Economic Policies for an Incoming Labour Government (Part 1 of 9)

The outcome of the next general election cannot be confidently predicted but one thing is clear; the odds on both a Labour election victory and a successful term in office would be greatly increased if the Labour leadership had the confidence and courage to develop and deliver a convincing alternative economic policy.

At present, Ed Miliband and Ed Balls seem inhibited from attacking the failed policies of austerity (to which George Osborne claims there is no alternative) and are content to focus on policy in other areas as a means of avoiding any real debate on economic policy. Yet there is, as both experience and reason demand, a growing consensus that austerity has failed and, as a consequence, an urgent need for Labour to describe clearly what an alternative and better policy should be and how it would operate.

The purpose of these articles is to identify one of the basic and central issues on which that successful alternative policy should be developed. A full understanding and adoption of the proposals advanced here would allow the Labour leadership, in the run-up to the election, to attack the Coalition’s economic record with greater conviction and confidence, and would provide the launching-pad in government for a long-delayed and hence urgently needed restoration of Britain’s economic fortunes.

Not A Moment Too Soon

The new direction that an incoming Labour government must adopt will come not a moment too soon. The damage done by the Coalition government is cumulative and fundamental, and extends beyond purely economic failure to social dislocation and political disintegration.

In economic terms George Osborne’s record is appalling. The so-called recovery has been delayed unnecessarily for more than half a decade and means that a return to pre-2008 living standards is still many years away. Median GDP is still 3% below 2007 levels, and since the population has increased by3%, that means an average fall in individual incomes of 6%. The decline of the productive sector and particularly of manufacturing has meant that only 10% of our GDP is now accounted for by manufacturing – the lowest proportion of any major developed economy – and our share of world trade has fallen to just 2.7%.

Coalition polices have resulted in the sharpest fall in living standards in more than 60 years. According to data from the Institute of Fiscal Studies, average wages have fallen by over £1,600 since 2010, at an average rate of over £530 a year. The pre-Coalition reduction in median income (not the same as average wages, but an acceptable proxy), can be calculated at about £5,400 over thirty years (1980 to 2010) – about £180 a year – so that the Coalition has produced a reduction in worker incomes of almost three times the previous trend.

But these figures relate only to the working population, and take no account of the reduction in unemployment and disability benefits, the denial of benefits to mothers seeking work because they have not been employed during the previous two years, and the exclusion from the data for both the employed and unemployed of the growing practice of zero-hours contracts, all of which mean that the real extent of income cuts is much larger than official figures indicate.

The burden imposed on working people has not of course been shared by the wealthiest people in our society. According to an Oxfam report 1 , the richest 5 families in Britain have more wealth than the poorest 20% of the population. That level of inequality is unprecedented since records began in the UK.

In an even more recent report 2 , Oxfam also reports that the Coalition’s welfare cuts have pushed 1.75 million of the UK’s poorest households deeper into poverty, suffering an absolute cut in their income in the past three years and leaving them struggling to cover food and energy bills.

And all the attendant evils of this unprecedented decline in working-class living standards are now manifest in Coalition Britain. The national scandal that millions of children in the UK are going to bed hungry is not some accidental by-product of Coalition policy. It is the inevitable and deliberate consequence of policies pursued by a government that is “of the privileged, by the privileged, for the privileged”.

The disadvantaged poor – the disabled, the sick and the unemployed – have suffered, through cuts in their benefits, the greatest burdens in dealing with the recession. SCOPE, the charity supporting disabled people, have shown, for example, that 600,000 people in the UK lost a total of £2.62 billion pounds a year from Monday 8 April 2013 as a result of the Coalition Government abolishing the Disability Living Allowance (DLA) and introducing the new Personal Independence Payment (PIP), with tighter eligibility criteria and a controversial new assessment. The purpose of that change is not to improve service or to make things more fair but simply to save money. The lack of concern for the most disadvantaged in our society was compounded by the amazingly (and deliberately) inaccurate statements about incapacity benefit made by Ian Duncan Smith.

Coalition policies have disproportionately affected women, who are disproportionately found in lower-paid occupations and in the caring professions. An analysis of Treasury data by House of Commons Library researchers in 2012 showed that £11.1bn of the £14.9bn raised from the five spending reviews since 2010 comes from women even though they earn less than men on average. Planned changes to tax credits, child benefits and public sector pensions were largely to blame. They came shortly after the government announced plans to cut the 50p top rate of tax for all those earning over £150,000.

A Failed Banking System The failures of the Coalition government have extended into other areas of policy. One of the principal reasons for both the excesses that led to the Global Financial Crisis and the difficulty we have had in recovering from recession has been the absence of a responsible and supportive financial-industrial banking system in the United Kingdom. The Coalition Government acknowledged as much in “The Coalition: our programme for government” 3 where they promised that, “We will reform the banking system to avoid a repeat of the financial crisis, to promote a competitive economy, to protect and sustain jobs,”

None of this has been done. There has been no reform of the banking system with the result that, as Mervyn King has regularly warned, a repeat of the financial crisis is still a major risk.

They further promised that “We will introduce a banking levy and seek a detailed agreement on implementation.” The banking levy was introduced in 2010 and was intended to raise £2.5 bn, but has raised nothing like that sum. In the 2014 Budget, George Osborne restructured the levy to provide maximum limits for individual banks and five bands, which meant a cut that is disproportionally beneficial to the very largest banks.

They also undertook to “bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.” Less than six months after the Coalition came into Government, the proposal to deal with bonuses was abandoned. Bonuses are back with a vengeance.

A fourth promise to “bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry” produced no action whatsoever, while a fifth to “develop effective proposals to ensure the flow of credit to viable SMEs ‘ which will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks” produced an extra £80 bn of re-discounting of loans by banks, part of which may have proved useful to some banks who wished to reduce the bank levy, but which nevertheless produced a fall in loans to SMEs of about £56bn.

The failure to take effective action on any of these issues has been, as we shall see later, hugely detrimental to any attempt to correct one of the main deficiencies in the management of the British economy. The failures were compounded by the fate of the Parliamentary Commission on Banking Standards which was established in July 2012, following the LIBOR-rigging crisis. The Commission’s report was set aside by politicians who showed themselves anxious to find reasons to shy away from the necessary reforms. It was claimed that such reforms had been rendered unnecessary by reforms already being implemented, that they would damage the competitiveness of the City and cost jobs, and that they would harm the banks’ ability to support the rest of the economy.

The UK’s competitiveness will be threatened in the long-term by this indifference to the dangers associated with poor banking standards and culture. If the arguments against complacency and inaction have not been heeded now, when the crisis in banking standards has been laid bare, they are yet more certain to be ignored in the future when memories have faded.

It should be understood, however, that the real problem with British banking is not about dubious ethics but that it does not, unlike foreign banks, see the funding of investment in productive capacity as its main function. The right ethics with the wrong agenda is no recipe for British economic recovery.

The list of failures demonstrates one central theme; because the Coalition Government does not understand the process of wealth creation at all, their focus is on the side-issue of making economies in the budgeted cost of government. Their obsession with the objective of achieving a balanced budget blinds them to the fact that there is a much better way to govern Britain – a way that increases the wealth and welfare of all, as we will illustrate in the following articles in this series.

[1] www.theguardian.com/business/2014/mar/17/oxfam-report-scale-britain-growing-financial-inequality?1 CMP=EMCNEWEML6619I2

[2] www.theguardian.com/politics/2014/apr/22/welfare-cuts-drive-uk-poorest-poverty-oxfam2

[3] www.gov.uk/government/uploads/system/uploads/attachment_data/file/78977/3 coalition_programme_for_government.pdf

© Bryan Gould and George Tait Edwards 2015

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This post was written by Bryan Gould and George Tait Edwards