Can Labour still keep its promise of renewal and, if so, how?

This is an approximate transcript of the presentation which launched our new report, A Blueprint for Economic Renewal, at the Labour Party Conference Fringe on Monday 28 September.

The panel for the event combined expertise in Economics, Finance and Business. Esther Giles is an economist by education who then trained as a public finance professional and worked as finance director in many parts of the NHS, most recently in the South Region as Finance Director for Specialised Services. Esther is now a Director and Treasurer of The Socialist Health Association, and Treasurer and Trustee for War on Want. Vince Gomez is a former bond trader and a member of the Bank of England’s citizen forum. Vince had a very successful career in the city—and when the Global Financial Crisis struck, he realised that it was not only economists who had failed to predict it: hardly anyone in the City fully understood what had just happened either. Since then, Vince has been assiduously studying, speaking and writing about the myths we all believed about the economy, and specifically about money. Mark E Thomas is the Founder of the 99% Organisation, His background is mathematics and business strategy. His book 99%: Mass Impoverishment and How We Can End It was one of the FT’s Best Books of 2019, and he is also the lead author of the new report. The other authors were the panellists and Ann Pettifor and Dominic Minghella.

Introduction to the report

Before we get into the Blueprint itself, let’s just remind ourselves how high the stakes are. The UK is suffering from a protracted cost-of-living crisis – real median wages have now been almost static since 2007. We have nearly one in three children growing up in poverty. Austerity has starved public services – even the NHS, which suffered less than many, is struggling badly and, as the Prime Minister said there is some risk of collapse. And we are told that we ‘cannot afford’ to tackle climate change and environmental degradation.

When we go into the next election, one of two things will happen: either what I have just said will still be largely true, in which case renewal will not have happened and voters will rightly be disillusioned; or the picture will have changed noticeably and voters will feel, not that their lives are perfect, but that the job of renewal has begun.

So let’s look at what we would have to do to deliver renewal.

What is Renewal?

It is brutally simple. When we ask voters what is their number one issue, the answer is almost always that they want the cost-of-living crisis fixed. They want a strong economy, and they want to be feeling the benefits of it. So we need robust economic growth, real wage increases (after inflation) and significant poverty reduction. Whatever else happens, however many other good things the government does, if it doesn’t do those, it has failed voters.

The last Chancellor  said she believed that she was on track, that all of these things would be delivered, and more; we just needed to stick to her fiscal rules and all would be well. And the new Chancellor seems to have accepted that argument. If they are right, that would be rather important.

So let us look at the evidence.

This is the picture of long-term real growth in the economy per person. According to the IMF’s latest forecasts, made in April, we are on track for the worst decade since the 1920s. The worst decade for a century. To deliver renewal, we should at least be able to show that we’re getting back to the level of growth that we enjoyed during the 1970s, which we are constantly told was a low level of growth – though it is far higher than we are experiencing now.

Of course, most voters don’t track the figures on per capita GDP, but they are aware of whether their wages are enough to cover their rent, their bills, and their weekly shopping. The best measure of that is real median wages which, astonishingly, have hardly risen since the Global Financial Crisis. Again, that is a period of stagnation we haven’t seen for over a century.

And, according to the Office for Budget Responsibility we’re on track for about 0.5% this year. Even if that does happen, it won’t feel like renewal.

And, of course, there is poverty.

Under the 1997 Labour  government, most of the poverty lines fell, quite noticeably. Poverty wasn’t eradicated, but it was in retreat. And it felt like it: you could walk through a major city in the evening without seeing shop doorways full of homeless people trying to sleep. Child poverty fell by about 5 percentage points. People can feel that kind of improvement. We have to get back to that.

So, what would renewal look and feel like?

The long-term vision of a society in which the 99% can live decently might feel almost utopian at the moment – but it really shouldn’t: many of those things were broadly true, and the rest were moving in the right direction, before 1979. When Harold Macmillan said, “you’ve never had it so good,” he was speaking the truth.

But there are only two and a bit years from now until the next election, so the government will need a laser-like focus on the most critical issues – especially fixing the cost-of-living crisis and key public services like the NHS.

So now, let’s think about what would enable us to deliver that.

What would enable us to deliver that?

The first thing is that we have to step off the merry-go-round  of decline. We have got ourselves into a situation where every new Budget makes things worse. Let’s see how this happens.

First, we get an external shock. That’s not the fault of our politicians, or our citizens. That could be a Global Financial Crisis, or a pandemic, or it could be thanks to Putin and Trump invading Ukraine or attacking Iran. When they do that, global oil prices rise and that pushes up UK inflation. And that’s when our merry-go-round  kicks in.

Even though it knows that raising interest rates will have no impact on global oil prices, the Bank of England responds by pushing up interest rates. This contributes to the cost-of-living crisis for British consumers, and reduces the amount they can consume, and depresses our economic growth.

The mathematics of debt sustainability mean that when interest rates are higher than growth rates, the ratio of debt to GDP will increase. And if that looks likely, then the Office for Budget Responsibility puts out a report saying if we don’t tackle this quickly, then we will break our fiscal rules and by 2070 our debt:GDP will have become unsustainable, so the government needs to cut spending or raise taxes now.

And the Treasury responds by putting together another ‘difficult’ Budget, constraining public spending.

Since consumer spending and government spending are the two biggest components of GDP, if they are constrained, then so is GDP growth, and the Treasury responds to the low growth with yet more suggestions for austerity.

There is a lot wrong with this picture. And one of the most important is that the Prime Minister doesn’t figure in it. If we leave the wiring like this, it doesn’t matter who is Prime Minister: we get the same economic policies anyway.

If we want renewal, we have to step off the merry-go-round . And that was the subject of our previous working paper, Ending Treasury-Induced Decline. I haven’t got time to go through it in detail today because we want to talk about the Blueprint but there are copies available outside, or you can download it.

Our proposed rewiring, which builds on the Prime Minister’s idea of a Number 10 North looks like this.

A powerful new Department for National Strategy providing the strategic overview which is currently taken by default by the Treasury. A new department with the skills and attitudes to plot a realistic course for renewal.

Another new Department for Inflation Control – as we discussed, our current approach to inflation management is almost the worst which could be devised. Other countries do a far better job of protecting their populations from the effects of energy price rises.

A new Office of Regulation to make sure that our regulators serve the British people and are not captured by the very organisations that they are supposed to be regulating.

A reinvented Office for Budget Responsibility which defines responsibility in terms of whether the government will meet the needs of the people of the country rather than whether there is some illusory risk default in 50 years’ time. That will require a change of leadership and remit for the OBR.

And a focused role for the Treasury as a financial controller whose function is to maximise revenue for the Exchequer and minimise leakage.

What would that rewiring enable? What could we do if we stepped off the merry-go-round  of decline?

The simple answer is, we could start to produce Budgets for renewal. We know that we need to be spending more: the NHS is in crisis and needs around £30 billion a year; pensions and other benefits need at least £5 billion a year to keep pace with inflation; there’s a huge backlog of investment and maintenance of our national infrastructure; with ever growing threats from Russia and other hostile states, we need to be spending more on defence; schools are crumbling, universities are shutting entire departments – we need to spend £ billions more just to stand still on education. A ‘difficult’ Budget will not deliver renewal – all these things will get worse – but if we could find £60 to 70 billion, we could make a big improvement.

Where can we get £60 to 70 billion? The conventional answers would be that we can borrow more or tax more – or, of course, the government could create more money as it did to bail out the banks after the Global Financial Crisis and to fund the furlough scheme.

We haven’t got time to talk through all of those options today, but we did want to highlight the extraordinary amount of leakage in our system at the moment: money which is either never collected by the government or, or which leaks out in ways which are at best suboptimal and at worst criminal.

The total value of this leakage is of the order of £250 billion per annum. The new job of the Treasury  should be to minimise that leakage, and its performance measured by how well it carries out that task. Of course, it is easier to identify leakage than it is to plug the gap. For example, although HMRC’s estimate of uncollected tax has risen since we did that analysis to almost £60 billion per annum, and with better resourcing and a remit to be slightly less forgiving of the very wealthy, that could the reduced dramatically, it would take time to rebuild capacity and capability. And the same applies in most other areas. So £250 billion pounds is a long-term aspiration – but getting £60 to 70 billion pounds per annum should be achievable.

And that would enable us to start to get the economy moving again. There are four components of GDP: the two big ones are public spending and household spending; the smaller two are business investment in new capital and trade surplus (or in our case deficit).

Funding public services would both increase public spending directly and strengthen household finances and that would increase the two largest components of GDP and boost demand. The Chancellor said he is relying on businesses to invest and drive growth. As someone who has spent most of his career working with businesses on their strategic growth plans, I can tell him: that won’t work. Businesses invest in growth when they can get a return on that investment which exceeds their cost of capital, and that happens when demand is high (so that they need more capacity) and cost of capital is low enough so that their returns are above that cost.

But the things we have talked about would grow three of the four components of GDP.

Finally, of course, there is foreign trade. Brexit was hugely damaging, so the faster we can rebuild links with our most important trading partners the better.

So we should rewire, and we should be looking to stimulate the economy with around £60 to 70 billion per annum. And if we can do that, then we can look at policy formulation in a completely different light.

In reality, policy formulation is complicated and each individual policy needs rigorous analysis. But at a high level there are only four types of policy: each policy either grows the pie, or it does not; and it either shares the benefits fairly, or it does not.

That gives us these four types of policy:

1. captured growth policies – those which grow the pie, but give almost all the benefits to a small group
2. shared growth policies – those which grow the pie, and share the gains across the whole population

• vulture policies – which fail to grow the pie, but make a tiny group (the vultures) wealthy; and

1. balancing policies – which do not grow the pie but help balance the captured growth policies.

If we want to understand how we have reached this point of crisis, this way of looking at policy explains it fairly simply.

Today’s crisis is because over the last 45 years, we have had far too many captured growth policies and vulture policies and far too few shared growth policies and balancing policies. A powerful Department for National Strategy could create a portfolio of policies which was rich in shared growth policies. It would probably need some captured growth policies, but these would be balanced by Type IV balancing policies. And there should be no more vulture policies.

Almost everyone, except for a small number of extremely wealthy people, would be better off if the country had such a policy portfolio.

So, what could a Budget for renewal look like? Of course we don’t know what the next Budget is going to contain, but we do know what Rachel Reeves’s last Budget looked like, and we can consider an alternative to that.

In this chart, an additional £60 billion has been provided by leakage prevention, and a further £67 billion has been invested in national renewal. The alternative Budget has a slightly larger deficit than Rachel Reeves’s Budget – which means that it is putting slightly more money into the economy to stimulate growth. It is also clearly far better for the population as a whole and for rebuilding our public services.

It is almost certainly not an optimal Budget because it has not been produced using the kind of rigorous process that we suggest in our Blueprint working paper. It may be possible to stimulate significantly more growth than this proposed alternative, but that is hard to say without detailed analysis of what spare resources are available in the economy.

But it is clear that this is the shape of a progressive Budget which would at least start the process of national renewal. And it is far better than the one we got.

So, we have seen what economic renewal would look like and we have seen what it would take to drive economic growth. The final question is how can we do this in practice?

How can we do all this in practice?

There are three key steps to economic renewal:

1. Responsible, dynamic economic management: static fiscal rules are incompatible with national renewal, and they prevent government taking responsibility for the most important issues – they must be replaced with a dynamic system of fiscal rules which reflect reality and the needs of the population. Our first working paper set out in detail how such a system would work;
2. We must rewire our key institutions: the Treasury , the office for Budget responsibility, and the Bank of England, so that they work for the benefit of the UK population as a whole – without such rewiring, we cannot step off the merry-go-round of decline;
3. With the rewiring, and with the new capabilities present in Number 10 North, it becomes possible to construct a portfolio of policies to grow the pie and to share it fairly. In other words it becomes possible for government to plot a course for renewal.

So this means changes at all levels. Our Blueprint for National Renewal starts by asking the government to clarify its values. As Bert Bernbach said, “a value isn’t a value until it costs you money” – if we say that we have a value that we serve the British people, but we’re not prepared to find the money to do that, it is not a value.

Clarity of values must be followed by clarity of vision: a very small number of vitally important issues which the government commits to tackling before the next election. If the government has 100 priorities, it has no priorities. Realistically it should have no more than three to five and it should pursue them relentlessly. That would enable the government to be clear about precisely what kind of country it’s trying to build and to communicate it to the British people. And it is really the foundation for all the actions that the government should take.

We have Blackshirts on the streets for the first time since the 1930s, so Defensive Constitutional Reform is as important as economic renewal. Our report on the subject sets out the issues and the steps that government should take to ensure that we do not slide into dictatorship.

Of course, as I’ve said before, the rewiring of key institutions is vital: if we don’t rewire them, they will make renewal impossible.

And once the rewiring is done, our new Department for National Strategy can produce a portfolio of policies for solidarity and prosperity. It can again make sure we are investing for the future. And it can do something I haven’t talked much about but is also increasingly important: it can tackle the problem of businesses externalising their costs to the rest of society – for example by polluting the environment.

So, to summarise, to claim renewal we would have to do enough in particular on the cost-of-living crisis for voters to feel that renewal had begun. To do that we must drive economic growth, and we must rewire our institutions and strengthen government itself.

Labour promised national renewal. With a change in economic approach, it is still possible for Labour to keep that promise.

Conclusion

Without renewal there will be no second term for Labour, and we may well find ourselves with a far-right government. The removal vans will be moving Labour out and something far worse in.

But what happens with renewal? Just imagine if October’s Budget reflects what we have talked about instead of bringing further cuts to public spending and benefits. If, instead of a perpetuation of the cost-of-living crisis, we see measures which start to put pounds into the pockets of ordinary British people. A rewired Bank of England will keep interest rates low, further easing the cost-of-living crisis. The new Office for Inflation Control will cap energy bills and impose windfall taxes on oil companies. People will start to spend more, because they finally can. Shops and restaurants will no longer close in such large numbers. The NHS crisis will start to ease and waiting lists reduce. Some of the 3 million people currently out of work due to long term health will rejoin the jobs market, further boosting the economy. Schools and universities will be properly funded. Child poverty will begin to decline. And, as the Prime Minister has promised, homelessness will become a rarity. How would it feel?

This is a difficult time. But it is nothing like as difficult as it was in 1946. We can choose to act like Attlee. We should find the money. And we should drive for similar results. Attlee ushered in the most successful 35 years in our economic history

There followed around 35 minutes of Q&A with the expert panel.

If you think your MP should understand this before the October Budget comes, please write to them and direct them to this article and the report.

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