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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This is no time for Labour to turn its back on free trade

The Brexit negotiations centre on a trade deal. But Labour is divided on the benefits of free trade. 

On Wednesday 29 March, Theresa May will trigger Article 50 and the process of leaving the European Union will begin. The Prime Minister and David Davis, the Brexit Secretary, have made a commitment to “pursue a bold and ambitious free trade agreement with the European Union.” On 24 January in Parliament, Davis went even further and committed the government to negotiating “a comprehensive free trade agreement and a comprehensive customs agreement that will deliver the exact same benefits as we have".

As Labour’s Shadow Brexit Secretary, Keir Starmer set out earlier this week, it is critical that we hold the government to account on Davis' pledge. But it is also crucial that the Labour movement gets to grips with the new reality of trade deals with the EU and other countries, resists any knee-jerk protectionist instincts and makes the right progressive demands on workers’ rights and environmental and consumer protections.

The successful negotiation of a free trade deal with the EU is essential. Together, the remaining 27 EU countries are by far and away our largest export market. And we import more from the EU than from any of our other trading partners. A UK-EU trade deal will therefore be the single most important free tree agreement the UK will ever have to strike, and if it covers both goods and services it will also be the most comprehensive deal that any country has ever negotiated with Europe.

The stakes are high. Our EU membership has given us unfettered access to the single market which is so much more than a free trade deal. It is a vast, integrated factory floor across which goods conform to the same regulations and standards. At the border with the EU, goods are not subject to customs duties, onerous rules of origin or time-delaying checks. Given that services make up 80 per cent of our economy, the government must seek much greater access for our services than the EU has been willing to grant to other countries in the free trade deals it has negotiated so far.

Retaining the exact same benefits is going to be a huge challenge. Indeed, there is no guarantee that such a deal will be achieved, particularly within the two-year period set out under Article 50. The government has already struck the wrong tone with our European partners. The Foreign Secretary seems intent on needlessly upsetting them. The PM parrots the mantra “no deal is better than a bad deal”, effectively threatening to walk away. It is crucial that a new positive dynamic is established to create mutual goodwill and help deliver an ambitious UK-EU trade deal.

There is a substantial risk that the government’s mishandling of Brexit could see the UK fall out of the EU with no trade deal at all, thereby falling back on to World Trade Organisation tariffs and barriers. Furthermore, we would do so with none of the technical agreements in place - such as financial services equivalence agreements and mutual conformity of assessment agreements - that other major countries around the world enjoy. As Sir Ivan Rogers, the former UK Permanent Representative to the EU, recently asserted in his evidence to the Exiting the European Union Select Committee, on which I sit, “no other major player trades with the EU on pure WTO-only terms”.

The Prime Minister asserts that “no deal is better than a bad deal”, but it is increasingly clear that no deal is the worst possible deal. It would do considerable damage to our economy. And yet, we have learnt that Cabinet members have been told to plan for the no deal scenario. In recent weeks, Davis has admitted to the Brexit Select Committee that the government has conducted no analysis of what this would mean for the British economy. Labour will fight strongly against such a reckless step which would hit jobs, living standards and growth.

As Starmer said in his speech to Chatham House, the government must agree a strong and collaborative relationship with the EU. If it does not, it will not be acting in the best interests of the UK and it will not have Labour’s support.

I believe that Labour must champion the right free trade deal with EU over the next two years. We must demand that the government accepts meaningful transitional arrangements that will be necessary to successfully complete such negotiations. A successful EU-UK deal could then become a template for future agreements. After all, our country’s future economic prosperity rests on striking free trade deals not just with the EU but with other G20 economies and developing countries around the world. So Labour must become a champion for striking progressive free trade agreements.

Yet this poses a challenge to the Labour party. Within our movement, there is currently a heated debate about what our approach to trade should be. This was exposed by the recent votes in the UK Parliament and European Parliament on the Comprehensive Economic and Trade Agreement (Ceta) between the EU and Canada when Labour MPs and MEPs were divided. I fear Labour risks sliding into a dangerous position: one of perpetual opposition to trade deals that puts us the wrong side of the public interest and history. Globalisation cannot be stopped but it can be regulated. So the real challenge is how to make it work for people so that they can benefit from an increasingly globalised world.

No trade deal is ever perfect. Each is inevitably the result of negotiation and compromise. However, if we followed the advice of some on the left and refused to ratify any trade deals, no matter how progressive, the UK would be isolated, poorer and left behind. Of course we need assurances that public services will be safeguarded, that workers’ rights are protected and environmental and consumer protections are in place in any deal, but we also need to open up markets. Trade deals are not the threat to public services that some claim, but a failing economy facing trade barriers that puts a squeeze on the public finances is a clear and present danger.

Labour’s values place us in a strong position to lead the way in rejecting the Tory right-wing approach of unfettered globalisation, a race to the bottom and unchecked markets. We must show that we are the party of work and workers, looking to both create jobs and protect the rights of workers in our future trading relationships. Our internationalism can be expressed by establishing progressive global rules and opening up markets, using trade to bind nations together in a way that prevents conflict and opens minds.

As these historic negotiations begin, Labour must hold the government’s feet to the fire and champion regulated and progressive free trade deals with the EU and other countries. Turning our backs on properly regulated free trade will not further social justice or economic prosperity on our shores, it will only serve to do harm to both. Labour has to reject the defeatism of protectionism and instead embrace progressive free trade agreements if we are to truly succeed in building a fairer and more prosperous economy for the people we represent.

 

Emma Reynolds is MP for Wolverhampton North East and former shadow Europe minister. She sits on the committee for exiting the European Union.