Blair gives hope for something different
Tuesday 23 May 1995
It is worth noting three elements to Mr Blair's speech. For The first is that for Mr Blair the turning point in British economic policy was in 1976, when Denis Healey, then Labour Chancellor, imposed the cuts in public spending and the monetary targets required by the International Monetary Fund, and so rebuilt fiscal integrity. This was the foundation upon which the Conservatives built their fiscal policies.
The second is the acknowledgement that the principal error of Tory governments was in macro-economic policy, rather than micro- or supply-side policies. The third is the set of supply-side policies which aLabour government would seek to establish.
The first two points need little elaboration. If one takes government spending as a percentage of GDP as the relevant measure (see graph) one can see that the spending peak occurred in 1974/5 - ahead of the IMF- inspired cuts, so one could argue that the IMF reinforced a move which was under way. But taking the trend as a whole, there does seem to have been a turning point about 1976, for before that the trend in public spending was up and afterwards it has been down.
As for macro-economic failure, the particular point that Mr Blair makes is that the Government failed to see how its micro-economic policies of deregulation would interact with its macro-economic policy of permitting very rapid economic growth. The criticism is fair, but it is worth adding that most governments in the developed world made the same mistake. The late 1980s boom was a global phenomenon.
The terms in which Mr Blair talks about these events are significant, for they would be very much the same sort of language that a City broker would adopt. On the third element of the lecture, further detail on micro policies, a similar tone is adopted. There were three new elements here: on labour market flexibility; on long-term unemployment; and on long-termism in finance and industry.
On the labour market, Mr Blair's point is that flexibility is not enough, that there needs to be a greater degree of commitment between firms and employees, and that education and skills need to be improved. Few would object to any of this; the problem surely is that it is not clear what the skills of the future will be. The core skills of the future are probably only numeracy and literacy, for everything else can be taught later.
On long-term unemployment, his main point was that the benefits system needs to be overhauled. Few would disagree.
And on short-termism in finance? Here there was an interesting shift. Up to now much of Labour's thinking seems to have been to admire the Japanese and German bank-based financial systems and to criticise "Anglo- Saxon" securities market-based ones. Now Mr Blair still acknowledges some strengths in the German system (though there is less adulation of Japan) but makes the point that the Continent is moving away from bank finance and that the US economy is particularly dynamic. What he does not perhaps fully appreciate is the extent to which British company performance has, in relative terms, improved since the early 1980s, and that the financial services industry is so international that thinking in terms of different countries having different systems is outdated. A large company will be raising money on markets around the world - not only in London.
What message should the markets take from all this?
This may be an unfair comparison, but the similarities with Kenneth Clarke's approach to economic management seem overwhelming. Here are two people who do not really have much of a feel for the subject, but being both clever barristers and being quite well advised, are able to make a sensible fist of outlining a competent "conventional-wisdom" approach to economic management.
Both, for example, talk about the need for the City to serve industry, or the need for the country to have a strong industrial base. There is nothing wrong with that, except that I doubt either fully appreciate how industry is being downsized in every so-called "industrial" country in the world. Neither seem able to see that we have made an early structural shift which countries such as Germany and Japan will, very painfully, now have to do. As for short-termism in London, the fact remains that the British Government can borrow for a longer period - up to 40 years - than any other government. The usual limit elsewhere is 25 years. Nor does he acknowledge the availability of finance for management buy-outs and start-ups (including this newspaper), nor the way in which very risky long-term projects like the Channel Tunnel were able to raise money in London.
These might seem small points and it may be unreasonable to expect politicians to be experts on complex industries like the international financial services. What does seem a bit odd is that Mr Blair does not seem fully to grasp that finance is an industry much like any other, but seems to want to put it in a special category. But then so does Mr Clarke.
The real test is whether the Blair/Brown approach will change the way in which a future Labour government will be perceived by investors around the world. The normal terms in which such a government would be discussed is the scale of the "risk premium" that the markets should apply to Labour over the Conservatives. The assumption is that a Labour government will inevitably tend to run a larger borrowing requirement; that taxation will rise as a percentage of GDP; that inflation will be higher and that as a result returns to investors will be tend to be lower.
This is a somewhat dismal way of discussing political change - dismal but up to now pretty realistic. I think there is now hope for something different. The best clue comes in the acknowledgement that what matters for public finance is "not how much to spend but what to spend it on". I suspect that the long-term downward trend in public spending as a percentage of GDP would continue under Labour - and I suspect that Messrs Blair and Brown know it.
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