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It's time for Osborne to use the I word - 'Intervention'

We need the state to invest in business innovation and infrastructure that commercial investors fear

It's not looking good for Osborne. Output, employment, sectoral data and confidence all point to an economy either on the brink of recession or stuck deep in the doldrums. Inevitably, the debate about how to escape this very nasty patch intensifies and the battle lines dividing fiscal hawks from doves become ever more stark. But it is a debate that masks an even nastier truth for the UK economy. Even when we are through this crisis, we will still be an economy unfit to fight the big global economic battles ahead.

As a new paper published this week by IPPR and written by myself and David Nash shows, the UK is a serial under-performer compared to our competitors on those OECD, IMF and other international economic indicators which are most vital for successful competition in the global market.

On investment in business, on skills, on innovation and productivity, and on presence in emerging markets we are decidedly mediocre and, in some cases, worse than mediocre when compared to similar economies.

This should be troubling at any time but at a point when new, confident players from the East are striding into global markets and as business practices and markets are being turned upside-down by web technologies, fear and trepidation should be stalking Whitehall and the business world.

But because of the intense focus on the short-term crisis there is a real risk that once the economy is growing healthily again, a 'job done' mentality will seize policy-makers. It would hardly be a surprise. There is a long history of complacent back-slapping in British economic policy-making: Macmillan's "never had it so good" as inefficiency ate away at the economy, Nigel Lawson's self-satisfaction at rapid growth in the late 1980s just before the property market crashed under its own weight, and Gordon Brown praising the City to the skies in his 2007 Mansion House Speech while the credit crunch (and worse) rumbled in the distance.

A continuation of this ignoble tradition could prove equally disastrous now.

We can avoid the potential crisis of the future not just by acknowledging the threat but also by moving beyond ideological shibboleths about the state as the enemy of enterprise that has gripped government for too long. Instead we need a new pragmatism that learns from those economies that have long out-performed us on business investment, skills, innovation and exports. These are countries have a hugely healthy respect for the free market and intense competition as the main drivers of growth and innovation but also recognise that the market simply is not very good at delivering some of the fundamentals.

Germany, Japan, the Scandinavian economies and, yes, even the USA use the state to invest in business innovation and infrastructure that commercial investors fear. At their best, they take an active role in predicting skills needs and so can shape their education and training systems to get ahead of the curve. They positively target innovative firms not just with tax breaks but with world class generously funded research. And when firms want to export they get generous credit guarantees plus a whole range of other supports. In short, they intervene. Not out of some ideological love of the state but because it works. Of course, these economies have their own problems and they are far from perfect but on the measures mentioned above, they consistently do better than us.

Intervention has, of course, had a very bad name in the UK. This is partly because the Thatcherite world view became so successfully embedded into Whitehall and into Party political debate (even though Thatcher herself could be quite the intervener when she wanted). But it is also because intervention became confused in the public mind with the economic planning of the 1940s and 1950s when the focus was actually on controlling employment and prices, not on the modernisation of business, as it was in the rest of Europe. The only time when intervention was seriously tried in the 1960s, it was all too late and ill-conceived to save out-dated British business and it degenerated in the 1970s into support for lame duck firms and fading industries.

The intervention we need today should have a very different focus. It is not about predicting the economy of the future and plotting a path there. It needn't even be about identifying high growth sectors and giving them special support. It should focus instead on the very significant long-term weaknesses of the UK economy relative to our competitors by building a bold policy framework to address those weaknesses before it is too late and we find ourselves once again in decline mode. In short, it is the opposite of our tradition of complacency replaced by an embracing of the pragmatism and common sense displayed overseas.

Adam Lent is Associate Fellow at IPPR.