Nearly three months have passed since the May election where Labour miraculously managed to win 258 seats on 29 per cent of the vote – its worst general election performance since 1983.
Since then, the party has begun a long leadership election, while the Conservative-Liberal Democrat coalition has passed the most regressive Budget since Geoffrey Howe’s in 1981. Successive forecasts, by the Government’s new Office for Budget Responsibility and the International Monetary Fund, have revised down Britain’s growth prospects in 2011 from 2.5 per cent to 2.1 per cent.
These figures still look optimistic, notwithstanding the economy’s faster-than-expected growth of 1.1 per cent between April and June – the biggest quarterly growth since 2006. However, while Labour and most leading economists are rightly horrified at the brutality of the public spending cuts and tax increases, the stark truth is that the Tory-Lib Dem coalition is being allowed to dictate the debate on the future of Britain’s economy.
Labour’s frontbench is appropriately critical of the Government’s frighteningly misguided economic approach and the stark unfairness of the emergency Budget – specifically the VAT rise which, alongside the cuts to housing and child benefit, will mean the poorest are hit hardest.
However, if we only criticise the economic and social damage that will be caused by the new Government without proposing an alternative vision, Labour should not expect to win the next general election. The coalition may not have had much of a honeymoon period, but after 13 years of a Labour Government that grew increasingly stale, many people want it to succeed. If an election were held tomorrow, the Tories would probably win an outright majority.
Part of Labour’s policy vacuum is due to the leadership battle and the intellectual exhaustion caused by more than a decade in office. But the problem is also that Labour’s economic message during the 2010 election campaign boiled down to “more of the same” along with the message that, although the party would make some cuts, the process would be far less painful than anything planned by the Tories.
Labour needs to respond fast, because the current policy vacuum is allowing the Tories to rubbish its entire economic record since 1997. Yet there is much in that record of which we should be proud. Over a decade of growth, massive investment in public services transformed hundreds of schools and hospitals. A return to stimulus measures staved off the worst effects of the financial crisis. We should never forget that, without the stimulus package, unemployment would be 500,000 higher than if we had, as the Tories wanted, allowed the “invisible hand of the market” to wreak its havoc.
Having failed to renew itself in power, Labour must now do so in opposition. The scorched earth approach of tax rises and massive spending cuts could lead to a double-dip recession. But principled policies designed to create the growth we need to create a fairer society will help to renew both Labour and Britain.
In fact, Labour’s current weaknesses on economic policy are largely of its own making. Despite the late conversion to Keynesian economic management when the crisis struck in 2007, during the preceding decade the Labour Government stuck largely to free-market orthodoxy – light touch financial regulation, a tax policy that was neither fair nor sufficiently redistributive – and failed to correct the neglect of our manufacturing base with the result that British manufacturing now accounts for a lower proportion of the economy than in 1997.
One of Michael Foot’s favourite quotations was Ignazio Silone’s observation that: “Every means tends to become an end”. It applies in equal measures to Labour’s attitude to nationalisation and the old Clause IV of its constitution, and then to free-market orthodoxy under Tony Blair and Gordon Brown. That period is over. All five leadership candidates have been clear that Labour must articulate a new form of political economy.
This economic strategy must be based on fairness, economic democracy and efficiency – simple values that chime with an electorate that wants to balance the books but not butcher public services, and are in harmony with Labour’s core principles.
This approach will have to include a more balanced economic model that reduces our dependence on the City. As far as the financial sector is concerned, we should propose financial regulation that rewards long-term profitability rather than short-term risk-taking and ban the use of financial instruments such as naked short-selling and unabashed credit default swaps that are nothing more than casino capitalism. While we should not castrate the financial services industry, which has the cash to contribute to improved public services, it must behave like other economic sectors – with rewards that reflect long-term results.
Labour must also promote an industrial strategy that nurtures and strengthens Britain’s manufacturing base and also the small businesses and enterprises which will drive the future growth we need to pay for better public services.
Following the Lib Dems’ meek acceptance of Osborne’s Budget, Labour needs to take advantage of its position as the only party that can campaign credibly for a fairer tax system. In addition, it is crucial to promote more economic democracy for employees by placing strong co-operatives at the heart of our agenda – something Labour has ignored, despite its success in numerous Western countries including Sweden, Germany, France and the United States.
On financial regulation, the scope for national government control that can be exercised over the City is very small. Since the 1980s, markets have become far more complex and internationalised. The bulk of the City is foreign owned and financial regulation can only be effectively exercised at European Union and global level. However, regulation at EU level can be complemented by national legislation.
In relation to promoting economic democracy and commercially viable co-operatives, Labour should follow the model introduced by the Swedish Social Democrat government in the mid-1980s. Under this, workers saw a portion of their income allocated to one of five regional investment funds. Employees’ representatives were guaranteed a majority on the boards of these regional investment boards. It meant workers were given the chance to ensure that profits were actually used to benefit them – either through reinvestment or improved job opportunities and conditions. This was share ownership with a difference. In contrast with the conventional capitalist model, ordinary employees had real power.
Such models, on a large scale, have the capacity to mark a major shift in economic power, as the investment funds would make up an increasing share of each company’s capital. The result would be to redistribute wealth and hand workers and the trade unions which represent them the tools to generate the growth which is essential for industrial progress. Labour should be about economic and political democracy. Those most likely to further the interests of a business are those whose futures are most directly concerned with its success.
Indeed, there is extensive evidence that such co-operatives, assisted by local authorities or development agencies, create jobs far cheaper and more sustainably than private sector firms and lead to higher productivity. German unions reported an absolute increase in productivity of 15 per cent following the introduction of greater employee participation, while the American Centre for Employee Ownership studied 360 companies and saw that firms with shared ownership grew between two and four times more than companies where employees owned no stock.
Promoting such co-operatives requires major policy changes: preferential tax treatment and financial institutions able to finance them. For example, losses made by individual workers on shareholdings should, as with conventional businesses, be allowed to be tax write-offs.
Moreover, in the current climate, an appropriate financing mechanism could be easily created by converting one of the numerous bailed-out banks into an industrial nvestment bank. As the crisis has shown, banks have had access to unlimited cheap money from the Bank of England and the European Central Bank, but have not passed it on in consumer lending, causing many businesses to wither on the vine.
An industrial investment bank would exist to ensure investment in British industry and businesses that, despite being commercially viable, are denied the capital they need to get started and then to grow. The existence of such an institution would have ensured that the commercially viable Sheffield Forgemasters received the £80 million of investment that was denied by the myopia of the coalition.
There are numerous other examples where British manufacturing has been sold short because commercial banks were, either through prejudice or the culture of short-termism that has become embedded in the financial world, unwilling to provide them with capital.
As far as tax policy is concerned, the Chancellor announced in June that he would increase the tax threshold to £10,000 over the next five years. This was no more than an attempt to appease the Lib Dems. Labour should commit to an immediate raising of the threshold to £10,000, while also arguing for reducing the tax rate on the first band of income tax to, say, 15 per cent. This graduation of income tax should be alongside applying the 50 per cent top rate applied to incomes in excess of £100,000.
These policies should be proposed not just to outflank the coalition, but because a more progressive tax system is fairer and more efficient in providing incentives for people
to work.
And we need to focus on the detrimental effects – both social and economic – of not taxing unearned income proportionately. The inheritance of large fortunes has little economic or social justification. It perpetuates inequality and does not encourage economic growth or entrepreneurship, since an inheritor of millions is less likely to contribute to the economy. It is neither fair nor efficient.
The same is true of capital gains tax. In its understandable bid to gain the confidence of the City following 18 years in opposition, one of the sops Labour offered in 1997 was a very low level of CGT. This was taken far too far and CGT was a meagre 18 per cent when Labour left office. Consequently, cleaners working for hedge fund magnates were paying a higher proportion of their income to the taxman than the financiers were paying on multi-million pound profits.
In most cases, capital gains are essentially unearned income. With few exceptions, this income is not widely dispersed. It is kept in the bank balances of the already extremely rich. Money and property are kept by a minority and not dispersed to the many. To any rational observer this is palpably unfair and unjust – and inevitably limits social mobility. The coalition has increased CGT to 28 per cent, although with huge exemptions for businesses and investment firms. Again, Labour should go further and tax capital gains at either the 40 per cent or 50 per cent rates, depending on the size of the profit.
Labour’s new economic approach must expound the principle that markets, while useful in delivering economic growth, are social constructs. They are not morally superior to government intervention, nor are they an all-purpose tool for society. If markets operate in a way that damages society, they should be either guided through rules or abandoned. Having seen the wreckage left by the recession caused by light-touch regulation and laissez-faire economics, most people are likely to support that proposition.
Ben Fox is parliamentary advisor to a Socialist vice-chair of the Economic and Monetary Affairs Committee in the European Parliament. He is also chairman of the GMB Brussels branch.
