Planning for long-term growth tells us what we should do in the short-term

Demand-friendly cuts and tax rises will boost UK PLC now.

Two things are striking about yesterday’s report of the LSE Growth Commission. The first is the very strong implication of its conclusions that the path to future prosperity is decidedly one involving, indeed demanding, government involvement in the economy rather than the state stepping back. The second is what its prescription for long-term economic growth says about how we should get the UK out of its current economic malaise.

The first isn’t a political statement. Indeed, the Commission points to evidence that the pick-up in Britain’s relative productivity growth began in the 1980s, and is largely attributable to the policies of Conservative (but also Labour) governments. Most of the growth-enhancing reforms are clear victories for economic liberals: increased labour market flexibility, better active labour market policies, and openness to foreign capital and labour.

But what the report also makes clear is that the benefits of simply removing such barriers to growth has run its course. The authors couldn’t be clearer that “demands for ever greater deregulation and reductions in government spending as a panacea for the UK’s growth problems are misguided.” Rather it is now the state that must act and invest wisely if the UK is to keep pace with productivity growth in other leading countries. Investment in education at every stage from pre-school to vocational training is advocated. The authors argue for new and better government institutions – and indeed public investment – to stimulate investment in transport and energy infrastructure. And a new role is claimed for the state role in subsidising R&D through a business bank, taking “a wider view of the social returns to innovative projects”.

All in all this amounts to a significant increase in state involvement in the economy. It’s also hard to see how this agenda is compatible with the current government’s plan to load future fiscal consolidation entirely onto departmental spending between now and 2018. As SMF research has recently shown, protecting education spending – let alone increasing it – alongside health at the next spending review will impose politically unacceptable cuts on other public services. There will certainly be no scope for increasing public investment in infrastructure, or scaling-up Vince Cable’s business bank.

In other words, the supply siders had some useful insights in the 1980s, on which the recent productivity spurt was largely based. But the prescriptions of advocates for a small state and blanket deregulation are now the road to economic lassitude.

So what about the short term? While the Commission focuses on long-term growth rather than remedies for the current stagnation, there is a strong link between the two. The reforms advocated will take many years, and perhaps decades, to bear fruit. All the more important to start immediately. But with the deficit reduction programme now running to 2018, and an aging population likely to put further pressure on the budget thereafter, action can’t wait until the (hopefully) sunlit uplands of the next decade.

Rather than seeing the short- and long-term as distinct challenges, we must find a way to tackle the current economic problems in a way that lays the foundations for future growth. A huge and immediate investment strategy for our creaking transport, energy and housing infrastructure is the way to square the circle. And the chancellor can do it without deviating from his current deficit reduction plan.

How can this be achieved? With £31bn of further fiscal consolidation in the pipeline by 2018, the chancellor should bring forward cuts to elements of public spending which do little to support the economy, recycling the saved money into infrastructure investment between now and 2018. Prime examples of such "demand friendly" cuts include cutting benefit payments and give-aways to the better-off, and axing financial incentives for rich people to save more.

A growth-boosting deficit reduction strategy relies on funding the investment plan in ways that won’t damage demand in the economy. For this reason, having picked the low-hanging fruit on demand-friendly cuts, some proportion of the necessary £31bn should come from growth-friendly tax rises. Income tax and corporation tax should be avoided. But much higher property taxes would raise money while having little impact on growth. The socially beneficial effects of a well-designed tax on housing allocation is another story. Raising that money immediately and investing it between now and 2018 would kick-start growth and help to leave UK PLC set fair for a productivity boom in the decades ahead. 

Photograph: Getty Images

Ian Mulheirn is the director of the Social Market Foundation.

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Chuka Umunna calls for "solidarity" among Labour MPs, whoever is voted leader

The full text of shadow business secretary Chuka Umunna's speech to Policy Network on election-winning ideas for Labour's future, and the weaknesses of the New Labour project.

There has never been an easy time to be a social democrat (or “democratic socialist” as we sometimes call ourselves in Britain). Whereas the right can demonise the poor and extol the virtues of the market, and the hard left can demonise the market and extol the role of the state, our position of constraining the domination of markets and reforming the state is, by definition, more complex.

It is nonetheless the case that social democracy has a historic responsibility, in every generation, to renew democracy and preserve a civic culture. This is achieved not through soundbites and slogans, but through the hard-headed development of a progressive politics that reconciles liberty and democracy, new comers and locals to our communities, business and workers, in a common life that preserves security, prosperity and peace.  This historic mission is all the more urgent now and my determination that we succeed has grown not weakened since our election defeat last May.

But, in order to be heard, it is necessary to make balanced and reasonable argument that both animates and inspires our movement, and which is popular and plausible with the people.  The first is pre-requisite to the second; and there is no choice to be made between your party’s fundamental principles and electability. They are mutually dependent - you cannot do one without the other.

We are in the midst of choosing a new leader and it is clear to anyone who has watched the UK Labour Party leadership election this summer that amongst a significant number there is a profound rage against Third Way politics – as pursued by the likes of Bill Clinton, Tony Blair, Gerhard Schröder and others - as a rejection of our fundamental values.

In the UK there is a view that New Labour accepted an uncritical accommodation with global capital that widened inequality, weakened organised labour and we were too close to the US Republicans and too far from the European left.

I do not believe this is fair, not least because we rescued many of our public services from the scrap heap when we came to office in 1997 and there were very significant achievements  we should celebrate.  New Labour renewed our National Health Service in a fundamental way; we built new schools and improved existing ones; we set up new children’s centres all over the country; we brought in a National Minimum Wage; we worked with others to bring peace to Northern Ireland; we introduced civil partnerships.  Just some of our achievements.

However, though we may take issue with the critique, I do not think we can simply dismiss out of hand those who hold critical views of New Labour. Like any government, the New Labour administration made mistakes - it could and should have achieved more, and done more to challenge the Right’s assumptions about the world. In the end, it is not unreasonable to be ambitious for what your party in government can achieve in building greater equality, liberty, democracy and sustainability. It is far better we acknowledge, not reject, this ambition for a better world, as we seek to forge a new politics of the common good fit for the future.

Realising our values in office has been disrupted by globalisation and the surge of technological forces that are displacing and reshaping industry after industry.

Some argue that globalisation as an ideological construct of the right. But we must recognise that we live in an increasingly integrated world in which markets have led to an unprecedented participation of excluded people in prosperity, a rise in living standards for hundreds of millions  of people and a literacy unprecedented in human history – this is particularly so in emerging economies like my father’s native Nigeria. And the internet has led to a level of accountability that has disturbed elites.

Yet, this has been combined with a concentration of ownership that needs to be challenged, of a subordination of politics that requires creative rather than reactive thinking, and these global forces have exacerbated inequalities as well as helped reduce poverty.

So it is important that we understand the sheer scale and impact of new technologies. At the moment we are engaged in a debate about Uber and its threat to one of the last vestiges of vocational labour markets left in London, those of the black taxi cabs and their attainment of 'The Knowledge'. But the reality is that within the next decade there will be the emergence of driverless cars so we have to intensify our exploration of how to support people in a knowledge economy and the realities of lifelong learning, as well as lifelong teaching. As people live longer we will have to think about how to engage them constructively in work and teaching in new ways.

Once again, I'm addressing all of this, Social Democracy requires a balanced view that domesticates the destructive energy of capital while recognising its creative energy, that recognises the need for new skills rather than simply the protection of old ones. A Social Democracy that recognises that internationalism requires co-operation between states and not a zero sum game that protectionism would encourage.

Above all, Social Democratic politics must recognise the importance of place, of the resources to be found in the local through which the pressures of globalisation can be mediated and shaped. Our job is to shape the future and neither to accept it as a passive fate nor to indulge the fantasy that we can dominate it but to work with the grain of change in order to renew our tradition, recognising the creativity of the workforce, the benefits of democracy and the importance of building a common life.  Sources of value are to be found in local traditions and institutions.

This also requires a recognition that though demonstration and protest are important,; but relationships and conversations are a far more effective way of building a movement for political change.

One of the huge weaknesses of New Labour was in its reliance on mobilisation from the centre rather than organising. It therefore allowed itself to be characterised as an elite project with wide popular support but it did not build a base for its support within the party across the country, and it did not develop leaders from the communities it represented. It was strong on policy but weak on strengthening democratic politics, particularly Labour politics.

Over half a million people are now members, supporters or affiliated supporters of our party, with hundreds of thousands joining in the last few weeks. Some have joined in order to thwart the pursuit of Labour values but many more have joined to further the pursuit of those values, including lots of young people. At a time when so many are walking away from centre left parties across the Western world and many young people do not vote let alone join a party, this is surely something to celebrate.

So it is vital that we now embrace our new joiners and harness the energy they can bring to renewing Labour’s connection with the people. First, we must help as many them as possible to become doorstep activists for our politics. Second, I have long argued UK Labour should campaign and organise not only to win elections but to affect tangible change through local community campaigns. We brought Arnie Graf, the Chicago community organiser who mentored President Obama in his early years, over from the U.S. to help teach us how to community organise more effectively. We should bring Arnie back over to finish the job and help empower our new joiners to be the change they want to see in every community – we need to build on the links they have with local groups and organisations.

I mentioned at the beginning that in every generation Social Democracy is besieged from left and right but the achievements of each generation are defined by the strength of a complex political tradition that strengthens solidarity through protecting democracy and liberty, a role for the state and the market and seeks to shape the future through an inclusive politics. Solidarity is key which is why we must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office.

Yes, these are troubled times for social democrats. All over Europe there is a sense among our traditional voters that we are remote and do not share their concerns or represent their interests or values.  There is surge of support for populist right wing parties from Denmark to France, of more left wing parties in Greece and Spain and in Britain too. There is renewal of imperial politics in Russia, the murderous and abhorrent regime of ISIL in the Middle East, volatility in the Chinese economy and in Europe a flow of immigration that causes fear and anxiety.

But, the task of Social Democracy in our time is to fashion a politics of hope that can bring together divided populations around justice, peace and prosperity so that we can govern ourselves democratically. We have seen worse than this and weathered the storm. I am looking forward, with great optimism to be being part of a generation that renews our relevance and popularity in the years to come.

Chuka Umunna is the shadow business secretary and the Labour MP for Streatham.