It may be a
coincidence, but the possibility of fresh leadership seems to have
inspired a couple of papers published by Labour groups on how to
reform the UK economy. In reality their appearance is probably more a
testament to at least the perception of the lack of major reform
coming from the current Labour government. Ben
Zaranko has already discussed both in the Observer,
but I think what I write here is complementary. (Unlike Ben I won’t
be discussing ‘Manchesterism’ for reasons well set
out by Joshi Herrmann here.)
The paper
from the “Labour Growth Group” is written by Mark McVitie with
Chris Curtis MP. Its overall theme can be summed up by the following
quotation:
“Britain has
become an economy where position too often pays better than action
and contribution. We call this the extraction economy: a settlement
in which holding scarce assets, protected licences, legal leverage,
regulatory position or the power to shape and navigate broken systems
can pay better than working, building, investing, caring, competing
or taking productive risk.”
This is a call to
prioritise socially productive activity over rent seeking that will
be familiar to many, including economists. The paper argues that to
achieve this requires a shift “from a distributive state to a
capable one: the democratic choices of the people delivered by a
state that can choose, build, enforce, reshape markets.” The paper
argues that the UK state contains the power to act capably, and
implies that the reasons it doesn’t lie in political attitudes.
The paper does have
two important, although familiar, suggestions as to how to get the
state to be more capable and less managerial. The first is to give
the Prime Minister more resources, by building a Department for the
Prime Minister. The second is to devolve power regionally, and in
particular financial power, which this government has begun to do.
(If Manchesterism is anything it is this.) While I strongly agree
with the second proposal, I was not convinced either would in
themselves necessarily achieve a more capable state. The paper says
that centralisation means that “organised interests need capture
fewer decision points”, but equally organised interests may find it
easier to dominate local and less powerful politicians, or even play
one region off against another. That criticism does not imply that
financial devolution is wrong, but that it is right for different
reasons.
More generally, if I
ask myself why this Labour government has been such a disappointment
over the last two years, I’m not sure I would answer that at an
institutional rather than personal level. Its major mistake, it seems
to me, has been a wish not to upset most social and political
groups, leading to an inability to make key reforms. This helps
produce an excessive deference to the status quo. It is the mindset of an opposition facing an unpopular government, not a government determined to pursue its own vision. (Ironically one group the government has felt free to offend
have been its core supporters, which has led to its current downfall.) To quote from the paper: “The British state increasingly … treats conflict between objectives as an administrative problem to be managed, rather than a political choice to be made. The consequence is paralysis, not balance.” This seems like a criticism of political leadership rather than institutional structure.
Of course there are limits on what it is possible for Labour insiders to say publicly in this respect. However on one important point in the paper I clearly disagree. To quote: “The tax
burden as a whole is unsustainably high, in time the economic benefit
of this programme should provide scope to reduce it, but for the time
being we believe the burden must first shift from the payslip.”
The overall tax
burden is historically high, but this is true in most countries and
the main reason for it is the same: a growing demand from an ageing
and wealthier population for health services. That cannot be wished away. What is not
historically high and what is certainly not unsustainably high, is
taxes coming from the payslip. As the
IFS shows, UK tax revenue is lower than in most
Western European countries, and in particular the UK raises far less
from employees’ social security contributions than other countries.
While the overall tax burden has been increasing, since the early
1980s taxes in median earnings have been falling almost steadily (see
this
post and the chart from the Resolution Foundation
reproduced there).
The second
paper is by Louise
Haigh. There are clear commonalities with the Growth
Group paper. For example “we must look to reduce regulatory
barriers, especially those that are holding back new and innovative
businesses wishing to scale up.” Labour’s reforms of the planning
system are praised by both papers, and as Ben Zaranko points out this
parallels US
arguments around “abundance”.
While the Growth
Group paper sees the central problem as vested interests around rent
seeking holding back growth, Haigh focuses on short-termism.
“A central weakness in the UK’s economic model is the systematic
undervaluation of what might be termed “preventative” investment
– spending that reduces future fiscal pressures while raising
long-term growth. Our institutions, appraisal frameworks, and
political incentives are poorly configured to recognise these
benefits, tending instead to favour interventions with immediate,
easily measurable returns.”
But isn’t it the high cost of borrowing that is currently holding
back investment?
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