Show Hide image Economy 1 March 2017 The Conservatives have failed to build an economy that works. Here's what Labour should do next The failures of George Osborne are only the tip of the iceberg. But there is hope. By Alison McGovern Sign UpGet the New Statesman’s Morning Call email. Sign-up In just seven days, Phillip Hammond will rise in the House of Commons and present his first budget as Chancellor of the Exchequer. How should the opposition respond? There are three important messages that we must communicate. Firstly, that the Tories have presided over seven years of economic failure. Second, that Brexit presents new threats. Lastly, that there are - Brexit or no Brexit – fundamental weaknesses in the British economy that only a Labour government will ever resolve. Perhaps given the context of our fundamentally changing position on trade and economic co-operation with our nearest neighbours, the price of a pint of beer, or a litre of fuel, won’t be the big news, for a change. Perhaps the attention of the press will be - as it was at the time of the global financial crisis nearly a decade ago - on the big numbers: sterling, debt, the deficit. Or, more likely, the pro-Brexit press will give Hammond a pass, as he plays the hand they have dealt him. All the more important, then, for Labour to shun the seminar room, roll our sleeves up, and make a big noise about the Tory economic failures. To be clear. We are currently nearly 30 points behind the Tories in polling questions about trust to run the economy. We have a job to do. Our first task is to demonstrate that even before the EU referendum, George Osborne had dragged down our prospects significantly. When he became Chancellor in 2010 George Osborne set himself one principal economic challenge- to eliminate the UK’s budget deficit by 2015. His failure to meet this target, alongside losing our credit rating, and building up debt, should define him. Brexit of course then added to these woes. Our country looks set to be plunged further into debt now totalling £2 trillion. By 2020/1 the UK is set to be £210bn deeper in debt than George Osborne forecast at the time of the March Budget, pre-Brexit vote. That means increase in borrowing of £122bn over the next 5 years. Now, of course the Tories will argue that it is only a matter of time before this is dealt with as long as the economy keeps growing. Though, note that this is the argument that they criticised Gordon Brown for making in 2006. What’s more, Hammond has already let himself completely off the hook. As the IFS tells us, “Fiscal policy is not currently subject to any fiscal targets that can be met or missed in the remainder of this Parliament.” In other words, all of those debates we had pre-2015 about the importance of dealing with the deficit were just hot air. In practice, the new post-Brexit Chancellor has, unseen, reversed Osborne’s stance. It is a mystery to me why the Tory press have not criticised his profligacy. It is amazing that Tory MPs are not queuing up to explain that borrowing today will be heaped onto the backs of our children. Or perhaps their protestations were just further acknowledgement that it is not actually their children who will suffer if the public finances preclude public investment. It is the many that will suffer. Not the few. In addition to the failure to get to grips with the public finances, there is a new set of risks to our economic prosperity. Firstly, the number of people who are self-employed have grown as a proportion of the workforce since the Tories came to power in 2010. What’s the problem with that you might wonder? The government say we have more people in work than ever before. The problem is the difference in taxation. According to the IFS, the tax advantage in lower National Insurance contributions for a self-employed person over an employed person amounts to £1240 per year. And the OBR say the cost of the trend towards self-employment (particularly the growth of owner-manager companies) will mean tax revenues will be £3.5bn lower by 2021-22, than if this form of self-employment had grown at the same rate as conventional employment. This is a big problem. Will this trend continue? Has the Treasury researched that? What if it speeds up? How can we get more employees paying tax? All questions Hammond must answer. Secondly, Britain’s future age-profile will not be easy on the tax base either. A population that has more older people and relatively fewer people of working age will have greater liabilities to be met by a smaller number of people to pay the tax required. For example, the IFS tell us that, “simply to keep pension promises and keep pace with rising demands for health and social care beyond 2021-22…we will need to increase annual spending by about £20billion over the next parliament.” These demographic problems are faced by all western developed countries. However, in making immigration cuts the driving force behind every policy of the state, the government have placed an unprecedented and unnatural limit around our ability to change our demographic fortunes. In the end, this immigration policy is like swimming against a strong tide. As nations develop and educate their citizens, women and men end up having fewer children. And people live longer. So, rich countries need immigration to even things up between the age groups. Theresa May can rail against it, but the fundamentals will stay the same. But as this analysis on the impact of lower immigration on GDP shows, the populist dream-world story that all our problems are down to immigration has real-world consequences. There is an assumption in the minds of those who support Government cutting immigration that it is cost-free, practical, and achievable. It is none of these things. It will be costly to our public finances, and bureaucratic for British business. Meanwhile there are even worse problems that Osborne and Hammond have failed on. Growth in wages for most people now appears to be unconnected to the growth in the wider economy. That means that people can no longer expect to do better if the country does better. That must be fixed if we are to unite our country, post the Brexit vote, as I have previously argued. And then, to this picture of woe, add the old Tory story: running down public services. More cuts in public spending are planned for the rest of this parliament, and worse than that, the parts of government that have already delivered the lion’s share of cuts – local government especially – are on the hook for more. Given the impact of these cuts on social care, and therefore, the NHS, the modest increase available for health will come nowhere near the change required by the demographic shift in our country. This is a profound challenge for the UK, and the Chancellor in particular. Do the Tories wish to preside over more sick older people dying in corridors? Do they wish to exacerbate the flow of our doctors and nurses elsewhere as the stress of NHS cuts becomes too much to bear? Are they happy with people waiting longer and longer in pain, or suffer lonely and alone because they can’t afford simple social care? We know too from the National Audit Office that while schools are being asked to save £3billion by 2019-20, “against a background of growing pupil numbers and a real-terms reduction in funding per pupil”. This cannot amount to anything but a cut in resources. And, a generation of young people growing up with ever fewer choices at school, stressed-out teachers, and pressures on parents to pick up the cost of learning, will react in exactly the way I did. They will learn to hate what Tories do to schools. They will feel robbed of chances and choices. And they will never forget. And in case this appears to be party politicking, it’s not just Labour that say public services are being damaged. Sir Amyas Morse, the NAO’s Comptroller and Auditor General has described the process of austerity by which he says, ‘significant damage has been done’. It is all too depressing. So in addition to the seven years of failure and the new demographic pressures, we have the economic turbulence of Brexit. At the time of the Autumn Statement, the Office for Budget Responsibility calculated that the cost of the Brexit vote to the public finances was an extra £58bn worth of debt. But of course, that is not the end. The Tory pursuit of lower immigration, at any cost, will have a substantial cost. Unless they are prepared to turn away from hard-right policies, we will all have to pay. The Office for Budget Responsibility have a range of forecasts looking at the future population structure and the consequences for the national finances, if we assume it is desirable to return borrowing to 40 percent of GDP. The reality is stark. The difference between their central projection, and their low inward migration projection is an extra £10billion in permanent fiscal tightening. That’s spending cuts or tax rises. And worse, Theresa May has made it clear that she is happy to leave the single market, with its common standards and tariff-free access to European consumers for goods that are often made across European borders, rather than within the borders of one European country or another. Now let me be very cautious here. We ought not to exacerbate fears for staff in existing sectors that look to be very challenged by Brexit. There is no benefit to those whose livelihood is at stake in providing a counsel of doom. But there is clear cause to point out the error of Tory ways, and campaign for a better approach that will create a new deal between Britain and Europe that can satisfy our national interest, and the interests of the other 27 countries in the Union. When it comes to current economic arrangements with the European Union, there are two crucial agreements that the Tories are trying to unpick. The first is free movement of European people in order to access labour markets across the EU. The second is the free movement of goods around the European Union, maintained by the customs union which places an external administrative barrier (regarding rules of origin, and other regulations) around the European Union and Turkey, and removes almost all the barriers within the Union. According to the Government, they wish to get out of this union in order to have the freedom to negotiate new Free Trade Agreements with other countries. This is a highly disruptive approach. Many British workers are employed by multinationals: global companies that rely on multinational supply chains to make their products. You can’t just place administrative barriers in their way and expect zero impact, in the hope of Free Trade Agreements that may never come. These though, are the medium-term risks. We can already see the immediate cost of Brexit. The fall of sterling against the dollar and the euro provides a clear judgement on the relative strength in the British economy compared to the USA and the Eurozone. The Bank of England says that there is evidence that the falls in the value of sterling are related to perceptions of the UK’s future trading arrangements, and that the volatility we have seen since the Brexit vote looks set to continue. The fall in sterling is an important factor in the inflation rise that the Bank predicts. Recall the lack of growth in real wages since the crash. If inflation picks up, and employers are unable to match price growth with wage growth, the price of Brexit will become ever more clear. Not just in our national accounts, but also in our personal accounts. Price rises will inevitably hurt those on fixed incomes. But the impact of rising prices will also be felt by those who the government has targeted for cuts: low-earning, working families. The freeze on tax credits, and other parts of the social security system that support people of working age, will become more painful as inflation kicks in. Further, it will make life harder for those struggling to keep small businesses going in low-pay areas, and exacerbate the pre-existing crisis in town centres that are fail due to having too few customers. Sadly, it is many towns that voted overwhelmingly in favour of Brexit that, without help, will be at the sharp end of any downturn. In many ways, whilst Brexit has caused this drop in the value of sterling, the inflation versus wages and tax credits squeeze will be demonstrated in a worsening of economy for those locked out of growth, in a fashion that was ever-present since the global financial crisis. It is a ‘same as it ever was’ weakness in the British economy. The lack of shared growth is not new, but Brexit makes it worse. And it is a problem that hurts families as parents wrestle with the financial stress, and guts confidence in towns all across Britain. Sadly, that’s not the only weakness we’ve lived with for far too long. Yes, I remain deeply concerned about the impact of Brexit on my constituents and my country. Yet the greatest failure of the past seven years is not the Brexit vote itself. That vote may be the cause of economic risk and insecurity. But it was also the consequence of economic insecurity. Too many people in our country did not have a stake in the status quo, so quite logically voted for change. They expressed their disquiet with the Tories who had done far too little to change the fortunes of the many. And there is no clearer indication of the unhealthy state of UK economic policy than the state of our infrastructure and housing. The OECD has told us that “protracted underinvestment has taken its toll on UK infrastructure.” This is true. But what’s more, our infrastructure investment is exacerbating, not dealing with, profound imbalances in the British economy. But first consider the length of time it has taken the UK to decide about airport investment. Crucial infrastructure beset by politics on all sides. The same could be said for HS2. It has taken so long to decide to do it that the debate has crowded out all discussion about other railways infrastructure needs. Similarly on energy. Political parties might disagree about the energy mix, but the increased capacity as a whole that our economy requires rarely receives the attention it deserves from policy makers. The Tories rightly adopted Ed Ball’s idea of a National Infrastructure Commission. But it isn’t clear that the process for taking decisions is developed enough yet to move investment on more quickly. The NIC is still dealing with a plethora of local authorities, and the absence of devolution to English regions makes this process unnecessarily cumbersome. George Osborne’s city deals does little to resolve this problem given that they cover a very limited section of the population. Yet it’s not just as simple as a lack of capital investment in our infrastructure, or investment being dragged out too slowly. Analysis by Sheffield Political Economy Research Institute last year highlights a staggering regional inequality in infrastructure spending in our country. Based on figures from the government’s own national infrastructure pipeline, they found that planned infrastructure spend per capita in London (£5305) was over two and a half times that in the North West (£1946), over six times that in Yorkshire and Humber (£851) and thirteen times that in the North East (£414). Poor infrastructure is a key driver of low productivity, according to the ONS GVA per hour in London is around 30 per cent above the national average, while every other region bar the South East lags well behind. But it also influences housing. When investment and jobs growth is concentrated in the South East, it causes overheating of the economy there. Figures from the DCLG show that 44 percent of the projected growth in the number of households in England by 2039 will be in London and the South East. This in turn has an effect on house price growth, with London house prices racing away from the rest of the country. The practical effect is that the regional imbalance in the economy is becoming bad for London too as even high average London wages struggle to keep pace with the rising cost of housing. Instead of increasing supply to keep try to take the heat out of the housing market, the government has driven demand through policies like Help to Buy that have only fuelled more growth in house prices in the overheated capital. The National Infrastructure Commission does not have housing infrastructure under its remit. Surely this is a mistake that must be corrected? New towns built in the post-war years are popular places to live, take the heat from cities, and could continue to be developed. And possibly, the NIC could consider the scope for new New Towns in the north where there is existing infrastructure that could be developed alongside them to build up the case for businesses to relocate away from the south. And as well as financial capital for new infrastructure, we also need to consider how long the UK has struggled with developing human capital also. Unemployment may be low. But there are a sizable number of people who could join or do better in the labour market if they were able to gain further skills. And what’s more, low productivity in Britain requires an effective plan to raise the skill level of those in work. We cannot sustainably grow any other way. This, sadly is not a new analysis. The same could (and was) said of Britain a decade ago. Reviews of skills training in 2006 and 2011 said that we needed a concerted effort to raise not just the number of apprenticeships, but crucially, the quality of training available to apprentices. Since Leitch, a decade may have passed, but we still witness the same problem of low skills concentrated amongst groups of people in specific areas of the country. Unfortunately, the government’s central policy on apprenticeships will not resolve this problem either. As the IFS have explained, the apprenticeship levy will raise in tax, “far more money than the additional resource planned to go into apprenticeship training.” Nearly £3billion of new taxation, much of which will not be spent on the skills training it is designed to promote, and worse, a tax that - because it is a payroll tax - is likely to reduce wages even further. The problem doesn’t end there, however. Government training schemes – such as Train to Gain or previous apprenticeship models - in the past has often driven firms to simply re-label existing schemes, in order to meet Government targets. This mistake is repeated yet again with the apprenticeship levy. It is time we took a whole new approach. Add to this cuts to colleges of further education. Now, whilst it is right that young people have a structured route to good on the job learning through apprenticeships, we also have a large number of people in work already who need to improve their skills. For those whom school was not a success the first time around, colleges can be a second chance. Yet funding for adult education has been cut by 14 percent in real terms since 2010. Of course, standards, must be high, spending for the sake of it won’t work. But we need to rebuild these important institutions that can offer adults a chance to change course, or correct the mistakes of the past. In much of the discussion about new technology, the assumption is that there will be less work for people to do. What economic history tells us, however, is that it is actually likely to be different work. And that while status, culture and identity may be significantly changed, the idea that people will be happy to exist on state hand-outs rather than with the dignity of work for a living is wrong. The profound mistake of the Thatcher period was that during rapid economic change, little attempt was made to smooth the path between one kind of work and another. We ended up with large numbers of people existing on benefits, while we had a skills shortage elsewhere. In some ways the change was too rapid, too abrupt for any policy to combat the negative impacts. Inequality rose so rapidly as the City ballooned and manufacturing fell sharply. Imagining a way through that combination of the Big Bang of new technology in the City of London, and the long-term shift away from manufacturing, that didn’t leave some people feeling left out is hard. But that is a lesson to us about what the consequence could be of very disruptive new technology today. The institutions of the state are very important in smoothing the path when the economy is changing rapidly, and surely the lesson of the 1980s is that if the state does not play its part, poverty and inequality will blight British towns for a generation. Those institutions we need at a time of turbulent chance do not end with adult education. The Beveridge plan for a welfare state was written at a time when it was just assumed that women would not work if they were looking after children. It is a world that no longer exists, and is not coming back. That is why one of the newer functions of the state: as a commissioner and funder of childcare is such a vital area of policy in responding to the current economic turbulence. Yet, for an issue that was at the heart of the general election in 2005, 2010, and 2015, the issue of childcare is now relatively overlooked. This is ludicrous. Tooley Street Research found that those working in low pay sectors, such as retail, were held back from seeking promotion because of lack of effective childcare. If dealing with low skills is one part of tackling Britain’s productivity crisis, then challenging ourselves to reach towards free universal childcare must be another. We need to free those with childcare responsibilities to put all their skills to work if they choose to. Often though, pre-school childcare has been seen purely through the lens of child development. So, whilst free childcare for low income families with two-year-olds is having a positive impact on the development gap pre-school, the problem with a system that targets resources just at those with least (as the extended hours for disadvantaged two-year-olds does) is that you inevitably don’t reach everyone who could benefit. And resentment is likely to occur between those getting more help and those who aren’t. Moreover, the current restrictions the government is placing on the new extension to 30 hours of free childcare for three and four-year-olds for working parents, fails to enable those in training or those looking for work to do so – this is where the biggest gains in productivity lie. Take the means test away and everyone can focus on that which really matters in childcare: quality and availability. We know that good quality childcare during the early years can be the difference between confident parents and children, ready to get the most out of school, and those who are falling behind already at too tender an age. And universal childcare need not be as expensive as other parts of our social security system. We currently on spend about £6bn a year on childcare, compared to around £100bn on the state pension. A moderate increase in commitment to our nation’s children would enable more parents to work, which would be good for the government’s income, the prospects for those families, and would help to tackle the productivity gap that has held our country back. In fact, investment in childcare would pay for itself in the medium term through higher tax receipts and lower welfare bills. The IPPR has calculated that for every woman that returns to work after one year of maternity leave, thanks to universal childcare, the government would gain £20,050 a year in the medium term. But, while institutions like colleges and childcare help everywhere, as we plan for our future, I cannot help but see the greatest challenge we face is the unequal nature of our economy. As discussed above, the huge difference in infrastructure spending in the difference regions of our country is representative of an economy that is fundamentally divided. And, this economic inequality has led to deep dissatisfaction in many parts of our country. That change that happened in the 1980s – with the city of London charging ahead, and areas of mining, manufacturing and heavy industry falling way behind – scarred the economy in many parts of the north and midlands of England. It was hard for younger people to see a way ahead, so many of them left. This has left towns dominated by older people, those existing on disability benefits, and lower skilled jobs for example in care or retail. Yet – despite this maddeningly unequal picture - the OECD acknowledge that Britain had in reality had no regional development policy at all since 2010. None at all. And, they have demonstrated that productivity gains were in reality only made in Greater London and Scotland between 2000 and 2013. The truth is, despite the pause in inequality growth as Gordon Brown fought off poverty through Labour’s time in office, in some important ways, we are still living with the long hangover of the Thatcher years. Cities like Liverpool, Newcastle, Sunderland and Birmingham, now up off their knees, have been placed at risk again by the Tories. And what Thatcher began, Brexit could finish for good. Labour must have a power-sharing plan that cannot be undone as George Osborne undid the regional institutions that were addressing inequality. We now need a permanent settlement. Seven years of Tories wedded to austerity for local government, ignoring the knock-on consequences for hospitals and schools, and prioritising tax cuts for corporations, has taken its toll. The UK’s budget is still – nearly a decade after the global financial crisis – in deficit. Our debt is rising, and the combination of long-term shifts in our liabilities, the Bank of England’s market operations, and the movement of sterling makes this a more risky situation than ever. Meanwhile, even the head of the National Audit Office is spelling out the damage done to public services by austerity handed out by the Treasury to town halls. Notably but not uniquely, social care is underfunded. Pensioners who were once allowed to be generationally poor by the Thatcher and Major Governments are now left in their 80s and 90s without sufficient care to end their life with dignity. The Conservatives could not be more blameworthy. And Brexit is both consequence and cause of their failure. The vote was a vote of no confidence by the public in Cameron and Osborne’s plans for Britain. Now Theresa May has a mapped out a Britain that takes a lead from the hard right and the far right, rather than the rhetoric she herself has employed. It is party and politics first, economics and the national interest a poor second. Labour’s job is to consider again the long term strategic weaknesses in our economy. Whether that is rebalancing through infrastructure, housing, and major sites of employment, or making sure there is a ladder from entry level work, through training, to a career, we must have a new vision for Britain. In the end, our economy matters not for its own sake. It is the means not the ends. But the ends are important. The economy is the means by which British people are able to be and do all the things they might wish. Their dreams and hopes - British dreams and British hopes - count for something, and people cannot just be left with the terrible hand the Tories have dealt them. Labour has a job to do to rebuild our economy, and it’s a job that cannot wait. Alison McGovern is Labour MP for Wirral South and the co-chair of the all-party parliamentary group Friends of Syria. Subscribe For daily analysis & more political coverage from Westminster and beyond subscribe for just £1 per month!