George Osborne during a visit to the Royal Mint in Llantrisant, Wales. Photograph: Getty Images.
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Under the bonnet of the UK's economic recovery all is not well

To resign ourselves to a return to the economic pathologies of the past, as the Tories do, would be to miss a historic opportunity.

Last month, the OBR confirmed that Britain is now experiencing growth of over 2 per cent. After the slowest recovery from a recession on record – partly because of the depth of the impact of the crash, partly because of the fiscal austerity chosen by this government – we should all welcome this news, whatever our views on economic policy or our party affiliations. To do otherwise is not simply churlish: it is self-defeating for those who want to make the case that there are serious problems with the UK economy, and with the policy choices this government is making. And I think there are some very serious problems.

To see what the problems are, you need to look under the bonnet of the UK recovery. Firstly, it is a recovery predominantly fuelled by consumption, more than any other major economy. Where is this consumption coming from? Partly from the expansion of household debt, which reached a record high at the end of 2013. And partly from people running down their savings to spend more. Between January 2012 and December 2013, the UK savings ratio went from 8 per cent of GDP to 5.4 per cent. Germans save nearly twice as much as that. 

Secondly, it is a recovery of an economy that is relatively inefficient. Our productivity has gone from bad to worse since the crash, and is now about 20 per cent below the average of our G7 competitors. This year, Britain’s trade deficit is predicted to rise to the highest level of any industrial country in 2014, its highest level for a quarter of a century. And what about investment? As a share of GDP, investment in the UK economy dropped by a quarter in the five years after 2008. We now rank 159th in the world, just behind Paraguay and Mali.  

Thirdly, it is a recovery whose benefits are being felt by a very few, not by the broad majority. And not any old "very few" either. City bonuses are predicted to be 15 per cent up on last year. Meanwhile, average earnings are £1,600 a year lower than at the last election, and earnings will only have grown by half the level of the overall economy by the next election. The median household has seen their income drop by nearly 4 per cent since the recession. In our country, the poorest 40 per cent have the lowest share of national wealth of any western country.  

However you cut it, our economy has a problem in the engine room. We are too dependent on housing and debt for family incomes, too dependent on consumption rather than saving and investment, too dependent on an under-skilled workforce, and too dependent on low-wage and insecure jobs.  

But let’s be honest about these problems. They are not being addressed by this government, but they were not caused by it either. Nor are they problems that will be rectified in one policy heave, but instead require a determination to address them over a number of years. The question is: what is to be done?

This is where a clear choice between Labour and the Conservatives starts to emerge. The Conservatives’ answer has two parts. First, to say that the return of growth is the definition of economic success. Second, to double down on the economic model created after 1979. In George Osborne’s view, there is no point trying to reform the way our economy works. It is what it is. The role of government is to feed the low-wage, low-skill monster.  

That’s why the Tories prioritise further labour market deregulation in an economy that is among the most deregulated in the OECD. It’s why they want to revisit UK membership of the Social Chapter, 20 years on from the last debate about it. It is why they refuse to tackle zero-hours contracts. It is why they are happy to subsidise demand for housing yet preside over historically low levels of housebuilding activity. It is an approach based on the policy recipes of the 1980s and 1990s. And it won’t fix what doesn’t work.

The response of Labour under Ed Miliband’s leadership is different. We refuse to accept that there is nothing to be done about the snapping of the link between the fortunes of the economy and those of working people. Britain's problems with productivity, competitiveness and living standards are interconnected, and demand a thoroughgoing reform of how our economy works. That’s why Ed Miliband has said that the government he leads will prioritise a transformation of our banking system, resetting the energy market, a new target of building 200,000 new homes a year, a revolution in apprenticeships and technical education in our schools, and a historic transfer of many of the levers of economic policy from Whitehall to city regions and county-regions.

The easy response to the return of growth after such a long wait is to say that this agenda for fundamental reform is both too difficult and unnecessary. I strongly believe that would be a mistake. As Britain emerges from the most devastating and prolonged downturn of the past 100 years, to resign ourselves to a return to the economic pathologies of the past would be to miss a historic opportunity. As long as Britain’s international ranking on skills, investment and productivity is so low, and on inequality, centralisation and poverty so high, there will be a need for a government that sets itself the defining challenge of reforming the way our economy works. That is the challenge that Ed Miliband will meet.

Stewart Wood (Lord Wood of Anfield) is shadow cabinet minister without portfolio and an adviser to Ed Miliband in the leader's office

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The Autumn Statement proved it – we need a real alternative to austerity, now

Theresa May’s Tories have missed their chance to rescue the British economy.

After six wasted years of failed Conservative austerity measures, Philip Hammond had the opportunity last month in the Autumn Statement to change course and put in place the economic policies that would deliver greater prosperity, and make sure it was fairly shared.

Instead, he chose to continue with cuts to public services and in-work benefits while failing to deliver the scale of investment needed to secure future prosperity. The sense of betrayal is palpable.

The headline figures are grim. An analysis by the Institute for Fiscal Studies shows that real wages will not recover their 2008 levels even after 2020. The Tories are overseeing a lost decade in earnings that is, in the words Paul Johnson, the director of the IFS, “dreadful” and unprecedented in modern British history.

Meanwhile, the Treasury’s own analysis shows the cuts falling hardest on the poorest 30 per cent of the population. The Office for Budget Responsibility has reported that it expects a £122bn worsening in the public finances over the next five years. Of this, less than half – £59bn – is due to the Tories’ shambolic handling of Brexit. Most of the rest is thanks to their mishandling of the domestic economy.

 

Time to invest

The Tories may think that those people who are “just about managing” are an electoral demographic, but for Labour they are our friends, neighbours and the people we represent. People in all walks of life needed something better from this government, but the Autumn Statement was a betrayal of the hopes that they tried to raise beforehand.

Because the Tories cut when they should have invested, we now have a fundamentally weak economy that is unprepared for the challenges of Brexit. Low investment has meant that instead of installing new machinery, or building the new infrastructure that would support productive high-wage jobs, we have an economy that is more and more dependent on low-productivity, low-paid work. Every hour worked in the US, Germany or France produces on average a third more than an hour of work here.

Labour has different priorities. We will deliver the necessary investment in infrastructure and research funding, and back it up with an industrial strategy that can sustain well-paid, secure jobs in the industries of the future such as renewables. We will fight for Britain’s continued tariff-free access to the single market. We will reverse the tax giveaways to the mega-rich and the giant companies, instead using the money to make sure the NHS and our education system are properly funded. In 2020 we will introduce a real living wage, expected to be £10 an hour, to make sure every job pays a wage you can actually live on. And we will rebuild and transform our economy so no one and no community is left behind.

 

May’s missing alternative

This week, the Bank of England governor, Mark Carney, gave an important speech in which he hit the proverbial nail on the head. He was completely right to point out that societies need to redistribute the gains from trade and technology, and to educate and empower their citizens. We are going through a lost decade of earnings growth, as Carney highlights, and the crisis of productivity will not be solved without major government investment, backed up by an industrial strategy that can deliver growth.

Labour in government is committed to tackling the challenges of rising inequality, low wage growth, and driving up Britain’s productivity growth. But it is becoming clearer each day since Theresa May became Prime Minister that she, like her predecessor, has no credible solutions to the challenges our economy faces.

 

Crisis in Italy

The Italian people have decisively rejected the changes to their constitution proposed by Prime Minister Matteo Renzi, with nearly 60 per cent voting No. The Italian economy has not grown for close to two decades. A succession of governments has attempted to introduce free-market policies, including slashing pensions and undermining rights at work, but these have had little impact.

Renzi wanted extra powers to push through more free-market reforms, but he has now resigned after encountering opposition from across the Italian political spectrum. The absence of growth has left Italian banks with €360bn of loans that are not being repaid. Usually, these debts would be written off, but Italian banks lack the reserves to be able to absorb the losses. They need outside assistance to survive.

 

Bail in or bail out

The oldest bank in the world, Monte dei Paschi di Siena, needs €5bn before the end of the year if it is to avoid collapse. Renzi had arranged a financing deal but this is now under threat. Under new EU rules, governments are not allowed to bail out banks, like in the 2008 crisis. This is intended to protect taxpayers. Instead, bank investors are supposed to take a loss through a “bail-in”.

Unusually, however, Italian bank investors are not only big financial institutions such as insurance companies, but ordinary households. One-third of all Italian bank bonds are held by households, so a bail-in would hit them hard. And should Italy’s banks fail, the danger is that investors will pull money out of banks across Europe, causing further failures. British banks have been reducing their investments in Italy, but concerned UK regulators have asked recently for details of their exposure.

John McDonnell is the shadow chancellor


John McDonnell is Labour MP for Hayes and Harlington and has been shadow chancellor since September 2015. 

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump