A different economy for Britain.

AuthorDenham, John
PositionFeatures

Across Europe the centre-left has suffered defeat after defeat. Former support has swung to populist parties, nationalist parties or the greens - that may sound familiar.

The old reason for voting social democrat - getting a good deal for workers in a market economy by restraining the private sector - became harder as wealth creation stuttered. The replacement strategies - adopting liberal economic policies, investing in supply-side measures like skills, and redistributing the tax receipts - have run their course of effectiveness.

The result is the three challenges Ed Miliband has set out (Miliband, 2011a):

* the squeezed middle - that large group of people working on low and middle incomes who feel that the rewards of hard work, paying taxes and playing by the rules are too little, in contrast to both those who enjoy stellar salaries not matched by results, and those who claim benefits too easily;

* the British promise - the nagging and deep-seated fear that our children will not enjoy better lives than we have done because we cannot pay our way in the world;

* strong communities - recognising the myriad ways, including changing workplaces and working lives, we sense our communities with strong social institutions and common bonds are being eroded.

Our election demands credible responses to those challenges. And that means an economy that looks and feels very different to today's: stronger in more sectors; globally competitive to pay our way in the world; offering fair rewards and creating shared prosperity; underpinning not undermining a strong society.

Labour's Business and Enterprise Review was launched in March. Months of intensive consultations with businesses, large and small, across the country, have helped shape our understanding of the challenges facing British business in the coming years. There is no doubt our review covers many of the critical economic, social and political issues underlying Ed Miliband's three big challenges.

While we have world class companies and huge potential, too little of our economy is globally competitive, across too few sectors of the economy. As Ed Balls has warned, the years of lost growth which George Osborne's fiscal reduction strategy look set to inflict on the UK may be lost forever as the BRIC countries and others invest heavily. Our domestic economy has too many low wage, poor productivity jobs. We have an economy that simultaneously experiences both skill shortages and many people working below their capability and potential productivity. In turn this puts pressure on public policy attempts to compensate for a poor labour market.

Our economy must be more broadly based. It has to become more competitive in those key sectors where today and in the future we have the opportunity to be globally competitive in order to pay our way in the world. It needs to be better balanced, not just between the financial and other sectors, but between the regions and nations of the UK.

Why it matters

At a time when last year's recovery has been choked off - with yet more disappointing GDP Q2 growth figures of just 0.2 per cent - it might seem churlish even to ask these questions. Surely, as the current government has argued in allocating the Regional Growth Fund to immediate job creation rather than any strategic purpose, any job is better than no job?

But while we have to be concerned about people having a job, we must also be concerned about what that job is. In the medium to long term, the nature of the growth and the jobs we create is crucial to the overall success of the economy and to those who work in it. Otherwise both the country and its families face a bleak future. The Resolution Foundation, using projections from the Office for Budget Responsibility, has estimated that median gross real wages adjusted by RPI are set to be lower in 2015 than they were in 2001 (Plunkett, 2011). The Governor of the Bank of England has talked of living standards falling for six years (King, 2011).

And this is not just because of the global banking crisis and our stuttering recovery; though it is being made worse with the living standards squeeze of George Osborne's VAT hike and higher inflation under this government. For middle and lower earners (the squeezed middle), wages stagnated long before the crisis, from about 2003. According to the Resolution Foundation, between 2003 and 2008 average earnings fell by 1.1 per cent across the UK despite GDP growth of 11 per cent over the period. In eight of nine English regions, the falls were bigger than that (Plunkett, 2011). The economy was creating three million jobs; jobs at the highest skill levels, yes, and at the lowest skill levels, but hollowing out the jobs in between.

The difficulty of developing more, higher skill, higher value-added jobs, and the long tail of less productive, less efficient business, hampers our attempts to be internationally competitive. But there are political and social challenges here as well.

Labour believes that people who work, pay their taxes and play by the rules should be properly rewarded. If work does not bring that reward, the state is under increasing pressure to step in. Ultimately the costs, and hence the tax burden, of compensating for poor jobs could continue to rise - whether through tax credits to top up wages, or through benefits and employment services for those who revolve in and out of low-paying, insecure jobs. Using the state to compensate for the increasing failures of the labour market feels like running up the down escalator. No government can protect all its citizens from an economy which is simply not producing enough productive, decently paid jobs.

And work is central to our lives. For our incomes, our ability to pay our way, to raise our families well, to secure our retirement. And for much more: for the lives we build around it; the friendships we make; the way we are valued; the ability it gives us to develop our skills, to get on; the respect and autonomy we enjoy.

In a free society with a free economy, that's surely the deal. Yet the evidence suggests that our economy is not offering those rewards to millions of people who may have jobs but who do not have decent work. Serious questions have to be asked about our economic model if, year after year, it is not raising the living standards of the majority; it is questioned if it undermines, rather than underpins, family life and the strength of our communities; if there is no challenge to the idea that a narrow view of markets must always trump the richer values of human relationships and the broader social meaning of work.

You don't have to predict Greek-style disturbances to recognise that both politics and business are surely going to run into trouble if the best we can offer is years of falling living standards, followed by growth whose benefits are as unfairly shared as they have been in recent years.

So can business and politics together offer something better?

Supporting private sector growth

In building a different and stronger economy, the growth and jobs we need will be private sector growth and private sector jobs. The next Labour government will need to have a relentless, single-minded focus on creating the conditions for private sector growth. That means creating the conditions in which companies compete within fair markets and make profits by being the best in those competitive markets.

The Tory-Lib Dem notion is that support for market-led growth means that the ideal state is one in which government does as little as possible. In truth, markets are inevitably and unavoidably shaped by what governments do, and by what government doesn't do. The powers of government go way beyond establishing the right fiscal conditions for the macro-economy, or supply-side measures like investment in skills and infrastructure.

Indeed, without the effective use of all the tools available to government, supply-side measures cannot have their full impact.

* Government policies determine to a significant extent the size and shape of key domestic markets, the sectors which attract investment, and the opportunities to ensure that research is exploited to develop successful companies with new products which can achieve success in world markets.

* Government policies can shape the balance between short-term pursuit of profits and the long-term growth on which greater profits and greater tax income can be based.

* Government can create market certainty or uncertainty. For years, uncertainty about nuclear power depressed investment in nuclear technology and nuclear-related skills. As certainty grew, private investment grew and investment followed in the skills and technologies we need.

* Competition and pricing policy in energy can determine which technologies attract investment, and determine the opportunities for domestic companies to develop new and internationally competitive strengths in green technologies.

* More generally, competition policy will set the balance between the smaller and the larger company - between banks and small businesses, between supermarkets and farmers, between the innovative insurgent company and the established market leaders.

* Government procurement will play a significant role in deciding whether the benefits go only to established companies, or whether there is a guaranteed flow of funds - albeit on a small scale compared with overall investment - which can provide the opportunity for new and innovative companies, technologies and services.

* Government regulation can create markets for new businesses and new solutions, as the establishment of the 3G standard for mobile phones gave the European mobile phone industry a significant market advantage over its rivals in other countries. The establishment of a target for zero carbon homes fostered whole new markets across a range of business activities - from architects to building technologies, from renewable energy supply to carbon offset mechanisms...

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