Getting money to the poor is morally right, and effective

It was not the best of times to be reminded that politicians of all parties seem so easily to find themselves enjoying the hospitality of billionaires and plutocrats. Nor to be told that the meetings off the coast of Corfu on the yacht of the richest man in Russia were quite unconnected to party funding (which would be illegal), just "social events". In fact, in a week when the governor of the Bank of England confirmed that the UK was entering a recession, reports of matey Mediterranean dining on luxury yachts probably seemed more provocative than if those present had been flagrantly breaking parliamentary rules on party funding.

Most of us in Britain are transiting from the shock and awe of the market crashes and the bailouts to the realisation that wage earners, small businesses, pensioners and young families could face years of austerity and uncertainty. The bailouts were skilfully handled and Gordon Brown justifiably saw his reputation and poll ratings increase as a result. But the challenge now is to steer the economy through recession and to try to lessen the impact on those least able to withstand a drop in income. Alistair Darling's plan to bring forward public spending, in particular capital works programmes, is a good, Keynesian solution. Astonishingly, given that the all-party consensus in favour of free-market fundamentalism is so recent, the plan has received a general welcome, even from the Conservative press. As Kwasi Kwarteng, a leading Conservative thinker, argues on page 29, "We're all Keynesians now."

The success of Mr Darling's programme will depend on the impact it has on the so-called real economy, where unemployment, house repossessions and insolvencies are beginning to emerge. Already, small businesses are finding they cannot borrow even small amounts of money; forced to lay off staff, they create more households unable to pay the mortgage, thus speeding up the rate of house repossessions.

Even those fortunate enough to remain in work are having to deal with rising mortgage rates. For many Northern Rock clients, for example, a fixed-rate mortgage term has just come to an end. As many as 35,000 borrowers face much higher mortgages to pay from next month and the reluctance of banks to lend leaves them with little chance of switching elsewhere.

All this raises clear policy imperatives. Northern Rock is, in effect, owned by us. Yet its rates of repossession are 50 per cent higher than those of the industry as a whole, and it has more than 4,000 repossessed properties on its books. Yvette Cooper, Chief Secretary to the Treasury and a former housing minister, has said she will take action to force banks to be lenient. Yet it is not "leniency" that is required for those struggling to meet higher repayments. It is direct help. The costs to the state of making people homeless, to the banks themselves of having to sell on a house at a low price, along with the loss to the homeowners, justify intervention. The policy must be determinedly to keep people in their homes. This is not a crisis of the borrowers' making. They should not be punished.

Vincent Cable, the Liberal Democrat Treasury spokesman, has pointed out that banks receiving state support can be made to act in a responsible manner. "All lenders, not just the major banks but also the companies in the sub-prime and secondary loan market, must agree to binding procedures to stop a repeat of what happened in the Tory recession of the 1990s," he has said.

The second imperative is to build on the Chancellor's public spending plan. Building projects take a long time to feed through the economy: new jobs must be created urgently. Easy to scoff, as some commentators did, at the idea of retraining people for loft-lagging, but this is an essential step on the way to achieving our carbon-emission targets, will save households money and will generate immediate revenue. The government needs more such immediate fixes, particularly those with environmental benefits. Green spending is a genuine investment in the future and one Britain is obliged by treaty to make anyway.

A third policy essential is to be bold in lowering interest rates. After Mervyn King's announcement, a reduction is certain. The doomsayers attacking this are the same diehard, fundamentalist free marketeers whose blind adherence to their philosophy brought us to this crisis. Their fear that low interest rates will generate inflation is exaggerated. We are not in a 1970s situation of double-digit inflation. Very far from it.

A fourth effort must be towards policy initiatives that increase the pay of the poorest. As in America, the huge rise in indebtedness has come about because of widening income inequality. It is also sound economic sense to support the poor in order to kick-start the economy.

As J K Galbraith, the great Canadian-born liberal economist, once said: "The poor will always spend their money; the rich may not." Getting more money to the poor is not only morally right, it is a more effective way of boosting the economy than relieving the rich of tax.

The proof of Labour's success in this crisis, which it is so far managing well, will be how many people it can save from losing their houses and their jobs. On that may depend whether the voters give Labour their ultimate approval.

Dull (and prudent) but true.

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