Seven years on, British politics still hasn’t come to terms with what happened to our economy in 2008. Arguably, none of the parties has yet fully learned the lessons of the Noughties boom or the 2008-09 bust.
In 2007, before the crisis hit, the UK government was running a deficit. By historical standards, it was small and uncontroversial – it averaged 1.3 per cent from 1997 to 2007, compared with 3.2 per cent beforehand under 18 years of Tory rule. And yet to be running a deficit in 2007, after 15 years of economic growth, was still a mistake. My party’s failure to acknowledge that mistake compromised our ability to rebuild trust in 2010 and in 2015. If a government can’t run a surplus in the 15th year of an economic expansion, when can it run one?
Yet that admission deals with only half the story. If the deficit was small and unremarkable, how did a historically small deficit balloon into a large one? The answer: the recession of 2008-09, triggered by grossly irresponsible behaviour in the banking sector. Though, clearly, we should have better regulated the banking sector, it was thanks to the actions of the last Labour government that catastrophe was averted. But that crash brought about a collapse in tax revenues – tax revenues that had become far too dependent on stamp duty receipts from a frothy housing market, corporation tax from an overextended banking sector and taxes on City bonuses.
The driver of that recession wasn’t government spending, as George Osborne absurdly insists on arguing – if it was, he presumably would not have matched Labour’s spending plans in 2007. The fatal mistake was failing to deal with an economy with too few savings, too concentrated in too few sectors and regions of the UK, and too based around cheap credit. This left our economy awfully exposed.
So, if there is any outstanding mea culpa Labour needs to make, it is in relation to our failure to restructure and rebalance the economy. The previous Major government had failed to rebalance, too, but we failed to sufficiently address it, although the Tories chose to bash us on spending rather than to acknowledge the real problem.
Our goal now must be to show that we have learned the lessons from this past. We must now go about doing this ruthlessly if we are to regain trust. It starts by asserting again and again that reducing the deficit is a progressive endeavour – we seek to balance the books because it is the right thing to do. We will not stand by while the state spends more paying interest every year to City speculators and investors holding government debt, than we do on people’s housing, skills or transport. It will be far too late to leave this to the 2020 general election campaign.
Next, if Britain is to succeed, it needs to become a more productive, higher-savings, higher-export and better-balanced economy. We have the worst productivity in the G7, save for Japan. The Household Savings Ratio (the percentage of disposable income that is saved) is now the lowest it’s been in more than 40 years. Since 2010, Labour rhetorically often sounded as though the solutions to these structural problems were simple, but they are not. Too much focus was given to those doing the wrong thing; not enough was given over to the “producers” creating wealth in our economy.
The most successful British businesses, whether large-, small- or medium-sized, actually want the same things. They don’t want the hands-off approach that characterises the instincts of the new Tory government; they want government – at a national and local level – that supports training, that invests in infrastructure, that takes access to credit seriously, that devolves power down. These things should be core to our economic policy.
However, the biggest challenge of all – facing not just the Labour Party but centre-left parties across the Western world – is how to build a fairer, more equal world in the context of globalisation and the surge of technological forces that are displacing and reshaping industry after industry. Globalisation has worked for an internationally mobile elite, but it has signally failed to deliver for all our communities, often destroying jobs that families have done for generations.
Of course, we must clamp down on tax avoidance, and ensure that firms play by the rules, however greater tax and regulation of business are not the answer. But, as Carlota Perez, professor of technology and development at the London School of Economics, argues in my book, Owning the Future, green growth is one vehicle through which technology, globalisation and the environmental challenges the world faces can be turned from obstacles to solutions for problems related to growth, jobs and competitiveness in our country. Matthew Taylor, CEO of the RSA, points out in the same book that unleashing our creative and digital capabilities, covering more than 14 industries, is also rich in opportunity. The life sciences is an obvious source of future growth. There will be other vehicles, too, which may not even exist yet – it is our job to make sure that the UK is in the vanguard, creating the jobs at home which enable everyone to have a stake in the future and to lead fulfilling lives.
Some have said that the Labour Party does not know what it is for. I could not disagree more. We know what our values are. It is coming up with the policy solutions that will make them real in a completely different world which we have struggled with. The urgent task ahead: to find progressive answers to the world as it is now and as it will be, not revert to tired, old policies from a bygone era.
Chuka Umunna is Labour’s spokesman on business, innovation and skills, and MP for Streatham