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The economy needs real reform to recover from Covid-19

The government should look to green growth to tackle the gargantuan national debt.

By Ed Davey

The focus during the pandemic has rightly been on saving lives, and how best to support an economy in lockdown. Yet we must begin to think long term. A public inquiry into how the pandemic has been handled will be crucial to better preparation for a future pandemic. The shocking loss of life and selfless sacrifice of health and care workers demand nothing less.

The economic debate will be the most testing, with the UK economy needing to recover from its worst recession since records began, alongside a global economy on its knees. And the most political part of that debate? What should be done about the gargantuan national debt.

I’m unequivocal: there must not be a return to austerity. Instead, we need a green growth strategy to tackle the climate emergency, with increases in public investment and a step-change on social justice to build a truly caring society. I simply refuse to tell constituents who risked their lives in hospitals, care homes, supermarkets and on buses that the public services and welfare support they and their families depend on must now be slashed.

The unique nature of this economic shock, the sheer scale of the crisis and the size of its debt legacy demands we throw out recent orthodoxy, go back to the economic history books and consider new policies for the inclusive, digital and zero carbon economy we must now build. Coupled with the oncoming and seemingly unavoidable economic shock of Brexit, a fresh approach to public finances and taxation is urgently needed.

And our political situation post-coronavirus will bear little comparison with previous recessions, including the downturn and fiscal crisis after the 2008 financial crash. The opportunity exists to build a progressive consensus around measures like living wages, social housing and paying for the care our elderly and disabled need, and the centre-left must not squander it. We must argue that it’s unacceptable to label care staff, cleaners, delivery drivers, bus drivers and warehouse employees as key workers and heroes one day, and then the next day endure the Home Secretary talking about them as unskilled workers with barely concealed contempt.

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But rejecting austerity is one thing. Even Boris Johnson now hints at that. The intellectual challenge for progressives is to grapple with the big questions – how can a country live with much higher debt levels yet make the transition to a green economy and a caring society?

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Economic history and modern experience of countries like Japan shows that countries can still develop, advance and embark on social reform, even when carrying heavy debt levels. Witness the post-war growth years across Britain as the NHS and Beveridge’s welfare state was built.

Moreover, unlike 2010, the financial markets already seem more willing to lend. And today we have the benefit of historically low interest rates that makes such debt levels less daunting – alongside central banks willing to step in and buy government paper to keep rates low. Indeed, monetary policy innovation may yet play a critical role in how we respond to historically high debt levels.

More radical interventions in financial markets will certainly be needed if we are to colour the recovery green, and prevent a global climate emergency bringing economic meltdown on top of economic lockdown.

If we wish to bring greenhouse gas emissions to net zero before 2050 and stimulate genuinely green growth, we must force capitalism to decarbonise. New regulations in the money markets – on banks, pension funds and Stock Exchanges – are needed. A requirement to take account of climate risk must be imposed on investors, so trillions of private funds switch from brown to green.

And yes, there will be green taxes. Now may be the time to look again at Liberal ideas of old, including land taxes, as we’ve already begun to do, as a replacement for the out-of-date business rates system which is also destroying our high streets.

Higher taxes are inevitable, and it’s time politicians just admitted it. Our 2019 manifesto included a range of changes to capital and corporation taxes to fund our proposals to invest in education, childcare and welfare.

Indeed, Liberal Democrats have argued for the last four years that income tax needed to go up by 1 per cent to fund a major boost to NHS and social care funding. Perhaps we should now consider going even further and increasing spending by the equivalent of three pence in the pound on income tax as part of a unified health and care tax, or look at new ways of taxing wealth. There is a cost to building a society that cares.

These are extraordinary times. Fresh leadership on economics has never been needed more. We must learn the correct lessons from the past and offer a hopeful vision for a greener, more caring future.