When Alistair Darling unveiled his pre-budget report in November it was clear that the UK, along with most other economies globally, was entering recession. However, as time progresses – and the economic times move particularly fast right now, it is clear the challenges we face are greater than we anticipated even two months ago. So, what more can we do to offer help to families and businesses? And what can we do to ensure that when the recovery comes we are in a position to benefit?
The Budget, due in March, will be the key opportunity to articulate Labour’s vision. The budget should focus on three themes:
1. The root cause of the problems;
2. Our commitment to fairness; and
3. Investing in the future recovery.
The central problem facing the global economy is that a period of credit famine has followed the feast – responsible businesses and families cannot get credit. Particularly for businesses credit is needed to fund investment, buy stock and smooth payments. Useful policies could include an extension of the business loan guarantee scheme, lending targets for banks and authorisation for the Bank of England to start quantitative easing.
For example, the loan guarantee scheme for businesses currently covers investment in capital. This should be extended to cover investment in property and human capital – including training, and the money available must be ramped up. Lending targets for banks and financial services firms could also help. Emphasis needs to be put on banks lending again rather than re-building their balance sheets or paying back government loans as rapidly as possible. The government has an essential co-ordination role to ensure that individual decisions by banks to reduce risk through restricting lending does not have the effect of starving the economy of cash, thus making it more likely that businesses fail – exacerbating the problems banks were trying to minimise. Lending targets can help achieve this.
Quantitative easing should also be pursued with authorisation from the Treasury or parliament. The Bank of England has attempted to increase the supply of money through reducing its cost, cutting the base rate to 1.5 per cent (the lowest level since the Bank was formed in 1694). However, credit conditions continue to tighten. The Bank has another tool which should now be employed, increasing directly the money supply – ‘quantitative easing’. The Bank would effectively create a new line on its balance sheet to fund the purchases of government and corporate debt or equities. This would push down interest rates across a greater range of assets and over a longer-term horizon and will provide funding for public and private investment. This strategy lifted Japan from its decade-long recession and is now being pursued actively, and it seems, effectively, in the United States.
There is understandable reluctance to go down this route and it is worth addressing these concerns. The greatest fear is that it would be inflationary (look what printing money in Zimbabwe has done etc). George Osborne has wrongly called it the “last resort of desperate governments”. But the greatest risk now is not inflation but deflation. Inflation increases when demand exceeds supply. This is the opposite of the problem we face – where demand is drying up and workers, capital and property are under-utilised. The potential of quantitative easing to get the economy moving outweighs the risks. And we should be mindful of lessons from abroad. The Japanese waited a decade before they used quantitative easing. Let’s not do that here.
The second set of policies must focus on our commitment to fairness. Fairness, for me, is about ensuring the poorest in society don’t end up paying the highest price for the recession, especially as this group have had no role in building the economic framework within which they have to navigate their lives. Take my constituency, Leeds West. Average earnings at £15k are around 60 per cent of the national average. That is, the average family is living in poverty. People talk about this recession as a middle class recession – different in nature to those in the 1980s and 1990s, but I also see parallels. Earning £15k you don’t tend to have savings. You don’t tend to have a permanent job or much security. Coupled with the fact that Leeds has a higher proportion of jobs in the business and financial services sector than any other city in the UK (including London), you can see why families in Leeds are so worried about the year ahead.
As well as the policies to get money flowing we must continue to focus on abolishing child and pensioner poverty. I welcome the policies announced by Gordon Brown and James Purnell to incentivise businesses to take on people who have been unemployed for more than six months, as well as earlier measures to ensure that as few people as possible face having their homes repossessed. Every possible support must be given to help people stay in work, with personalised and rapid support to anyone who loses their job.
Finally, we should look at what more we can do to invest in the capacity of the UK economy for the economic opportunities of the future. If the downturn is protracted, as it now seems clear it will be, the benefit of such schemes increases – they last longer, offer employment and skills and give us a legacy for our money. Three priorities: investment in green technologies and green collar jobs; improving our transport infrastructure – connecting our cities with high speed rail; and zero-carbon communities with affordable and social housing on brown-field sites. The increase in the school leaving age to 18 could also be brought forward to ensure that young people are taking the opportunity to skill themselves for the future. Jobs of the future will be high-skill and in green and technology-based industries – we should take the time now to skill for them.
The price of these measures will not be small, and PBR estimates of record debt this year and next will be exceeded. But without action, the Tory approach, we risk bringing the UK to its knees, with business and bank failures meaning we are unable to take advantage of the global recovery when it comes. A much more costly scenario. The important thing is to be bold – helping families and businesses through the tough times is what is demanded of us.