We still don't know what Labour's alternative is

The party's policy rethink is hamstrung by a lack of detail.

Editor's note: This is a response to John Denham's blog, "There is no need for Miliband to choose between radicalism and pragmatism", itself a response to Neil's essay in the current issue of the New Statesman, "What is Milibandism?"

Dear John

I’m pleased (and flattered) that you took the time to respond to my article.

You write that

The emerging consensus among those Ed has promoted is that there is no foreseeable point where the public spending taps are turned back on. The cost of an ageing population, the need to invest, and the impossibility of increasing taxes for the squeezed middle will see to that.

This is good to hear, and your analysis is obviously right. As Liam Byrne famously pointed out, “there’s no money left”.

And yet, in Ed’s speech to the Scottish Labour Party in March he said: "this Tory-led government is making it worse…Higher VAT… Cuts to tax credits…The freezing of child benefit”, and promised that the next Labour government would introduce “a proper cap on rail fares".  Now those are either multibillion spending commitments, or they are meaningless.  Either is bad.

It’s the same with other shadow ministers. John Woodcock has proposed an extra £3bn in transport spending.  Ed Balls has complained that "The benefits cap will lead to more homelessness, the way it is designed", and that "what they are doing on disability living allowance is a big mistake." And yet we don’t really know what Labour’s alternative would be. 

You write that my "belief that Labour's spending instincts are bound to spill out misreads the way Labour's debate is going." I hope you are right.  But is Labour on really track to convince the voters that it will control spending?

You write that Ed is:

Confident that the economy can be reshaped by an active state enabling successful private business; an ambition that goes beyond the odd token grant and investment that passes for Osborne's "industrial strategy. 

You even promise "the construction of a different economy."

Wow. This is Big Stuff.  But how, how, how? 

In what ways would your "industrial strategy" be different from "handing out the odd token grant," which is what government of all hues have done for decades?  Indeed, you praise Peter Mandelson’s time at BIS, which involved doing more or less exactly that.  You write that, "The cost of tax credits rose in an economy producing too many poorly-paid jobs."  Whereas under Labour there will be millions more high paid jobs because…? Answers on a postcard, please.

You write that

O’Brien is right to say there are many issues that remain challenging for Labour, not least welfare. But it’s telling that he sees this as a tactical issue for the Tories.

Actually I see much deeper welfare reform as a good thing in itself, a way to reduce unemployment, and also a way of liberating funds to spend on tackling the root causes of poverty and economic underperformance.  But, yes, it is also an unsolved political problem for Labour.

You talk about "Shifting investment from tax credits to affordable child care, or landlords' rents to bricks and mortar. Rewarding those who work and contribute over those who didn’t."

These are really interesting germs of policy ideas, but so far they’re undeveloped.

Tax credits were supposed to be one of Labour main tools to reduce unemployment.  But in the end the overwhelming majority of tax credit spending has gone on child tax credit (CTC) which is really a bigger, means-tested version of child benefit, and does nothing to encourage work. Redirecting this spending to things like childcare which support work would be a good idea (shifting it to Working Tax Credits or cutting employers national insurance – the so-called ‘jobs tax’ - would be other possibilities). But the current child poverty measure (which Labour legislated for) would score a shift from CTC to childcare spending as a massive rise in child poverty (because CTC is income, and childcare a free service). Labour would have to either take the political hit from this, or come up with a better measure.

Shifting spending from housing benefit is obviously much harder.  You need to move nearly 700 people off housing benefit altogether to finance the building of one council house.  Housing benefit claimants are only a quarter of private renters, so squeezing spend won’t bring down prices that much, and a little bit more spent on social housing certainly won’t be enough to hold down soaring rents. Given that the majority of new homes are privately built, Labour needs much greater clarity on how it would get the private sector to build much, much more.  There is a huge opportunity for Labour here, as Labour voters are less likely to be home owners.  But I think that opportunity is yet to be tapped.

A more contributory welfare system in which what you get out reflects what you paid in is a great idea.  But how will we get people to run up the pots of savings that this requires?  We could top slice other types of welfare spending, but one way or another the money needs to come from somewhere. So far I don’t think I have heard where?

A big but neglected part of the welfare debate is about how job centres work and what we ask from claimants in return for their benefits ("conditionality" in the jargon).  We know from other countries that asking more from claimants can reduce unemployment.  There is more that can be done to identify the needs of each claimant, and tailor help and conditions like work requirements accordingly. 

With this in mind I thought that the section on welfare in The Shape of Things to Come was a bit dissapointing, particularly the rejection of the idea that stronger and better conditionality has a big part to play.  Labour should be thinking hard about this not because welfare is a political problem for the party, but because conditionality is a big part of the answer to unemployment.  It’s worth recalling that at the end of Labour’s time in government there were 4.6 million people on the main out-of-work benefits – almost exactly the same number as when the time series for worklessness started in 1999. Now the lack of money makes radical thinking on this front even more vital.

A year ago, a former Blair-era minister told me that he was worried that Labour would win the election, but then wouldn’t have a clue what to do differently if elected. 

A year on, Labour’s policy rethink so far consists of some interesting ideas, a lot of soaring rhetoric, but very little detail yet. The general election is probably still a little way off.  But isn’t it amazing how the time flies by.  Is Labour going to be ready in time?

Under Ed Miliband, Labour has promised "the construction of a different economy". Photograph: Getty Images.

Neil O'Brien is the director of Policy Exchange.

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We are heading for the next recession – it's crucial the right people are in charge

There is grave economic trouble ahead, and if the Tory right are in power, the consequences could be ghastly.

Well, we were warned. The governor of the Bank of England and the IMF, as well as much of the financial community, were very clear that Brexit would produce a damaging economic shock. It is happening.

Even if we discount George Osborne’s absurd and counterproductive attempts to predict the precise fall in house prices and threaten a deflationary emergency budget, there were sensible and dispassionate warnings of severe trouble ahead. We now need to think through how progressive opponents of this government should respond.

My starting point is a disagreement with my Tory former colleagues in the coalition – from both Remain and Leave – who argue that Britain has a “fundamentally strong economy”. It doesn’t. We have barely recovered from the 2008 crisis, are still on the life-support system of artificially cheap money and have a horribly unbalanced economy. Recovery was happening but fragile.

The first stage in the post-Brexit shock is the predictable turbulence in financial markets as liquid investors jump into safer assets and away from riskier holdings of sterling, UK banks and other shares. This is a very different situation from 2008, which was a financial crisis to which politicians had to respond; this is a political crisis, a huge escalation of political risk, to which markets are responding.

The fall in sterling should not exercise us too much. If devaluation is locked in, it would help rebalancing. The Monetary Policy Committee will surely be sensible and disregard the short-term inflationary consequences, as members did the spike in commodity prices five years ago. If investors move out of UK residential property and precipitate a sustained fall in house prices, that is also to be welcomed. The main casualties of the immediate turbulence are Brexit-voting pensioners whose annuity values crashed with the flight into gilts.

The gravest potential short-term risk was anticipated by the Bank of England when it pumped in £250bn to prevent a drying up of liquidity in the banking system and another credit crunch. The prompt action has clearly reassured markets. However, what may be more serious is the gradual reassessment of risk by bank credit committees leading to restrictions on lending to smaller businesses. That would be disastrous for growth. A pragmatic government should reach for some of the tools created by the coalition, such as the British Business Bank, for sources of business credit.

In the second stage the crisis will migrate from asset markets to the real economy and jobs. The new Tory leader will be praying the time before unemployment kicks in will be long enough to have a general election. By autumn, we shall have a clearer picture of the scale of any slowdown, but I find it difficult to see how we can avert a Brexit recession.

The issue is how to deal with a recession. Monetary stimuli are losing effectiveness. With interest rates close to zero, there isn’t much scope for further cuts and quantitative easing is becoming increasingly problematic. Some in the City will be urging more cuts, worried about Osborne’s plan to eliminate government borrowing by 2019.

There was never a better time for public investment to fill the gap in demand left by private investors. There is a long pipeline of coalition infrastructure projects, including Network Rail’s stalled investment plan, to get on with. But then we encounter the Treasury’s pathological aversion to borrowing to invest. Its deep conservative instincts will be reinforced by our deteriorating credit rating.

Yet the need to confront the structure and balance of the economy transcends the issues of short-term crisis and medium-term macroeconomic management. The financial sector may well take a bad hit with banks migrating to European centres. We should not minimise the costs to individuals and the Exchequer, but it may be no bad thing if the result is some rebalancing. The industrial strategy put in place under the coalition is an ideal vehicle for building confidence in long-term investment in manufacturing and creative industry. Of course, none of this will happen without a speedy confirmation of the UK’s continued role within the single market.

How the economics of this political crisis will be dealt with depends on the parliament that is returned when a new Tory leader calls an election. If the Tory right emerges triumphant, the consequences will be ghastly. If the parties of the centre and left – including disaffected Tory Remainers – can get themselves organised, however, we could see an altogether happier outcome.

This article first appeared in the 30 June 2016 issue of the New Statesman, The Brexit lies