Escaping the deficit narrative

October 1, 2015

Although the new leadership that was on display at the Labour Conference had some interesting things to say the message on economic policy was not just confused (which is hardly surprising given the unexpected nature of the left’s triumph in the leadership election) but oddly lacking in radicalism. Rejecting ‘deficit denial’ is a clever sound bite but a vacuous policy statement which fails to escape the narrative constructed by the Tories.

Although the UK has actually escaped the worse of the sort of austerity madness being practised in the eurozone, and consequently has enjoyed a higher rate of growth, there are some real structural weakness afflicting the UK economy. The UK GDP has barely recovered above what was lost because of the financial crisis, UK productivity is very poor, investment levels are very low, household debt levels are rising again and the UK trade current account deficit is one of the highest in the developed world (which is far more worrying than the public sector budget deficit). New thinking and new policies are needed.

There are some interesting ideas floating around that could inform a new sort of narrative about economic policy and some of those ideas are coming out of the LSE Growth Commission.

On the website for the Centre for Economic Policy Research’s, known as Vox, there is an interesting article entitled “Investing in UK prosperity: skills, infrastructure and innovation” which focuses on the structures that are needed to support growth policy beyond the next budget cycle, the next spending review, and the next parliament. The article is a short summary of the key points made in the substantial 2013 report of the same title (which is available for download here) which was presented as a manifesto for growth.

The article starts by pointing out that prior to the financial crisis of 2007-8 the UK economy had been performing fairly well for the last three decades, reversing the relative decline in relation to the other major developed nations it had suffered from the 1950s through to the end of the 1970s:

“It is sometimes remarked that the British are the only people who indulge in schadenfreude – pleasure derived from another’s misery – about themselves, revelling in stories of national decline. This is perhaps the inevitable legacy of being the first industrial nation. Although the UK has enjoyed significant improvements in material wellbeing for well over two centuries, UK GDP per capita was in relative decline compared that of with other leading countries such as France, Germany and the US, from around 1870.

At first, the UK’s relative decline reflected an almost inevitable catch-up of other countries whose institutions created the right kind of investment climate. But by the late 1970s the UK had been comprehensively overtaken: US GDP per capita was about 40% higher than the UK’s and the major continental European countries were 10-15% ahead.

The subsequent three decades, in contrast, saw the UK’s relative performance improve substantially so that by the eve of the crisis in 2007, UK GDP per capita had overtaken both France and Germany and reduced significantly the gap with the US.”

After analysing the roots of the relative recovery of the UK economy, and strong track record of economic growth, over those decades the article then explores some ideas about strengthening the growth potential of the UK economy in the future. It starts by identifying three key areas in need of reform, three areas of relative failure in the UK.

  • The failure to invest in mid-level skills.
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  • The failure to build adequate infrastructure, particularly in transport and energy
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  • The failure to provide a supportive environment for private investment and innovation.
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    The article then purposes a series of reform that would address these failures:

    “The reforms that we propose are aimed at tackling these problems (LSE Growth Commission 2013).
    First, for human capital, where the UK suffers from a stronger link between parental income and pupil performance than other countries, we propose:

    Improving teacher quality through expanding the intake of teachers and engaging in more rigorous selection;

    This is because ex-ante evaluation of teacher quality is hard, but ex-post evaluation is easier.

    Creating a ‘flexible ecology’ – by which we mean more autonomous primary and secondary schools, greater parental choice and easier growth for successful schools and their sponsors (for example, universities or educational networks);

    Linking targets, inspections and rewards more effectively to hold schools to account for the outcomes of disadvantaged pupils.

    We propose developing a new institutional architecture to address the poor quality of our national infrastructure. This would dramatically reduce the policy instability that arises from frequent changes in political personnel and priorities, particularly in transport and energy:

    An Infrastructure Strategy Board to provide independent expert advice to parliament to guide strategic priorities;

    An Infrastructure Planning Commission to support the implementation of those priorities with more powers to share the gains from infrastructure investment by more generously compensating those who stand to lose from new developments.

    An Infrastructure Bank to facilitate the provision of finance, to bring in expertise and to work with the private sector to share, reduce and manage risk.

    We propose improving the provision of finance for private investment and innovation through:

    Increasing competition in retail banking;

    Having the proposed Business Bank make young and innovative firms its top priority;

    Encouraging a long-term investment perspective through regulatory changes (for example, over equity voting rights) and tax reforms (for example, reducing the bias towards debt finance through an ‘allowance for corporate equity’).

    Prosperity is strengthened when everyone has the capacity to participate effectively in the economy and the benefits of growth are widely shared. We propose reforming the way we measure and monitor changes in material wellbeing and its distribution, including regularly publishing median household income alongside the latest data on GDP.”

    There are some interesting ideas here which the left should pick up, even the educational reforms which would require the left letting go of the tired but comfortable old educational policy motifs. Outside of the terribly limited arena of party political economic debate there is some interesting new thinking going on which the left should be engaging with right now in preparation for attacking the right when the UK recovery runs into the sand.

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