Exclusive: Vince Cable calls on Osborne to change direction

Business Secretary argues in the New Statesman for "greatly expanded" capital spending and suggests that the Chancellor should borrow for growth.

In recent months, as the economy has continued to shrink and as borrowing has continued to rise, Vince Cable has become increasingly convinced of the need for a change of economic policy. With the Budget now just two weeks away, the Business Secretary has made his boldest intervention yet. In a 3,800 word essay for the New Statesman, Cable calls for "greatly expanded" capital spending and suggests that any increase should be funded through borrowing, not greater cuts elsewhere.

Ahead of a speech by David Cameron on the economy tomorrow, in which the Prime Minister will defend the government's strategy, he warns that Osborne's cuts to capital spending have had "economic consequences" and that the £5bn increase in last year's Autumn Statement was too "modest" to have any major effect. He adds: "one obvious question is why capital investment cannot now be greatly expanded. Pessimists say that government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn or more in 2009/10 than last year."

Cable then takes a significant step towards Labour's position by implying that the government should now borrow to invest.

The more controversial question is whether the government should not switch but should borrow more, at current very low interest rates, in order to finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for house building. This last is crucial to reviving an area which led economic recovery in the 1930s but is now severely depressed.

Such a programme would inject demand into the weakest sector of our economy – construction – and, at one remove, the manufacturing supply chain [cement, steel]. It would target two significant bottlenecks to growth: infrastructure and housing.

While maintaining that the coalition was right to adopt an aggressive deficit reduction plan in June 2010, he suggests that the "balance of risks" may have changed. 

When the government was formed it was in the context of febrile markets and worries about sovereign risk, at that stage in Greece but with the potential for contagion. As the country arguably most damaged by the banking crisis and with the largest fiscal deficit in the G20 there were good reasons to worry that the UK could lose the confidence of creditors without a credible plan for deficit reduction including an early demonstration of commitment. The main international agencies (the IMF, European Commission and OECD) and business groups stated that it judged the balance of risks correctly.

Almost three years later the question is whether the balance of risks has changed. 

He points to IMF research showing that the risk of losing market confidence as a result of higher borrowing may now be outweighed, in his words, by "the risk of public finances deteriorating as a consequence of continued lack of growth."

Osborne has consistently rejected calls to loosen fiscal policy but Cable argues that borrowing for growth "would not undermine the central objective of reducing the structural deficit" and may even assist it "by reviving growth". He notes that Britain's long-term debt maturity means it suffers "less from the risks of a debt spiral where refinancing maturing debt rapidly becomes impossible" and argues that "the effect on our fiscal situation of higher interest rates is in fact nowhere near as bad as having weak growth."

Constrained by collective ministerial responsibility, Cable ultimately concludes that the balance of risks remains "a matter of judgement", "which incorporates a political assessment of which risk is the least palatable". But his decision to reopen a debate long regarded as closed by Osborne shows his willingness to dissent from the Treasury line. With government unity already frayed ahead of next summer's Spending Review, the intervention will be viewed with hostility by Cable's cabinet colleagues. 

In a further act of provocation, the Business Secretary uses the essay to launch a withering dismissal of those Conservatives demanding greater deregulation of the labour market and a reduction in workers' rights. 

This bastardised ‘supply side’ economics often degenerates into a saloon bar whine about HSE inspectors, newts and birds which block new development, bloody minded workers, equalities and Eurocrats who dream up regulations for square tomatoes and straight bananas. Philosophical cover is provided by the belief that the private sector can always fill the space left by a retreating state.

In advance of Mark Carney's arrival as governor of the Bank of England in July, Cable also calls for more creative monetary policy, including the expansion of the Bank's quantitative easing programme to include private sector assets. He writes: "There is currently a pause in QE in the UK and two related ideas are being developed to sustain loose monetary policy. The first is for the Central Bank to acquire a wider range of assets from corporate loans to infrastructure project bonds. By taking risk off the private sector balance sheet, we encourage it to find new investments. This is surely sensible."

Cable says the Bank is right to consider targeting growth as well as inflation but adds that the stability provided by the current regime means "the bar for any change must be high."

Osborne, who characterises himself as a "fiscal conservative" but a "monetary activist", is likely to welcome Cable's intervention on this subject. But with the Chancellor already under pressure from Tory MPs to cut taxes, the Business Secretary's call for higher spending, potentially funded by higher borrowing, means he now faces a war on two fronts. 

Update: Shadow financial secretary to the Treasury Chris Leslie has responded for Labour. He said that Cable "may at last be seeing sense" but added: "he has consistently supported a failing economic policy which has led to stagnation, falling living standards, slashed investment in infrastructure and rising borrowing to pay for the mounting costs of economic failure."

"Labour, business groups and even the IMF have spent the last two years making the case for this. If Vince Cable is finally coming round to that view he needs to start winning the argument round the Cabinet table, but his words today read like they have been written by a Secretary of State who despite being in office, is not in power."

Business Secretary Vince Cable addresses delegates at the annual CBI conference in London on November 19, 2012. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.