The Great Rebalancing

It is a truism to observe that the state of the economy is the dominant issue in British politics. At one level this debate is about the immediate questions of how to restore growth and jobs, manage the debt and deficit, and start to halt the slide in living standards. But beneath this debate lies a deeper question, about the way our economy is organised, whether it serves the interests of the majority of our country, and how desirable and feasible it is to change the rules of the game.

The 2008 financial crisis began the death-throes of Britain’s post-1979 economic model. That model relied on a range of assumptions: a heroic hope that tax cuts for the richest would trickle down and raise living standards for all; a commitment to deregulation, particularly in financial, capital and labour markets; a reliance on the health of one sector (financial services) to drive investment and provide the tax revenues on which redistribution and public services depend; and a relatively casual approach to inequality as the necessary price of prosperity.

This model was brought crashing down by what Ed Miliband has called the loud crisis of the financial crash, combined with a quiet, longer-term crisis of a continuing decline in living standards. It is a model that stopped delivering system stability, consistent growth, or rising real incomes for the bulk of working families.

The biggest financial crash in a generation is reason enough to question fundamental assumptions about how our economy works. But for Labour, we have additional reasons to revisit the post-79 consensus. If Labour wins the 2015 election, the failure of George Osborne to restore growth and therefore control Britain’s debt and deficit means we will find ourselves in office but severely cash-constrained. This forces us to put more emphasis than Labour has historically on supply-side reforms of our economy: changing the rules of the way markets work to improve not only their fairness but their efficiency.

The prize for Labour is that such a ‘supply-side revolution from the left’ offers the hope of changing the fundamentals of our economy in a way that, too often, we skated over during our time in office in favour of ameliorating the effects of low productivity and widening inequality. It also offers a chance to rethink the roles of the key institutions of our political economy – from banks, large firms and small businesses on the one hand, to unions, central and local government on the other.

The contributions in this volume cover a vast range of topics. But in different ways they address the central challenges facing those of us keen to build a new political economy for Britain.

First, how to encourage long-termism in “UK plc”. Proposals for reform of our banking system, our corporate governance rules and industrial relations should be measured in large part by the extent to which they help promote long-term investment in companies and in human capital.

Second, how to meet the challenge of investing in the forgotten 50 per cent of students who do not go to university. Governments of all stripes have yet to crack the problem of Britain’s comparative weakness in the production of technical skills, a weakness that has left our engineering, manufacturing, and industrial sectors hard-pressed to find the young talent they need to thrive.

Third, how to promote innovation and competitiveness. The days when the term ‘industrial policy’ was automatically associated with protectionism or propping up lame-ducks are over. A modern industrial policy must not be afraid to tilt the playing field in favour of firms who innovate, build sustainable value, and invest in people rather than poaching trained workers from others.

Fourth, how to pursue not just redistribution but also predistribution – Jacob Hacker’s term for “a more equal distribution of economic power and rewards even before government collects taxes or pays out benefits”. This calls for particular attention to the way Britain’s labour markets work – from finding ways to rein in the runaway rewards for the very few at the top, to tackling the insecurity, low pay and poor prospects enjoyed by too many with fewer qualifications.

Opposition has little to recommend it, but one opportunity it does offer is the chance to revisit our first principles, and find the courage to develop a genuinely radical response to the problems our country faces. The essays in this volume are imaginative and bold, and I hope they serve to stimulate both our thinking and further debate in looking to build a fairer and more sustainable economy for Britain.