In the Coalition Agreement Nick Clegg declared that even though he believed that ‘tackling the deficit was essential’ it wasn’t what he had come into politics to achieve. He explained that he’d stood for Parliament and for the leadership of the Liberal Democrats because he had a vision of how ‘Britain [could be made] better in every way’
If Nick still believes in that vision then he needs – along with other Liberal Democrats in the Coalition government – to consider what has happened, in the course of the last two years, to his vision. He needs not only to accept a full share of responsibility for the UK’s aborted economic recovery but an even greater part of the responsibility – because the Liberal Democrats’ Conservative coalition partners stubbornly refuse to acknowledge that anything has gone wrong – for getting the Coalition to rethink its policies and change course.
It isn’t any longer good enough to complain that the Coalition was saddled with an almighty Labour mess. It was, but the Coalition government has to look – and be seen to look – to the future and not to the past. It isn’t any longer good enough to insist that the Coalition has no alternative but to insist on accelerated deficit reduction, and to go on treating ‘deficit reduction [as] the most urgent issue facing Britain’.
Despite the panic that followed the 2010 General Election – a panic that seemed to have swept all before it, even Vince Cable – deficit reduction was never/should never have been the most urgent issue for the country; economic recovery was. Opinions certainly differed about how that could best be achieved. Liberal Democrats, given their party’s economic and political inheritance, should never have given more than carefully qualified support to accelerated austerity (and in my view that was a step too far). Indeed, the Coalition Agreement ensured that the priority given to deficit reduction was hedged around with conditions and qualifications. The Agreement promised that the deficit would be tackled:
- fairly and responsibly
- eliminated within the life of the parliament
- and would be reduced in a way that protected people on low incomes
Two years into the Coalition’s five year term it is undeniable that the process of deficit reduction has not been fair, and only the Chancellor’s closest political allies believe it has been managed responsibly. The OBR gave George Osborne cover for his first full budget but not for his most recent one. It isn’t simply that the Chancellor’s political skills appear to have deserted him, his traditional allegiances and party sympathies came to the fore. He opened ancient wounds but appeared perplexed by the public reaction. George Osborne fashioned a budget for those he knows best, rather than a budget that was fair and responsible.
The fundamental economic and political assumption, which underpinned the Coalition Agreement – that it would be possible to “accelerate the reduction of the structural deficit over the course of a Parliament” and eliminate it before the General Election in 2015 – has been revealed to be both an economic and a political pipe dream. What’s more the promise to protect those on low incomes has been abandoned. Something Iain Duncan Smith, the Secretary of State for Work and Pensions, has only just woken up to. The commitment to fairness and to protect the poorest no longer serves as a constraint on George Osborne; on his determination to treat deficit reduction as more than a government priority, as the Coalition’s paramount objective and Conservative totem.
The latest quarterly GDP figures – confirming a double dip – have dramatised the failure of Coalition economic strategy and underlined the need for the government to reassess its economic strategy and to contemplate a major course correction. It isn’t simply the case that two quarters of negative growth have encouraged the government’s critics to sound off – though they have. It is the feebleness of the recovery from the crash of 2008 and the steady drumbeat of official statistics confirming that unemployment, particularly youth unemployment, continues to grow. It is the absence of a clear government plan to support economic recovery. It is the void in economic policy-making that alarms not only the government’s critics but its supporters.
The nation needs a more intelligent – a truly Liberal Democrat – economic strategy if the economy is to recover (and the Lib Dems themselves are to have any prospect of facing the electorate confidently in 2015). The essential ingredients of that strategy are well understood by economic analysts and commentators who are broadly sympathetic to the political, social and economic objectives of the party. Those analysts and commentators include some of the best informed and most authoritative: Will Hutton, Martin Wolf, Jonathan Portes, from the UK, Richard Koo, Paul Krugman and Joseph Stiglitz, from further afield. While they are not agreed on all of the details of an alternative economic strategy they are agreed on many of its principal elements. And their shared enthusiasm for stimulus in the UK’s current and peculiarly adverse circumstances has the support of the IMF, which makes no secret of its evidence-based conclusion that:
“[countries] with very low interest rates or other factors that create adequate fiscal space, including some in the euro area, should reconsider the pace of near-term fiscal consolidation. Overdoing fiscal adjustment in the short term to counter cyclical revenue losses will further undercut activity, diminish popular support for adjustment, and undermine market confidence.” (see page 6 of World Economic Outlook update Jan 2012)
As Portes has explained, with admirable restraint, the UK Chancellor who claimed in October 2010 that “Britain [was] growing, growing strongly, [and had] the strongest growth we have seen in this part of the year for a decade”, and who went on to claim that this was evidence that his policies were working and justified “a big vote of confidence in the UK, and a vote of confidence in the coalition government’s economic policies”, could hardly expect to be taken seriously when, in March 2012 – some seventeen months later – he insisted that the absence of economic growth, which had contributed to a downgrading of the outlook for the UK by the ratings agency Fitch, now served as “a reminder of why it is essential Britain sticks to its plans to deal with its debts”.
Will Hutton has been rather less restrained in his assessment of the Chancellor – describing George Osborne’s approach to economic policy making as that of an ‘enemy of business’, the product of a broken intellect.
Martin Wolf, in a recent review of policy-making options for a deeply depressed economy, entitled ‘People who reject free lunches are fools’, has carefully considered the case for stimulus. He pays particular attention to the balance between fiscal policy and monetary policy and, in doing so, draws on a weighty examination of the case for aggressive fiscal intervention recently published by Larry Summers and Brad De Long. There are three good reasons why the UK is now a prime candidate for a well-directed Keynesian stimulus:
- the existence of substantial underutilised capacity – not least the capacity of young people desperate for employment;
- the likely impact of stimulus on future national output and on reducing debt levels and increasing government revenues, not simply the short term boost to aggregate demand; and
- the existence of ultra-low real interest rates – short and long term rates – confirming the ineffectiveness of monetary policy in current circumstances.
As Will Hutton has explained repeatedly Keynesian economics is not an unending campaign in favour of rising government deficits – it was never that. It is in fact a truly countercyclical economic philosophy. What afflicts the UK economy and has done great damage to its prospects over many decades is, as Keynes would have insisted, a misplaced reverence for a form of capitalism dominated by finance rather than entrepreneurship.
The severity of the bust in 2008, the ruinous condition of Britain’s biggest banks and the depth of the recession, have combined to create conditions in which well-directed government intervention , targeted at reviving the UK economy, has an especially good chance of counteracting what is otherwise likely to become Britain’s version of Japan’s lost decades.
Liberal Democrats in government shouldn’t be afraid to point out that the UK economy has become trapped by its neglect of innovation, preference for financial engineering over the genuine article, and the Tory obsession with deficit reduction. In the wake of an unprecedented and systemic financial crisis and given a shared appreciation of how unbalanced the UK economy has become, recognition of the extent of the waste of human talent and of the self-defeating character of accelerated deficit reduction, there is little excuse for persevering with policies that have failed. Liberal Democrats in the government should accept that as long as the government and the British economy is in a hole they are the ones best placed to get the government to stop digging and start building.
Vince Cable’s letter to the prime minister couldn’t have put it better – “I sense… that there is still something important missing, a compelling vision.” Cable continued: “It is a vision of where the country is heading beyond sorting out the fiscal mess.” Perhaps this is part of a vision he shares with Nick Clegg; the vision that the Deputy prime minister referred to in his preface to the Coalition Agreement. In any event Liberal Democrat Cabinet members have a responsibility to the country (as well as to their party) to reinforce Vince’s message. When a strategy isn’t working it is vital to review it, to acknowledge mistakes and to accept, in Britain’s case at least, that “market forces are insufficient for creating the long term industrial capacities we need”.
Will Hutton is surely correct to point out that thoughtful public policy makers should be concerned not only with helping to manage business and financial risks, but also with social risks. Liberal Democrats in touch with their electorates know that social risks have grown enormously since the beginning of the credit crunch. Not only is there now a necessity for government to acknowledge and address the inadequacies of the UK’s ecosystem for innovation – to employ Hutton’s favoured term – but there is an imperative to renew the social contract required to make it possible for Britons to pull together. When individuals and families face exceptionally rapid change and their capacity to manage risks has been severely depleted government needs to show clearly that it cares about them, about those at the bottom and not just the top.
George Osborne, who wanted us to believe that we were all in it together, has given the impression that he is actually rather more concerned about the masters of the universe, who jeopardised the whole of our economic system, than he is about the mass of the British population. They are increasingly and often desperately dependent on how well the masters of social welfare reform perform at the Department of Work and Pensions. Doing a good job of recasting the welfare state, so that that it is better aligned with the risks of being without a job, a home, a community and friends, and the skills required to gain employment and to navigate the modern world, has taken on even greater importance. It is time – well past time – that the Coalition demonstrated that it understands this and that it has the vision and strength of purpose to make it happen.
Ed Randall was Liberal/SDP Alliance, then Liberal Democrat, Councillor in the London Borough of Greenwich, 1982-98, and now Senior Lecturer in Politics and Social Policy at Goldsmiths, University of London.