Osborne won the battle on austerity, now Labour must look to the future

Rather than re-running the arguments of 2010, the party must start and sustain a debate about what a good, healthy economy looks like.

Earlier this week, George 'Slasher' Osborne gave a speech from a not-so-carefully chosen building site at One Commercial Street, London, E1, in the centre of the City, where he claimed that the economy was 'turning the corner'. Presumably he couldn’t find a suitable site to give the speech from in Newcastle, Birmingham or Liverpool; maybe he was afraid to venture north?  His choice of venue speaks volumes giving the growing disparities between north and south.  

Over the last few months, there have been several positive indicators, including the recent Purchasing Manager Indices (PMIs) as well as data on consumer confidence, retail sales, production and exports.  The recent poor export data suggests that there is still a long way to go before any recovery hits 'escape velocity'. There remain risks to the downside, including from the eurozone, but also from the consumer, who is currently dis-saving, and investment seems unlikely to take off. The rise in bond yields to over 3% also represents a major risk to recovery and may, in the end, force the MPC to engage in further quantitative easing.  It amounts to what the committee called an "unwarranted" monetary tightening.  If, as Osborne claimed, falling bond yields reflected the success of his policies then rising yields should reflect badly; he can’t have it both ways. Moreover, the deficit reduction plan has stalled for the last two years and there is little prospect of it improving.

We need to put all of this in context. Osborne has been responsible for the slowest recovery for more than a century. GDP per capita is now around 7% below its starting level. Four of the last 11 quarters have seen negative growth and we have had two quarters in a row of growth - 0.3% in Q1 2013 and 0.7% in Q2. The chart below illustrates that, 66 months in, the UK economy is still approximately 3% below its 2007 peak. This compares with the recessions of the 1920s and 1930s when at a similar point GDP was just under 7% higher. GDP after the shallow recession of the 1990s was 10% higher. In the period 2009 Q4 - 2010 Q3, output under the Labour government’s policies rose by 2.4%. I start from Q4 2010 on the basis that it took some time for the coalition's policies to take effect. The OBR even had to upgrade its estimate of how strong growth was. In the 11 quarters since then, 2010 Q4 - 2013 Q2, the economy has grown by a total of 1.8%, of which 0.7% occurred in 2012 Q3 because of Labour’s investment in the Olympics. 

The UK is still 2.9% below its 2008 starting level, whereas all of the other major countries, with the exception of the Netherlands and Italy, are above it. The UK has grown 1.8% since 2010 but this is markedly slower than the United States, Canada, Australia and Germany. So under Osborne, the UK has performed worse than France, which does not have its own currency and is unable to engage in quantitative easing. The UK has done worse than the EU, the euro area and the OECD.

Slasher went on to claim that the recent sharp pick-up in the PMIs and some better housing data meant he had been vindicated. He argued that what he called the "fiscalist" story - that spending cuts and tax rises have had a large impact on output - was wrong. Sadly for him, on the same day he claimed this the prestigious National Bureau of Economic Research published a major study of the impact of Osborne himself on the economy, and the news wasn’t good.

In this important new paper, Òscar Jordà of the Federal Reserve Bank of San Francisco and Alan Taylor of the University of California Davis, argued that the adverse impacts of austerity have been underestimated. They examined Osborne’s post-2010 austerity to determine the share of responsibility that should be borne by the decision to instigate austerity in a slump. The answer, they concluded, is "about three fifths...By 2013...the cumulative effects of these choices amounted to about 3.0% of GDP…Our model also suggests that additional drag from the 2010–12 policies will also continue to be felt into 2014–16, even not allowing for any further austerity." They also argue that, in all likelihood, this may well be an underestimate of the true effect. They concluded that "the vast majority of the difference between the actual UK recovery and what the OBR forecast can be attributed to the Coalition’s austerity policy choices in 2010–13."

The chief political problem for Labour remains the effectiveness of the Tory contamination of the idea of debt; that 'the money ran out' and that it was spent by Labour, and that the boom was a party fuelled by debt. It follows that austerity is a necessary antidote to excess. By extension, say the Tories, the solution to a problem caused by debt cannot possibly be more debt. The challenge for Ed Miliband and Ed Balls, then, is not just that people don't trust them on the economy, it is that they have lost control of what it means to be economically competent. They can talk all they like about living standards, under-employment and wage stagnation. But it sounds as if they are talking about social symptoms, not the essential judgments that underpin sound economic management.

Labour failed to pin the post-2010 stagnation on Osborne - that period is seen by too many people as a continuation of suffering made inevitable by the 2008 crash - and now the two Eds are facing an election campaign where something they see as self-evident - who is really responsible for the past three years of suffering - is too easily portrayed as self-serving partisanship and denial.

Ed Balls is now in a very difficult position. It is bad enough in politics to say 'I told you so' when, deep down, everyone knows you called it right. It is much worse to say it when there is a concerted campaign to say that, actually, you were wrong all along.

The task, then, is to start and sustain a debate about what a good, healthy economy looks like. What kind of jobs? What kind of society does the economy support? Who benefits? Only the south east? What about the workers? That allows Labour to capitalise on the plausible perception that the Tories have just about scraped together enough expansion to keep them and their friends in clover while, as usual, the rest of us fall behind.

Labour has to come up with a coherent plan that appeals to the median voter. Focusing on unfairness and the fact that the coalition has presided over declining living standards is a good idea. But being Osborne-lite won’t work. So many people are hurting and need some hope. Coming up with credible plans to raise real wages, create jobs and reduce youth unemployment looks like the way forward. 

George Osborne astonishingly claimed in his speech "our economic plan is the only sustainable way to raise living standards." This is Labour’s chance to show that simply isn’t the case. There is a lot of work to do.

Ed Miliband and Ed Balls at the Labour conference in Manchester last year. Photograph: Getty Images.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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An unmatched font of knowledge

Edinburgh’s global reputation as a knowledge economy is rooted in the performance and international outlook of its four universities.

As sociologist-turned US Senator Daniel Patrick Moynihan recognised when asked how to create a world-class city, a strong academic offering is pivotal to any forward-looking, ambitious city. “Build a university,” he said, “and wait 200 years.” He recognised the long-term return such an investment can deliver; how a renowned academic institution can help attract the world. However, in today’s increasingly globalised higher education sector, world-class universities no longer rely on the world coming to come to them – their outlook is increasingly international.

Boasting four world-class universities, Edinburgh not only attracts and retains students from around the world, but also increasingly exports its own distinctively Scottish brand of academic excellence. In fact, 53.9% of the city’s working age population is educated to degree level.

In the most recent QS World University Rankings, the University of Edinburgh was named as the 21st best university in the world, reflecting its reputation for research and teaching. It’s a fact reflected in the latest UK Research Exercise Framework (REF), conducted in 2014, which judged 96% of its academic departments to be producing world-leading research.

Innovation engine

Measured across the UK, annual Gross Value Added (GVA) by University of Edinburgh start-ups contributes more than £164m to the UK economy. In fact, of 262 companies to emerge from the university since the 1960s, 81% remain active today, employing more than 2,700 staff globally. That performance places the University of Edinburgh ahead of institutions such as MIT in terms of the number of start-ups it generates; an innovation hothouse that underlines why one in four graduates remain in Edinburgh and why blue chip brands such as Amazon, IBM and Microsoft all have R&D facilities in the city.

One such spin out making its mark is PureLiFi, founded by Professor Harald Haas to commercialise his groundbreaking research on data transmission using the visible light spectrum. With data transfer speeds 10,000 times faster than radio waves, LiFi not only enables bandwidths of 1 Gigabit/sec but is also far more secure.

Edinburgh’s universities play a pivotal role in the local economy. Through its core operations, knowledge transfer activities and world-class research the University generated £4.9bn in GVA and 44,500 jobs globally, when accounting for international alumni.

With £1.4bn earmarked for estate development over the next 10 years, the University of Edinburgh remains the city’s largest property developer. Its extensive programme of investment includes the soon-to-open Higgs Centre for Innovation. A partnership with the UK Astronomy Technology Centre, the new centre will open next year and will supply business incubation support for potential big data and space technology applications, enabling start-ups to realise the commercial potential of applied research in subjects such as particle physics.

It’s a story of innovation that is mirrored across Edinburgh’s academic landscape. Each university has carved its own areas of academic excellence and research expertise, such as the University of Edinburgh’s renowned School of Informatics, ranked among the world’s elite institutions for Computer Science. 

The future of energy

Research conducted into the economic impact of Heriot-Watt University demonstrated that it generates £278m in annual GVA for the Scottish economy and directly supports more than 6,000 jobs.

Set in 380-acres of picturesque parkland, Heriot-Watt University incorporates the Edinburgh Research Park, the first science park of its kind in the UK and now home to more than 40 companies.

Consistently ranked in the top 25% of UK universities, Heriot-Watt University enjoys an increasingly international reputation underpinned by a strong track record in research. 82% of the institution’s research is considered world-class (REF) – a fact reflected in a record breaking year for the university, attracting £40.6m in research funding in 2015. With an expanding campus in Dubai and last year’s opening of a £35m campus in Malaysia, Heriot-Watt is now among the UK’s top five universities in terms of international presence and numbers of international students.

"In 2015, Heriot-Watt University was ranked 34th overall in the QS ‘Top 50 under 50’ world rankings." 

Its established strengths in industry-related research will be further boosted with the imminent opening of the £20m Lyell Centre. It will become the Scottish headquarters of the British Geological Survey, and research will focus on global issues such as energy supply, environmental impact and climate change. As well as providing laboratory facilities, the new centre will feature a 50,000 litre climate change research aquarium, the UK Natural Environment Research Council Centre for Doctoral Training (CDT) in Oil and Gas, and the Shell Centre for Exploration Geoscience.

International appeal

An increasingly global outlook, supported by a bold international strategy, is helping to drive Edinburgh Napier University’s growth. The university now has more than 4,500 students studying its overseas programmes, through partnerships with institutions in Hong Kong, Singapore, China, Sri Lanka and India.

Edinburgh Napier has been present in Hong Kong for more than 20 years and its impact grows year-on-year. Already the UK’s largest higher education provider in the territory, more than 1,500 students graduated in 2015 alone.

In terms of world-leading research, Edinburgh Napier continues to make its mark, with the REF judging 54% of its research to be either world-class or internationally excellent in 2014. The assessment singled out particular strengths in Earth Systems and Environmental Sciences, where it was rated the top UK modern university for research impact. Taking into account research, knowledge exchange, as well as student and staff spending, Edinburgh Napier University generates in excess of £201.9m GVA and supports 2,897 jobs in the city economy.

On the south-east side of Edinburgh, Queen Margaret University is Scotland’s first university to have an on-campus Business Gateway, highlighting the emphasis placed on business creation and innovation.

QMU moved up 49 places overall in the 2014 REF, taking it to 80th place in The Times’ rankings for research excellence in the UK. The Framework scored 58% of Queen Margaret’s research as either world-leading or internationally excellent, especially in relation to Speech and Language Sciences, where the University is ranked 2nd in the UK.

In terms of its international appeal, one in five of Queen Margaret’s students now comes from outside the EU, and it is also expanding its overseas programme offer, which already sees courses delivered in Greece, India, Nepal, Saudi Arabia and Singapore.

With 820 years of collective academic excellence to export to the world, Edinburgh enjoys a truly privileged position in the evolving story of academic globalisation and the commercialisation of world-class research and innovation. If he were still around today, Senator Moynihan would no doubt agree – a world-class city indeed.

For further information www.investinedinburgh.com