Paul Anderson, Tribune column, 11 July 2008

Forget the Henley by-election, 42 days detention, the resignation of Wendy Alexander and whatsisname’s no-show at the Glasgow East selection – the worst news of the past few weeks for Labour is the economy, stupid.

Any hopes the government had three months ago that the worst of the credit crunch was over now seem certain to be dashed. With property prices in free-fall, the housing market has seized up. Construction companies are laying off workers. Retailers report that the buoyant consumer demand of the early months of the year has evaporated. Britain looks to be heading for recession just as soaring commodity prices, most noticeably oil and food, have introduced a nasty dose of inflation into the economy – which effectively rules out the obvious monetary policy response to the threat of recession, interest rate cuts.

So the government is in a tight spot. Voters have been hit by hikes in food, gas, electricity and petrol bills (and in many cases mortgage payments) just as the value of their homes has plummeted and the chances of losing their jobs have increased. Unsurprisingly, they are angry – and most blame the government.

This is a bit unfair. It is not the government’s fault that the US house price bubble burst last year, leading large numbers of Americans to default on their mortgages, which in turn led to banks everywhere refusing to lend to one another because no one knew how exposed anyone else was to “sub-prime” loans, which in turn caused the general credit crunch that burst the UK housing bubble. Nor is it the government’s fault that the rapid growth of India and China has increased global oil and gas demand or that there have been bad harvests in much of the world in the past year.

But it’s no good Gordon Brown and Alistair Darling pleading they are the victims of unforeseen circumstances beyond their control. For a start, it’s not the whole truth. The government allowed the UK housing bubble to grow as big as it did, and plenty of people had predicted it would burst, even if no one identified the mechanism. The vulnerability of the UK economy to the rampant oil price speaks volumes of Labour’s failure to invest in rail, renewables and nuclear energy. And, most important in terms of public opinion, it is the government that introduced income tax changes that hit the poorest hardest and the government that is blithely exacerbating the pain of petrol-price increases with new taxes.

There is little point, however, in wondering what might have been: the question is what the government can do now to rescue the situation. Its credibility on economic management has been severely damaged, it has less than two years before the next election – and the indications are that things are not going to get better for some time whatever it does.

But the position is not hopeless. With a clear strategy and a little luck, the government could yet haul itself out of the mire.

The first thing it needs to do is make amends for its recent faux pas on tax to make the tax regime more equitable. That means apologising for the 10p starting rate fiasco and ditching the planned motoring taxes, then reforming the whole tax system to ensure that the rich rather than the poor pay. The devil is in the detail here: the last thing Labour needs is to frighten middle-class voters. But there are all sorts of possibilities: increased personal allowances paid for with a 60 per cent top rate on incomes above, say, £200,000 and ending the upper earnings limit on national insurance; or maybe abolition of council tax bands so the contribution of those living in palaces is not capped. Redistribution from rich to poor makes sense in tough times. The poor spend their cash locally, which means more jobs and spending in the UK; the rich go on holiday in the Bahamas and import yachts. OK, I’m exaggerating – and it’s less of a no-brainer than it used to be because of the globalisation of industrial production – but you get the principle.

The second pillar of Labour’s anti-recession campaign should be a major public works programme to take up the slack left by withering consumer demand. This should not be paid for by an overall increase in taxation, which would be counter-productive, but by borrowing, both directly by the state and – insofar as they remain viable post-credit-crunch – private finance initiatives. There is no shortage of projects worthy of support: a high-speed rail network; dedicated cycle routes in every city; expansion of wind, wave, tidal, hydro and nuclear electricity generation; social housing; et cetera … Yes, it would bust Gordon’s rules on borrowing – or would it? – but needs must.

New Labour it ain’t, but sensibly countercyclical and social democratic it is. Actually, it’s straight John Maynard Keynes circa 1930. Anyone got a better idea?

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