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After austerity - what happens next?

Labour has to show it has what it takes to govern through the fiscal vice that it will inherit.

Financial crises cast long shadows over politics and this one has been no different. Prolonged economic stagnation risks fracturing the Coalition and has brought the re-election of a Labour government back into the realm of serious possibility. Should Labour win, it will find that the fallout from the events of 2008 still dominate what it can achieve in the next parliament. Cuts to public spending will continue until at least 2017 and quite possibly the end of the decade, at which point the demographic pressure for more health-care and social-care spending will rise steadily and start to crowd out the demands of many other, less politically salient services.

This fiscal straitjacket will hurt those on both sides of the political aisle but not to the same degree. Conservatives can use the era of austerity to redefine the boundaries between the state and the market. For progressives it means the prospects for another instalment of Croslandite social democracy, in which increases in public spending provide the basis for new attempts at a more equal society, will be vanishingly thin.

At the same time as public finances are further squeezed, living standards for a typical low-to-middle-income household are likely to be no higher in 2020 than they were before the recession started, and quite plausibly around their turn-of-the-millennium level. This poses a deep challenge to any rethinking of economy policy. While Britain’s economy has many strengths – far more than facile declinist or anti-neoliberal narratives admit – sharing prosperity widely is not among them. In contrast to the pre-recession period, however, we can no longer look to rising tax credits to mask the stagnation in real wages that underpins the hit to household incomes. Nor can personal debt take the strain. The structural problems in British economy must be addressed.

To navigate a way through this bleak terrain, the centre-left needs to embrace a mix of fiscal realism and economic radicalism. In some respects this is an uncomfortable blend for Labour. It means leading a candid conversation about the nature of the nasty fiscal choices it would face in office, as well as reversing some established ways of thinking about the economy.

Vice squad

While it is still far too soon for Labour to set out detailed tax and spending plans for the next parliament, in the years ahead it has to show it has what it takes to govern through the fiscal vice that it will inherit. If it’s not prepared for what it will face, it could consign any incoming administration to a fraught first few years and increase the risk of a fragile and ideologically uncertain period in office.

Labour in opposition has been proved right about the failure of the coalition government’s austerity economics yet by the next election the economic argument is likely to have moved on. A combination of spending cuts, public-sector pay restraint and selective tax rises is inevitable after 2015. Alternative choices are always possible and Labour can make different decisions to those the coalition would have. But they will still be bloody ones. In the years ahead Labour needs to pull off the seemingly intractable task of preparing the country (and its supporters) for that eventuality at the same time as it continues to land blows as an effective opposition.

To its credit, however, and in contrast to the fiscal question, the centre-left is engaged in a lively debate about wider economic reform. Here the charge sheet against British capitalism is familiar: excessive financialisation leading to asset bubbles and weak investment; stagnant real wages; and short-termist corporate governance. So much is clear. The task is to convert this critique into a broad-based reform agenda.

First and foremost, it means a macro-economic policy premised on more than the false belief that if we secure low-inflation then stability will automatically follow. Measures to pre-empt emergent speculative bubbles and constrain the excesses of the financial sector need to be brought to the fore. The Bank of England’s mandate should be revised so that it is tasked to consider asset as well as consumer price inflation.

Nor should banking reform stop with Vickers, never mind fall short of it. There is a strong case for breaking up the big banks and introducing greater competition to tackle rent-seeking. Investment in the productive economy needs to be stepped up, so in addition to incentivising patient capital and creating a new state investment bank, the deep cuts to public capital pencilled by the Labour government and implemented by the coalition should be substantially reversed.

Reforming Britain’s economy will also mean a sharp focus on its low-skill, low-wage sectors and not just those competing at the cutting edge of global markets. We can no longer tell workers that if they gain basic qualifications they’ll automatically get higher wages, nor pretend that low-skilled jobs are disappearing from advanced economies such as ours. Instead, we need a policy agenda that helps nudge up real wages, while shifting pedestrian companies out of low-cost, low-value-added business strategies, in part by helping employers to make more effective use of the skills of their workforce. That may mean slightly lower profits and consumers paying a bit more to avoid poverty pay. In some key sectors there is considerable scope for wage increases through a more imaginative and aggressive national minimum wage policy and the expansion of living wage arrangements.

Hard road ahead

These ideas are just a start. It will be hard, grinding work to achieve shared growth amid a decade of austerity. The electoral promise of buoyant credit, a rising housing market and the fruits of rising public spending is no longer available. A new political coalition needs to be stitched together: one based on fiscal realism and a shared sense of what it will take to chart a course out of the economic crisis to a sustainable new path for the British economy.

Gavin Kelly is Chief Executive of the Resolution Foundation and Nick Pearce is the Director of the Institute for Public Policy Research. Both write in a personal capacity. This article is a based on an essay in the forthcoming edition of “Juncture”, the IPPR’s journal

This article first appeared in the 24 September 2012 issue of the New Statesman, Lib Dem special

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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.