Economics: Blair can afford to be bolder

A WEEK in which the Labour Party crowned a new leader, the Liberal Democrats replaced their Treasury spokesman and three of Kenneth Clarke's four ministerial subordinates were supplanted by Old Etonians, should by rights liven up the political debate on Britain's economic future.

We can but hope. Many of the same old platitudes and nuggets of received wisdom will simply fall from less familiar mouths. Tony Blair will urge upon us the merits of 'partnership' between the public and private sectors. Malcolm Bruce will prescribe independence for the Bank of England as a cure for all ills. And Jonathan Aitken will reassure us - if not in these precise words - that he will continue to reverse the disastrous surge in public spending unleashed by the Prime Minister in the run-up to the last election.

We are unlikely to hear the uncomfortable truths: that taxes still need to be higher rather than lower to reduce consumer spending to a sustainable proportion of national income; that the gradual accretion of power by the Bank of England threatens an enduring bias towards excessively high interest rates and dangerously loose tax and public spending policy; and that the Government desperately needs to free funds for investment in infrastructure by ruthlessly pruning its running costs and narrowing the range of its activities.

But with Mr Clarke still in residence at No 11, we can at least look forward to further development of the ideas he began to outline in his spring Mais lecture and which he pursued again in his Social Market Foundation lecture at the London School of Economics this month. Mr Clarke used these speeches to mount a welcome defence of the welfare state against the attacks of the Tory right. He argued that the welfare state was vital in a world of greater international competition to dissuade people from resisting change and hampering economic flexibility because they feared for their jobs.

Pre-Budget kite flying is a traditional part of Whitehall ritual, but Mr Clarke has been surprisingly happy to raise expectations in this area. In particular he has hinted that he is looking at ways to extend and reform Family Credit to top up the wages of low-paid workers and improve incentives. Mr Clarke is now as good as committed to delivering something in this area in November's Budget, no doubt in the teeth of opposition from his former deputy, Michael Portillo, now sitting pretty at the Department of Employment.

On the other side of Parliament Street, Mr Clarke's move into the centre ground has presented the newly-elected Mr Blair with some long-term strategic problems as he and Gordon Brown, the Shadow Chancellor, begin to articulate their own economic policy, free at last from the cautious approach of John Smith.

Labour's Achilles' heel has long been its image of economic untrustworthiness, but the party's strategists increasingly believe that the debacle of sterling's devaluation and the Government's barefaced lies over the need for tax increases have turned the tide. Economic recovery is not producing the revival in the Government's political support seen in previous parliaments.

A similar message emerged last week from a survey of 2,000 people for Pearl life assurance, which found that twice as many voters believe they would be better off if Labour won the next election than if the Conservatives were returned. This sort of polling often reveals little about attitudes to particular areas of policy, but simply replicates general opinion poll results. However, the fact that the Liberal Democrats did relatively badly in this survey suggests it was saying something specific about Labour's economic rehabilitation.

Messrs Blair and Brown will no doubt continue to remind the electorate of the Tories' treachery on taxes, not least because this is their best hope of neutralising the inevitable pre-election tax cuts that will come in the 1995 Budget. But if the electorate's mood of cynicism and betrayal endures, tax cuts next year could even do the Tories more harm than good. Mr Clarke can do little more than stick to his line: that however high public spending and taxes are under the Conservatives, it is inconceivable that they would be lower under Labour.

Interest rate policy is less fertile territory for Labour. The party rightly argues that the Conservatives have exacerbated the economy's structural problems, leaving it with an industrial base inadequate to support a robust recovery without running into inflationary bottlenecks or a dangerous widening in the trade gap. Mr Blair has conceded that the tools of macro-economic policy can do little to help.

'It is rather akin to the throttle on the engine,' he argued. 'It can drive it fast or slow, recklessly or sensibly. It cannot alter the quality of the engine itself.'

But the logical corollary of this view is that Labour should be more hawkish on interest rates than the Conservatives, as it presumably believes that the economy becomes vulnerable to inflation at lower rates of growth. Labour may simply argue that it would never have got into this mess in the first place because it would have eased the bottlenecks by investing in infrastructure, skills and education. But that is dodging the question.

Come the end of the year, Mr Blair may find himself having to take sides in an argument between Mr Clarke and Eddie George, the Governor of the Bank of England, over the need for an early rise in interestrates. If Mr Blair really believes that the Chancellor has underestimated the damage the Conservatives have done to British industry and is, therefore, taking risks with inflation, he will have to side with Mr George. He will then be asked whether control over interest rates should not be taken away from the Treasury altogether and given to an independent Bank.

The Blair/Brown camp is keen to dodge this issue, not least because the idea of taking a key lever of economic policy out of democratic control is very unpopular with most of Labour's activists. But economists sympathetic to the party's cause argue that central bank independence will none the less be enormously seductive for an incoming Labour administration wishing to curry favour with the financial markets, however disastrous the consequences.

Messrs Blair and Brown are likely to steer well clear of this territory unless and until they are forced on to it. Instead they will try to outflank Mr Clarke's social marketeering by arguing that the Government's role should not merely be confined to patching up the casualties of free market economics. Instead they will argue that an active government is integral to a 'dynamic market economy', for example, by ensuring that people are equipped with marketable skills, by tackling short- termism in investment and by operating regulatory and competition policy in a way that promotes innovation and flexibility.

Making the electorate enthusiastic again about active government will not be easy, especially as politicians of all colours are now held in such low repute. A key battleground will be the state's role in enforcing minimum standards in the workplace, which the Conservatives argue simply hampers flexibility and erodes competitiveness.

Mr Blair does not yet sound convincing on this topic. He said in one of his leadership campaign speeches that 'any sensible modern economy will strike a balance between measures that provide minimum standards of fair treatment at work and measures that produce unnecessary burdens on employers or rigidities in the labour market', but this poses as many questions as it answers.

Labour should be emboldened by last week's Employment Outlook from the Organisation for Economic Co-operation and Development, which showed that regulations covering areas such as minimum wages, union representation, hours of work, job security and health and safety have little influence on economic performance. The argument that they destroy jobs does not hold water.

Similarly, the OECD has nailed the claim that workplace regulations deter foreign multinationals from setting up in Britain and creating jobs. It found that foreign multinationals in Britain pay better than their British and overseas rivals, they are more likely to consult their workforces on working conditions and they offer greater job stability. If multinationals come to Britain because regulations are light, why do they not take advantage of them?

Messrs Blair and Brown are not planning to ditch Labour's commitment to a national minimum wage or regulation of labour standards, but neither do they plan to draw much attention to them. This may be short-sighted. In a debate with a centrist and combative Mr Clarke, Labour cannot afford to look too defensive. And on economic grounds it does not really need to.