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23 August 2016

Want an economy that works for everyone? Here’s how you get it

Four proposals for a better economy.

By Jonathan Reynolds

‘An economy that works for working people’. It’s a good slogan. Successive leaders and would-be leaders have used it. It’s something every Labour member can get behind, because it immediately signposts what we see wrong in our economy: too much low-paid, insecure work, too great a set of regional disparities, an over-reliance on financial services and the City of London, and fundamentally far too much inequality.

But we’ve traditionally been much vaguer on how we would tackle this, beyond pledges on infrastructure and employment rights. These are important but by no means sufficient. To back up our slogans we will need practical, radical and coherent polices that will deliver the change we want to bring about.

Below are four proposals I hope all shades of Labour opinion could sign up to. None of these are particularly new – they come from the plethora of thinking commissioned by Labour over the last few years, or from books and articles by left-leaning academics and business people. What they now require is their adoption and articulation into a compelling political plan.

This is where I would begin, starting with a shameless Olympics analogy:

  1. A modern industrial strategy

Labour should state unequivocally that government alone cannot deliver economic growth, but we do understand that government determines to a large extent the conditions under which growth can occur. An “industrial strategy” is therefore not about a 1970s attempt at “picking winners” or government trying to do the job of businesses. What it is about is providing the conditions under which targeted sectors of the U.K. economy will be as competitive and successful as possible.

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For instance, it is well known German manufacturers enjoy lower energy prices than us. This is because in Germany all of the costs of the transition to renewables are borne by domestic consumers. This means German domestic energy prices are substantially higher than ours, but German households actually have much lower average bills than us because their homes are hugely more efficient than ours. This is the result of many years of successful and consistent policy that has involved grants, loans and planning changes. Whether you like the idea or not, it is a coherent strategy. In contrast, in the UK there has been little visible relationship between energy and business policy since 2010.

Team GB’s performance in the Olympics is a good analogy for a successful industrial policy. Back in 1996 we won just one gold medal and finished 36th in the medal table. It was our worst-ever result. The following year we committed the Lottery funds to support Olympic sports, ruthlessly focusing resources on successful performances. Our athletes were able to train full-time and benefitted from world-class coaching and support. UK Sport was created by Royal Charter to administer the system. In 2012 we won 29 gold medals and finished 3rd in the medals table, beaten only by the USA and China. We had brought about a transformational change in our fortunes.

  1. Reformed share ownership

Equity markets are not a particularly sexy subject. But they are hugely important. British corporate governance is based on the notion that shareholders are the stewards of the company they own. But this is hard to reconcile with pension funds and asset managers whose business models are instead based on maximising the value of the shares and other assets they manage on behalf of their clients. This is not an unprincipled position – it is just not one amendable to long-term, engaged investment. The notion that these asset holders are under any duty to improve the companies whose shares they own has been successively proved to be weak to non-existent.

Very simply, but radically, we should propose the longer basic voting shares are held the more votes should be attached to them. To complement this, the rate at which capital gains tax is paid when selling shares should reduce over time in a corresponding fashion. Other classes of non-voting shares could still exist for short-term traders and investors.

This fundamental reform – the sort of thing Will Hutton has been writing about for 20 years – would go a long way to redressing the persistent and damaging short-termism in much of Britain’s corporate culture. Many good examples already exist: when Google floated its founders issued two classes of shares, with Class A shares carrying 10 times the voting rights of Class B shares. Sergey Brin and Larry Page ended up with 37.6 per cent of the votes for 3.7 per cent of the shares. The letter accompanying their initial public offering explained this would allow the company to take a “long-term, innovative approach.” Their subsequent business success suggests they have been proven right.

  1. Expanded employee share ownership

Alongside greater incentives for long-term investment in companies, more should be done to encourage employee share ownership.

The United Kingdom already has a decent Share Incentive Plan scheme (SIPs), introduced by Labour in 2000. Employees can receive up to £3600 of free shares a year, and also buy additional shares from their salaries up to the value of £1800 a year. If the shares remain in the SIP for more than five years no income tax or national insurance is payable when the shares are eventually removed from the SIP.

This is a good system that could be substantially expanded, with the allowances increased considerably. We should increase it to £5000 a year immediately, on top of the free shares allowance.

  1. Tweak taxes to deliver progressive goals

In the last parliament, shadow teams were not permitted to make any spending commitments outside the envelope of the current departmental spending they shadowed.  This was frustrating at times but it did have a rationale, in that it avoided Labour being hit with a “tax bombshell” attack during the election campaign.

As a shadow energy minister I responded to this, and the floating of Ed’s ideas on “predistribution”, by advocating a plan to alter stamp duty so that more efficient homes would pay less stamp duty, and less efficient homes would pay more. The whole system was to be revenue-neutral and crucially anyone who did pay more would have been able to recoup their costs in full if they upgraded their home within 12 months of completion. It mirrored the very successful system of vehicle taxation that already exists, had major industry buy-in, and had a wealth of research behind it showing a likely positive impact on jobs and VAT revenues. I even had an Excel spreadsheet that illustrated how it would work in any given transaction.

It got nowhere on the basis that not messing around with stamp duty is something of a Treasury shibboleth (though George Osborne subsequently brought about wholesale change to Stamp Duty just two budgets later). But if we can make revenue neutral changes to existing taxes that will help eradicate fuel poverty and tackle climate change, or incentivise healthy food or good employment practices, we should. This would both be effective and serve as acknowledgment that funds for spending priorities are always limited.

These proposals would only be the beginning. We need serious work to be done on the future of research and development funding, executive pay, the Takeover Code, and our banking system. Crucially – we will also need to secure the support and endorsement of business people willing to back what we’re trying to do. But as we move to a time hopefully more focused on policies than personalities, these are the conversations we must be having.