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The Autumn Statement is just the start of rebuilding our economy

The UK invests less in its future than most comparable countries. 

Like the Brexit vote before it, the election of Donald Trump has been widely seen as a revolt of the dispossessed. It is portrayed as a cry of protest by the working class in former industrial areas who have been left behind by the processes of globalisation.

But there is a paradox. The results of both the EU referendum and the presidential election will almost certainly make better economic outcomes for those groups less likely, not more.

Yet progressives in both countries would be wise not to conclude that the public have voted irrationally. The facts are in favour of the revolt. In the US, real median household income is barely higher now than it was in 1990 – despite a growth of around 80 per cent in GDP in the same period. In the UK, half of all households have seen no meaningful increase in their incomes since 2005. Before taxes and benefits, only 10 per cent of overall income growth in Britain between 1979 and 2012 went to the bottom half of the income distribution, with the bottom third barely sharing in it at all. The richest 10 per cent meanwhile took almost 40 per cent.

The geography of national income is even more skewed. London and the South East account for almost two-fifths of national output. Indeed, the remarkable fact is that outside those two regions, no part of the UK has got back to the level of output it had before the financial crisis. When a majority of voters rejected warnings during the referendum campaign that Brexit would put the economic recovery at risk, they did so precisely because most of the country has not experienced any such recovery.

These facts pose a serious challenge to economic policy, particularly for those on the progressive wing of politics. For three decades it was felt sufficient to reap the economic rewards of globalisation and technological change, and then redistribute income after the event through the welfare system and spending on public services. It worked for a while, but the financial crash and its aftermath have exposed the hollowed-out economy on which the strategy was based. Lack of interest in the real process of wealth creation – fuelled by economic theories which claimed that the state could not improve upon private sector investment choices – has left the UK economy more de-industrialised, with lower wages, more insecure labour markets and larger regional imbalances, than almost all of our major competitors.

How have we got to this place? A new report published by the Institute for Public Policy Research (IPPR) sets out just how deep these structural weaknesses go. The UK invests less as a proportion of national income than most other advanced economies, and investment has been declining for a quarter of a century. As a consequence our productivity is lower, and since the financial crisis its growth has stalled altogether. This makes raising wages almost impossible – which helps explain why household incomes have not increased in recent years. We have a record trade deficit which has also been growing over a long period. This makes the UK deeply vulnerable to a decline in overseas’ investors’ confidence in the value of UK assets, which currently fund the deficit. The recent depreciation of sterling will benefit our exports – but so many of them are so full of imported components that the effect will be much less than it would be in a country (like Germany, say) with a stronger manufacturing sector.

At the same time the UK has an alarming fiscal gap: due to its ageing population, there is a rapidly growing divergence between future tax receipts and spending commitments, unless taxes (as a proportion of GDP) can be raised. The declining proportion of working age people relative to the young and the retired has also given us a huge pensions gap. The difference between actual pensions saving and the levels required to provide the incomes that most people expect in retirement now amounts to around 13 per cent of GDP.

The new Conservative government appears to understand that all this will require a much more active approach to economic policy than has been followed over recent years. Next week’s Autumn Statement is likely to see some relaxation of the previous Chancellor’s fiscal stance, with some additional borrowing for infrastructure. The government has also signalled its interest in developing a more active industrial strategy, even putting this into the title of its new business department. But there is little sense that in either sphere the scale of the problem has been fully grasped.

The challenges facing the UK economy today are unprecedented in the postwar era. We start from a fundamentally weak base, in which growth has been sustained since the financial crisis only by near-zero interest rates, rising household debt and almost continuous quantitative easing. Brexit now poses serious risks to trade and inward investment. But on top of this we will soon face a new wave of globalisation as China and other emerging economies start competing higher up the value chain. And meanwhile the new technologies of automation and machine intelligence offer huge opportunities but also serious risks of job loss and dislocation.

These challenges will require more than tinkering at the edges of economic policy, whether on left or right. Ensuring that economic growth can be sustained and its fruits properly shared across all households and regions will require some fundamental rethinking.

It is for this reason that we at the IPPR have launched this week the Commission on Economic Justice. With the help of leading figures from the Archbishop of Canterbury to organisers from Citizens UK, we will examine the challenges facing the UK economy over the next two decades and make practical recommendations for its reform. We will be exploring what industrial strategy really means; how to make financial markets more long-term; how to close the class, gender and ethnic skill and pay gaps. We will look at the distribution of wealth as well as income, and how it can be made more equal. We will look at how economic policy can be devolved to the nations and regions of the UK. We will think big, and consult widely.

The political revolt of 2016 asks a powerful question. It needs urgent answers. Our commission aims to start a new conversation about where the British economy is going, and how it can be shaped to bring prosperity to the whole country.
Michael Jacobs is Director of the IPPR Commission on Economic Justice and co-editor of Rethinking Capitalism (Wiley Blackwell 2016).

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What has happened to the Liberal Democrats?

As Brexit nears, Vince Cable is struggling – but his is a poisoned inheritance.

During the coalition years, Iain Duncan Smith came up with a plan: if unemployed people went on a demonstration, and the police stopped them for any reason, the officer should pass their names on to the Department for Work and Pensions, which could then freeze their benefits. After all, the minister’s reasoning went, if you had time to protest, you weren’t actively seeking work.

This was just one of the many David Cameron-era Tory proposals that the Liberal Democrats quashed before it ever saw the light of day. Every Lib Dem who worked in the coalition, whether as a minister or a special adviser, has a horror story about a policy they stopped or watered down – and usually the papers to prove it, too.

And so from time to time, Vince Cable’s team needs to respond to a news story by plundering their archives for anti-Tory material. A month or so ago, a former Lib Dem staffer got a phone call from the party’s press operation: could someone answer some questions about their time in government? To which the ex-staffer said: OK, but since you’re calling on a withheld number, you’ll need to get someone to vouch for you.

Perhaps, the former staffer suggested, Phil Reilly, the Lib Dems’ communications chief and a veteran of the party machine, was around? No, came the answer, he has moved on. What about Sam Barratt? Out at a meeting. Was Paul Haydon there? No. Haydon – who worked for the party’s last member of the European parliament, Catherine Bearder, before joining the press office – had moved on, too. After a while, this ex-staffer gave up and put the phone down.

The really troubling thing about this story is that I have heard it three times from three former Liberal Democrat aides. The names change, of course, but the point of the story – that the party machine has been stripped of much of its institutional memory – stays the same. The culprit, according to the staffers who have spoken to me, is Vince Cable. And the exodus is not just from the press office: the party’s chief executive, Tim Gordon, is among the heavyweights to have departed since the 2017 election.

Is this fair? Tim Farron, Cable’s predecessor as party leader, did not share Nick Clegg’s politics, but he recognised that he was inheriting a high-quality backroom team and strove to keep the main players in place. Reilly, who is now at the National Film and Television School, wrote not only Clegg’s concession speech at the general election in 2015, but Farron’s acceptance speech as leader a few months later.

The Liberal Democrats’ curse is that they have to fight for every minute of press and television coverage, so the depletion of their experienced media team is particularly challenging. But their problems go beyond the question of who works at the George Street headquarters in London. As party veterans note, Cable leads a parliamentary group whose continued existence is as uncertain as it was when Paddy Ashdown first became its leader in 1988. The difference is that Ashdown had a gift for identifying issues that the main political parties had neglected. That gave him a greater media profile than his party’s standing warranted.

There is no shortage of liberal and green issues on which Cable could be more vocal: the right to die, for instance, or the legalisation of cannabis. He could even take a leaf from Ashdown’s playbook and set out a bolder approach on income tax than either Theresa May or Jeremy Corbyn. While none of these issues command anything resembling majority support, they are distinctly more popular than the Liberal Democrats. They would also get the party talked about more often. At present, it is being ignored.

These complaints will receive a greater airing if the Lib Dems have a disappointing night at the local elections on 3 May. The party hopes to gain ground in Manchester and retain the Watford mayoralty, but fears it will lose control of the council in Sutton, south-west London. It expects to make little headway overall.

So what else could be done? If you gather three Liberal Democrats in a room, you will hear at least five opinions about what Cable is getting wrong. But the party’s problems neither start nor end with its leader. Cable inherits two difficult legacies: first, thanks to Farron, his party is committed to an all-out war against Brexit. In 2016, that policy successfully gave a shattered party a reason to exist, and some hoped that the Lib Dems could recover ground by wooing disgruntled Remainers. Last year’s general election changed the game, however. The two big parties took their highest share of the vote since 1970, squeezing the Lib Dems to a dozen MPs. That simply doesn’t give the party the numbers to “stop Brexit” – therefore, they feel to many like a wasted vote.

Why not drop the commitment to a second in/out EU referendum? Because one of Farron’s successes was attracting pro-European new members – and thanks to the party’s ultra-democratic constitution, these hardcore Remainers can keep that commitment in place for as long as they wish.

The legacy of coalition is even more difficult to address. In policy terms, the Lib Dems can point to great achievements in government: across every department, there are examples of Duncan Smith-style cruelties that the party prevented.

Yet there is no electoral coalition to be won from voters who are pleased and grateful that hypothetical horrors didn’t come to pass. More than half of voters still regard the Lib Dems’ participation in coalition as a reason not to back the party. That might change as the memories fade, but for now the party’s last spell in government is a significant barrier to gaining the chance to have another one. Even a fresh, young and charismatic leader – with a superb, experienced team – would struggle with such a poisoned inheritance. 

Stephen Bush is special correspondent at the New Statesman and the PSA's Journalist of the Year. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

This article first appeared in the 27 April 2018 issue of the New Statesman, The Corbyn ultimatum