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Thursday, December 11, 2008

Labour policy and the PBR

The Pre Budget Report (PBR) - it was only presented on 24 November and already it seems a long while ago. But what are the political implications for Labour post PBR and amidst recession?

Reality has in fact yet to properly sink in regarding the scale of what has been happening. Apart that is from the perspective of key policy-makers in government (certainly not the Conservative Party), a few outside government, and many in the City.

A sign of this is the recent batch of speeches and articles heralding a return to 'normal' Labour politics. It is certainly true that the Tories are finding themselves boxed in, playing out nasty-party politics again. But from a Labour point of view, just because we have suspended the fiscal rules and will be hiking spending and debt does not mean we can suddenly spend money everywhere and resurrect policies that seem to herald from the 1970s.

The reality that has to bite is that unemployment is rising and will continue to do so for some time. This is not a simple slowdown, because the banking system is still not working properly. Banks are not lending to businesses at normal interest rates, if they are lending at all.

The policy framework has to adjust for a period of rising unemployment, as I argued here. And the policy narrative has to change too, as I argued in April and January this year.

Ministers, especially those in economic posts, certainly seem to get this and you can sense the tone has changed. There is still a lot of firefighting to be done of course and it must be difficult to chart long term policy positions while dealing with more immediate problems such as banks in trouble or businesses complaining about lack of funding. That's where the Party and its policy forum need to come in and show they get the new scenario too.

The Conservatives will face a difficult time internally if unemployment rises significantly because they have committed to a policy position which eschews intervention beyond the 'automatic stabilisers' ie when borrowing rises in recession because tax revenue goes down while benefit payments go up. They will feel the pressure as they will have little to offer people. They will be trying to shift the blame for rising unemployment on Labour and at the same time highlighting examples they believe they have found of wasteful government spending.

Can we begin to sketch out the beginnings of a Labour recession policy framework?

For a start, it will not throw out economic lessons we learnt over decades. There will be a limit to how much good money can be thrown after bad. Except in a deep slump, there is no evidence to suggest that attempts to boost aggregate demand by tax cuts and more spending will lead to the outcome we will all judge most important - reducing unemployment. It might be cheaper to employ people directly through a government agency.

We will face a choice later on of whether to 'muddle through' a recovery that will take time or help shift the balance of economic incentives in favour of (job producing) enterprise, even though hard choices may be involved.

More people will focus on state provision, both in education and health. That will provide challenges but also echoes of the late 90s when most agreed our public services needed investment.

People may also come to value communities more, especially when facing the threat of redundancy. Policy should encourage the building of better quality relationships between people.

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