to identify some of the symptoms of the illness, starting exceptionally weak productivity growth.
Steady improvements in productivity, meaning steady improvements in the efficiency of production, have been the motor economic growth for industrial capitalism for over two centuries.
Improvements in productivity over time have led to huge and sustained improvements in the standard of living for most people. It’s the only way, over the longer term, that capitalism can sustain those improvements.
Yet what we have seen, in the UK in particular, is that the crisis of 2008 seems to have led to a slide in productivity, and economic growth.
On falling growth
Its causes are widely debated. For some, like Google’s Chief Economist, Hal Varian, what we see as falling growth is in large part due to a measurement error – we aren’t capturing the value produced by new information technologies properly in our statistics, and so we underestimate the real economic changes happening.
Or as US economist Robert Solow once put it, “How come I can see the computer revolution everywhere – except in the productivity statistics?”
For others, like Robert Gordon, the productivity slump indicates a decline in the fundamental rate of innovation. Other explanations for it can be found, from secular stagnation to the falling rate of profit.
These are big economic questions that we can debate almost endlessly.
On Britain as an outlier
But whatever the causes, one fact is not in serious doubt: Britain is now an outlier for poor economic performance in the rate of measured productivity growth and, most importantly, for living standards.
Amongst major advanced economies since the crash, in fact, Britain is the only economy where the economy has grown (even if only a little), but wages have actually fallen.
The experience is unique in modern British history. For sixty years, from the Second World War to the financial crisis, rising GDP meant broadly rising living standards. When GDP rose, unemployment came down and wages went up.
That link has now been seemingly broken. It should be no surprise that people express such cynicism in official forecasts and official pronouncements. Why would it matter if GDP goes up or down, if you, personally, are still worse off?
But falling real wages for most have sat alongside significant increases in the inequality of wealth since the crash, and, more recently, as Resolution Foundation have shown, rising inequality of incomes.
On rising debt
This has real economic consequences. Households in general paid down their debts in the aftermath of the crash, but more recent years have seen a significant rise in their debts.
This is of a different kind to before the crash, where the sharp increases in household debt came overwhelmingly through increasing mortgages.
Instead, it is unsecured lending on things like car finance and credit cards that has been the driver of growing indebtedness.
So there are three fundamental barriers to improving living standards for working people in Britain: first, that productivity has stagnated; second, that the link between growth in the wider economy and improved living standards has broken; third, that inequality produces financial barriers to prosperity.
None of these fundamental issues can be properly dealt with, I would argue, by redistribution of incomes through taxation and spending alone, of the kind we’ve seen governments attempt in the past.
It made sense when the economy was growing and creating relatively secure, relatively well-paid work.
But those conditions came to an end in the crash of the 2000s. Instead the challenges we now face require us to address the structural failings of our economy.
On funding public services
Yes, the next Labour government is committed to restoring funding to our public services, and we have pledged an £21bn over the Parliament to address the cuts Tories have made from the Work & Pensions budget including £3bn a year for Universal Credit.
We will do so through making sure a fair rate of taxation is paid by those wealthy people and businesses that can afford it.
We also do so by making sure corporations and the wealthy pay their taxes. The Tax Transparency and Enforcement Programme we presented at the last election will be the most comprehensive anti-tax avoidance programme ever implemented by a government in Britain.
Seven years of Tory austerity have dragged our public services to an existential crisis.
The figures for local government are genuinely shocking.
More than three-quarters of local councils believe that local authority funding is unsustainable. One in ten fear that they will not be able to meet their statutory requirements to deliver core services.
It’s not remotely good enough for Philip Hammond to try and sneak through his Spring Statement, due in just over month, without addressing these issues.
I’ve called on him to immediately bring forward the funding needed to place out local authorities onto a sustainable financial footing, for at least the next year.
On structural failings
But we have to look not only at the immediate symptoms of a failing economy, but at their causes.
The failure on productivity is the direct result of a failure to invest.
The economic evidence is increasingly clear, as laid out by the LSE Growth Commission, amongst others.
Since the crash, this economy has substituted the creation of cheap, insecure work for investment in the capital, skills and technology that can create decent jobs for the future.
Ultimately this failure is down to government. It beggars belief that London alone is set to receive half of all new government transport investment made in the whole of England.
There is a deep institutional bias at work here that deprives the regions and localities outside the charmed circle of the City of London of investment.
That, in turn, means great swathes of the country fail to meet their potential.
The next Labour government, through the £250bn National Transformation Fund and its industrial strategy, will deliver investment across the whole country.
And we’ll shift the thinking of government institutions towards the longer-term.
The industrial strategy, centred on broad, social missions, is one part of that.
So, too, will be critical institutional changes like asking the OBR to take account of climate change and environmental damage in its long-term economic forecasts.
We don’t just need a policy change from government – we need the overhaul of institutions, and a cultural change that goes right across Whitehall.
On the private sector
Alongside this, we will deliver an overhaul of corporate governance, changing the incentives for our major corporations to focus more on long-term and social benefits, and less on immediate returns.
That will include looking at ways to improve the representation of workers and consumers on company boards.
We need a clear view on how our economy is changing, and how it is likely to change into the future.
Technological change is accelerating, most obviously in the set of technologies around Artificial Intelligence, Big Data, and widespread automation.
But our legal and institutional structures are failing to keep pace. Britain is lagging far behind other, comparable economies in the use of robotics.
In manufacturing alone, we have the lowest rate of industrial robot use in the entire OECD.
British capitalism invests too little, and relies too much on underpaid insecure work to compensate.
We need new institutions with different priorities for the future. Over the next period, Labour will be laying out its programme for how the benefits of rapid technological change can be shared across society.
We want to see a new generation of co-operative and collective ownership that can properly utilise these technologies for the social good – creating a shared, co-operative Uber, or placing the ownership and control of automation in the hands of the people, not a few corporations.
On financial institutions
To achieve this, we need institutions that are democratic, transparent, accountable, and capable of making decisions for the longer-term.
Unfortunately, decisions about how, where and in what to invest society’s wealth are presently taken by institutions that are too often almost the exact opposite.
Our financial institutions put too much money into short-term, speculative investment, and not enough into real value creation.
As a result, we have the absurd situation where, overall, it is manufacturing and high technology sectors that are financing speculative investments in property and real estate.
This is exactly the reverse of what a healthy economy should be doing. Finance should act as servant, not master, for the real wealth creators.
The final report of the Graham Turner review of the UK’s financial system is due in the next few months, and we will be paying close attention to its recommendations.
The National Investment Bank and network of regional development banks will be one, major step towards this rebalancing our economy.
Graham Turner’s report sits alongside Bob Kerslake’s repot on reform of the Treasury and Prem Sikka’s on HMRC, with a further report to follow o regulation overall.
We have published a first stage report on the National Investment Bank with a further report to follow. The National Investment Bak and network of regional development banks will be one major step towards rebalancing our economy.
And for heavily-indebted households, now growing in number and in an increasingly precarious position as Resolution Foundation research shows, we’ll introduce some common sense measures to lighten the burden.
One part of this shifting the balance of market power in favour of labour – rapidly raising the minimum wage to £10 an hour, and removing the Draconian restrictions on workplace representation.
On beating the forecasts
The programme we intend to present at the next election will represent nothing less than the transformation of the British economy.
Labour will fundamentally change the priorities of government. Successive administrations here have spent too long trying to hammer society to fit the shape of the economy, rather than thinking about how the economy can best address the needs of society.
That will mean changing how government thinks about economic policy – not fixated on growth for the sake of growth, however and wherever it can be achieved – but on meaningful social outcomes, like creating decent, secure work across the country and combatting climate change.
The situation, if the status quo continues, will be dire for working people – of a public realm and public services that is disintegrating; of meaningless, underpaid, and insecure work; and a future that is blighted, perhaps permanently, by the appalling consequences of climate change and environmental destruction.
I believe, Jeremy Corbyn believes, and Labour believe that we can do better than this. These are the forecasts we intend to beat.
The potential is there – to create a society that is radically fairer, radically more democratic, sustainable, and prosperous, where that prosperity is shared by all.