Labour is not tackling the basic pension problem

COMMENT: 'Harriet Harman and her team don't like what the Conservatives want to do. So what does Labour propose instead? Leave the present system unchanged seems to be the answer'
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We now know what the Conservatives plan to do about pensions. The more important question, however, is what Labour proposes, for unless there is an extraordinary turnaround, they will be forming the next government. The straight answer, unfortunately, is that Labour doesn't yet know, or at least is rather vague about it, the excuse being that any pensions policy will be such a long-term thing that cross-party consensus should first be built around any proposed reform.

Actually, this is so much stuff and nonsense, for pensions and other forms of social security must be one of the few remaining areas of public policy where it should be possible still to see clear blue water between the two main parties. Hardly anything separates them on the economy, no one disagrees much about law and order, both are committed to the National Health Service, and on Europe Labour is as divided as the Conservatives (though better at keeping quiet about it). Are we all going to agree about pensions too?

To be fair on Harriet Harman and her team, they are at least clear on one thing; they don't like what the Conservatives want to do. So what does Labour propose instead? Leave the present system unchanged seems to be the answer. This actually isn't such a bad approach as it might seem, for it is a myth that we cannot afford the present arrangements. The fact of the matter is that the level of benefit they promise is so mean that even on present demographic trends, they are easily affordable. Furthermore, the transition to Mr Lilley's funded basic state pension brings with it a high medium-term cost, which will mean higher taxes or greater public borrowing for a generation or more. The eventual savings claimed by Mr Lilley are also questionable.

None the less, at least the Conservatives are trying to address the problem of how to provide a decent basic pension for all; Labour is not. There is, however, a basic flaw in Mr Lilley's plans, which is that although they promise an eventual level of benefit three times higher than the present state pension, it is still not enough to live on.

As argued here yesterday, the obvious solution is to abolish the state pension for newcomers to the jobs market altogether and introduce a larger element of compulsory saving than exists through present National Insurance arrangements. In a sense, this is only a more radical version of what Mr Lilley is already proposing, with the added advantage that it carries no cost to the present generation of tax payers.

The irony of it is that Labour would actually find such an approach politically easier to sell to the electorate than the Conservatives.

Our perception and reality gap with Japan

For the past two weeks Britain's man in Japan, Sir David Wright, has been pounding the rubber chicken circuit, persuading businesses here to export more over there. With the Japanese economy still barely off the canvas and sterling having appreciated by 20 per cent against the yen since last August, the ambassador has picked a challenging moment to spread the gospel.

To be fair, things are moving in the right direction. Opportunity Japan, Priority Japan and now the Government's latest snazzy campaign, Action Japan, have tripled our exports since 1987 to pounds 4.3bn and the target for next year is pounds 5bn. Unfortunately, imports have risen too - due in part, ironically, to the vast amounts of capital equipment the Japanese have hauled over here so they can manufacture locally and hence curb their yawning trade surplus. The net result is that the deficit in goods remains stubbornly high.

What can be done to rectify this? Sir David, an energetic fellow and an old Japan hand, reckons that to close the trade gap we need first to close the gap between perception and reality. Outside the European Union and the US, Japan is our biggest export market and it is not just because of their liking for Scotch and Burberry coats. Two-thirds of all our exports are industrial goods.

And yet a widespread assumption remains that Japan is a closed market. Increasingly, this is no longer the case. It may be unfamiliar, distant, expensive and time-consuming to penetrate but it is opening up in asset management, insurance and telecoms to name but a few. Japan is even scrapping its discriminatory taxes on Scotch, while the flow of inward investment here in cars and electronics is providing a channel for goods to travel in the other direction.

Of course, there is an even bigger job to be done in Japan, where the temptation must remain to engineer recovery, not through liberalisation of the domestic market but by using the weak yen to fuel an export boom. Sir David can do little about that but as he flies back to Tokyo he can console himself that at least one or two misconceptions have been put straight over here.

Germany would not allow Italy leeway

So Germany may meet the Maastricht criteria after all. The latest, better- than-expected German jobless figures have raised hopes that European monetary union is back on course after a prolonged bout of nerves.

But EMU watchers who hang on every move in German statistics are missing the point. Germany's performance relative to the Maastricht criteria is far less important to the prognosis for a single currency than the gap between the German and Italian economies.

Even with the latest figures taken into account, Germany will have difficulty meeting the Maastricht criteria on borrowing and debt. Admittedly, unemployment seems to have peaked, growth in the last quarter of 1996 wasn't as bad as expected, and new orders have bounced upwards strongly - particularly for exports. Nevertheless, there are still 4.3 million people out of work, squeezing tax revenues and pushing up the public spending bill.

But government determination, spending cuts, tax increases or simply a few accounting tricks could bring German borrowing very close to the 3 per cent borrowing criterion. In which case, a liberal interpretation of Maastricht - a fudge if you like - could allow Germany to form the anchor of a single currency in 1999 after all.

But there's the rub. A little bit of fudge is fine when only Germany is involved. Decades of respectability, prudent public finances and hawkish monetary history still count for something. No one seriously doubts Germany's ability to cope with the strict monetary discipline of a European Central Bank.

But what if a fudge for Germany lets the Italians in too? So long as it is still possible to keep the Italians out, the German public might be persuaded to swallow a Maastricht fudge. But if leeway for Germany is wide enough to let Italy in too, then the German public could yet reject the entire project. If German borrowing is 3.1 per cent this year, but Italian government borrowing hits 4 per cent, then expect a narrow-based EMU in 1999. But if German borrowing hits 3.2 per cent, while Italian borrowing squeezes in at 3.5 per cent, then there could be trouble.