The challenge for the centre left


by Hopi Sen    
10:00 pm - March 24th 2010

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This was a good budget. Perhaps unsusually, I thought the best bits were the bits that will probably get the least attention.

While the stamp duty holiday will benefit me personally and (given the age and salary profile of most journalists and editors), get a lot of headlines, it is essentially a measure designed to ensure housing values stay steady. Fair, enough – but not where the real action is.

Instead, I’m more excited by what Alistair Darling talked about, in his understated way, as the Growth Agenda.

Let me put it this way: the prime political challenge of the centre left for the next decade has to be the creation of around two million jobs. If we succeed in doing this, we will be able to pay down debt. If we succeed in doing this, we will be able to fund public services. If we succeed in doing this, we will be able to fund the research, development and technology that is needed for long term growth.

Doing that won’t be easy. People talk about export led growth, and that’s important. But everyone will want to export their way to growth. People talk about public works spending, but such projects can only do so much.

So, perhaps paradoxically for a left winger, it was the Treasury approach on supporting industry that most caught my eye: the bits of the budgets I got excited by were the tax relief for industrial investment being doubled, so it will be more cost-effective for companies to buy new machinery; the recognition that small businesses need help with their Business rates and flexibility on tax repayments; the focus on supporting commercial lending; the willingness to encourage entrepeneurs to build companies by reducing their capital gains tax.

This agenda can make a real difference – especially when allied to government and private sector investment in new technologies, a protected science budget, backing of industries like the video game sector and major infrastucture projects designed to boost private sector capability and compeitiveness – like Cross rail, Heathrow, High Speed rail, road investment and the Thames tunnel sewerage system (Don’t laugh. Sewers matter for growth. Ask a Victorian. Or a Mexico citian, or a New Delhian, or anyone else who lives in an emerging megalopolis).

Of course, most of these measures won’t make a huge difference to next years growth figures, but they have the potential to make a difference to job creation and GDP growth for years to come, which is what really matters for the economy.

Now there’s more we could do. I’d like to see areas like the North East be offered the chance to become a “special economic zone” for green technologies, with special tax breaks to encourage overseas investment. I’d like to see bigger programmes of support for FDI generally – especially in regions with high public sector workforces. I’d also like to see even more emphasis of industrial research, on skills and on ways to drive up private sector R&D.

Each of these moves would have a cost, and the cost would have to be met from within the current spending envelope. Choices have consequences. These aren’t easy. In fact, twenty years ago, anyone in the Labour party who took this sort of position would be assailed as a dangerous Thatcherite. Now, I wouldn’t be suprised if Jon Cruddas led the charge. These are interesting times on the left.

But wherever I’d like to go further, this was a Budget in the right direction on all of those issues.

What was remarkable, to me at least, was the Conservative response to the challenge of how to deliver growth.

Or rather, the lack of response. David Cameron uploaded a bucket of rhetorical manure on Gordon Brown and Alistair Darling. Fair enough, that’s his job. But that’s basically all he did.

Cameron’s policy agenda seemed to be two fold – first saying that a Conservative would deliver a lower deficit much faster than Labour would, while simultaneously pledging to “ease the tax burden” via tax cuts for the corporate sector. (No employers NI increase, cut in corp Tax*, etc etc).

How can he possibly hope to do both? He’s not really suggesting that corporation Tax is on the wrong side of the near-mythical Laffer Curve, is he? Even if he does have some secret plan that will allow him to painlessly reduce the deficit more quickly than Labour, while also protecting spending on the NHS and reducing corporate taxes, it’s simply stunning to me that a Conservative party has almost nothing more to say about how we deliver economic growth.

Sure, we got the odd grass-roots friendly soundbite about unleashing the spirit of enterprise, but little or nothing about how – aside from the aforementioned corporate tax rate cut (which in my view is a anti-growth step as it increases the tax burden on businesses investing for the future while reducing the burden businesses taking profits)*.

What else was there? The bank levy Cameron announced on Saturday disappeared from his speech today. The National Loan Guarantee scheme is presumably still policy, but is more or less irrelevant in the face of changing events. HSR? Heathrow? Business rate? Investment funding for future growth? Nothing.

Even the Tories own Dyson report, which was vague but essentially benign, didn’t rate a mention from the Tory leader.

If you listened hard to the leader of the Conservative party today, you’d have learnt a lot about how much he despises the Labour front bench, but almost nothing about what a Conservative Government would do to help people back to work.

There was only one party today with an agenda for economic growth via expanding the potential of our private industrial and manufacturing sector. It was the Labour party.

*Originally this was to be by a tax increase on manufacturers via abolition of Investment allowances and R&D Tax credits – since they’ve now reversed their policy on the R&D tax credit, it isn’t fully funded.

* Oh, and NICs. But NIC increase in 2011 won’t limit new employment anywhere near as much as the tories seem to think. It only starts at the £20k level, which is a lot below the level of most new hires, and even above that, you can do salary sacrifice for pensions which would neutralise costs for employers.

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This is a guest post. Hopi Sen blogs here.
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Reader comments


1. ad

Let me put it this way: the prime political challenge of the centre left for the next decade has to be the creation of around two million jobs

If the government has not managed to do that in the last thirteen years, it obviously does not know how to.

Which makes me rather skeptical of hopes that it will be able to in the next decade or so.

2. Alix

“While the stamp duty holiday will benefit me personally”

If you have the personal or family wealth to get round the problem that LTV ratios are at 80/20 on properties still averagely worth around six times the average salary, Hopi, then I’m happy for you. So did I. Lucky us. Unfortunately, people without that sort of personal or family wealth are not even slightly helped by this measure. To call it a sticking plaster is to dignify it.

3. Jimmy Hill

[blockquote]While the stamp duty holiday will benefit me personally and (given the age and salary profile of most journalists and editors), get a lot of headlines, it is essentially a measure designed to ensure housing values stay steady. Fair, enough – but not where the real action is.[/blockquote]

Is this good? Do we want housing values to be propped up (people that own houses probably do)?

4. Mark M

@2 Alix

Quite right. This government’s genius pro-cyclical regulation policy means that my partner and I, looking to borrow around 3.5 times our combined gross salary to buy our first house, are almost completely frozen out of the market because we are told we need 10/15/20% deposits.

Fair enough in normal times. Having a deposit is a good way to prove you are good for the money. But these are far from normal times. I want to buy a house – to do my bit to help the economy – but the government has decided now that banks should take fewer risks when lending.

And thus I’m stuck renting, because no-one will lend me the money to buy, thanks to this government.

5. Bob B

The banks have become very much more risk averse in lending both for mortgages and to businesses for investment. In the last quarter of last year, business investment was 25% on the year before, partly as the result of lower bank lending, hence the new gross targets set to Lloyds HBOS and to RBS for lending.

It seems that bank lending is down on an international scale according to this Reuters report:

“LONDON (Reuters) – International bank lending dropped by over $200 billion (122.8 billion pounds), or 0.8 percent, in the third quarter, marking a fourth consecutive quarterly decline as the financial crisis continued to restrain credit, data showed.”
http://uk.reuters.com/article/idUKTRE60R26O20100128

Figures for mortgage lending by banks in Britain are set out here:
http://www.bankofengland.co.uk/statistics/li/2010/jan/lendind.pdf

What we need to avoid is any further inflation of a house-price bubble:

“American house prices rose 124% between 1997 and 2006, while the Standard & Poor’s 500 index fell by 8%; half of US growth in 2005 was house-related. In the UK, house prices increased by 97% in the same period, while the FTSE 100 fell by 10%.”
Robert Skidelsky: Keynes – The Return of the Master (Allen Lane 2009) p.5.

6. inks

I thought Darling did ok today. He’s about the only senior Labour person I’ve got any time for.

There’s a nasty, nasty booby-trap in the bit about Housing Benefits though. It’s not clear exactly what he meant but it’s likely to be taking the highest rents out of the HB local reference rent calculation.

Nobody actually gets the highest local rents out of HB. The effect will be to push down the local reference rent for ALL claimants. Potentially significantly too, as the LRR is calculated as the median average of local rents, not the mean average. Remove a few at the top and the whole calculation shifts downward for everyone.

7. Bob B

This chart shows what’s happened with bank lending in Britain since the begining of 2004:
http://www.pwc.co.uk/pdf/ukeo_mar2010_banklending.pdf

With that, it’s hardly surprising that business investment at the end of last year was running 25% down on a year before.

The worry is that with public spending cuts underway, consumers being urged to save more and to pay down debt, and with the fragile state of the Eurozone economy, our main export market, there’s a real risk of a double-dip recession ahead.

8. Will Rhodes

twenty years ago, anyone in the Labour party who took this sort of position would be assailed as a dangerous Thatcherite.

Yep, that is, and what, they are.

Now, I wouldn’t be suprised if Jon Cruddas led the charge. These are interesting times on the left.

When Cruddas joins the left, let us know will ya? As for ‘interesting times on the left’ if you really decide to become one of the left, tell Thatcher you have left her policies behind.

The budget was crap, Darling had another opportunity to actually do something, like his predecessor, he made a pigs ear of it. When will you lot join the red Tories, that is your natural home.

9. GeorgeV

Ad @ 1 rather hit the nail on the head.

If the government couldn’t create private sector jobs in the North of England over the last 13 years and preferred instead to yoke the nation’s fortunes to runaway growth in the housing market and the pyramid sellers of the City, it is difficult to see how it is going to create them now.

Hopi’s suggestions might be a start but, as he says, the funding for them would have to be met from existing budgets – which means cuts. It would take a bolder chancellor than the one we have to accept the certain pain of public sector job losses in order to gamble on the creation of new private sector jobs in such a fragile global climate.

10. Strategist

Hopi seems to share Darling’s complete blind spot with respect to green issues.

There’s no point creaming yourself over GDP growth at all costs, if that GDP growth is mindless, oil-slurping, planet-wrecking, workforce-exploiting growth.

The big challenge of this decade is not recovering from the slump and putting everything back as it was in 2007, it’s preparing for the perfect shitstorm approaching on energy security and climate chaos.

There is a way of putting the country to work to prepare to get through those coming crises and to build a better country to live in, and that’s the Green New Deal. Darling hasn’t done nothing on this, but he is not done enough.

Just repeating the moronic mantra “growth, growth” as Gordon Brown does, is the behaviour of a complete dinosaur. GDP is a broken indicator. To use the New Labour vernacular, it isn’t fit for purpose.

11. Gwyn

Re: Mark M @ 11.01

The problem isn’t the LTV ratio, but the prices.

The reason house prices went up so high is because LTV ratios went down and allowed tons of people into the market who otherwise would have needed to wait a few more years.

12. Bob B

Houses are less affordable than 50 years ago although the quality of homes has improved, according to the Halifax.

The lender, now owned by Lloyds Banking Group, said that over the last five decades UK house prices have risen by 2.7% a year, allowing for inflation. This was above the 2% annual increase in real earnings over the same period.
Prices increased the most in the last decade.
http://news.bbc.co.uk/1/hi/business/8468605.stm


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    The challenge for the centre left http://bit.ly/c3JVPL

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    @CharlotteGore They include Hopi Sen apparently. So that's something. He's a nice chap. http://is.gd/aYgcX

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