Learning the right lessons from Labour's economic record

Neither Labour nor the Coalition is willing to ask why Britain's tax base was so fragile.

You might think the one thing the world doesn't need right now is yet another instant history about the Labour years. But here one comes -- this time, though, with a difference. The authors certainly won't be dining out on the royalties and there's no insider gossip or "he said, she said" revelations about rows in Downing St. Which is perhaps one reason why it's worth reading; it says something serious about what did and didn't happen to economic performance during the Labour years.

It is authored by John Van Reenen from the LSE -- one of Britain's leading economists, and something of a guru on productivity and growth; together with Dan Corry, a seasoned and respected economic advisor from the former Labour government, and someone not averse to being contrary and defying the conventional view of the day.

Their central argument is that the 2.8 per cent a year productivity growth achieved between 1997 and the start of the 2008 recession was impressive in both historical and international terms; rooted in substantive improvements in a number of sectors, rather than relying on the frothy gains from financial services; and arose in part due to policy choices -- particularly investment in research and science, strong competition policy, expansion of higher education and gains in skills. Their argument is as unfashionable as it is empirically substantiated.

Above all it is an attempt to rebalance the current economic debate about the Labour years, a first (and no doubt doomed) effort at taking on those who assert that there was little more to the Labour era than an attempt to surf the wave of public and private debt over which it presided. This puts the authors at odds with the swelling ranks on left and right who wish to portray Labour's economic strategy as little more than a Faustian pact with the City: light regulation in return for growing tax-revenues. The report, of course, concedes financial regulation was a failure, but contends that wider economic policy made a real and positive difference to a range of sectors -- a point that is currently in danger of being completely over-looked.

Nor do the authors just make an argument about the past -- they also seek to pick a fight about the future. Entering the fray of the current economic debate, they refute the "supply-side pessimists" who assert there is no scope for any further stimulus on the basis that the productive potential of the economy has already fallen (which if true would mean that further expansionary policy would be counter-productive). In contrast, the LSE report contends there is plenty of spare capacity, it just requires some form of Plan B to ensure it is utilised. In truth, however, the authors are most interested in advocating a Plan V, as they term it, for long term growth involving a more muscular and far-sighted industrial policy.

For all the cogency of their arguments on productivity -- and let's hope someone in Whitehall is taking note about the insights offered about the real sources of growth -- there are some puzzling omissions and assertions. Little is said about the UK's ongoing trade imbalances. There is no investigation of the weakening link between GDP growth and the gains going to low-to-middle income Britain, and the associated wage stagnation that took hold in the years preceding the recession -- a phenomena that Labour in office failed to grasp. When you reach the end of the report you don't have much of a sense of the policy agenda that would lift the prospects of the millions of low and modestly paid workers employed in Britain's vast low-skill, low-productivity sectors. The authors, like so many others, focus their attention on what can be done to improve the industrial vanguard, rather than the laggards.

And when it comes to the record on public finances, they choose to pin-point blame on Labour's record on overall public debt, saying it got too high pre-recession. This seems like an odd argument to select given that the UK's debt was relatively low compared to others. A better target would have been Labour's projections for tax receipts -- together with the wisdom of running modest deficits in the middle of the last decade, in a period of steady growth when modest surpluses would have been more prudent.

But even this criticism is dwarfed by the real argument which neither Labour nor the Coalition wants to make as it doesn't fit their favoured narratives -- which is to ask why Britain's tax base was so fragile, crumbling so dramatically, during the recent recession in a way that those in other countries didn't. Indeed, after several years of intense focus on the need to "stress test" banks to ensure their balance sheets could stand up to future financial shocks, it is remarkable that there is no equivalent debate about the sort of tax-base the modern British state needs if it is to better withstand global turbulence in the decades ahead (see this for an exception). Only when this issue is properly aired and addressed will we know that Labour, along with the Coalition, are intent on having a strategic discussion about Britain's long-term fiscal future.

Decades will pass before a full and fair account of Labour's economic record is formed. For now we need to recognise that, love them or loathe them, instant histories matter in politics: they frame today's media coverage and tomorrow's policy decisions. Here, unusually, is one that merits a wider readership than it will get.

Gavin Kelly is chief executive of the Resolution Foundation 

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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR