Labour Party policies.

Britton, Andrew

Labour's Economic Approach

The general philosophy is set out in the introduction of the report. The key themes are investment, partnership and social justice.

The call for more investment may seem uncontroversial, but it fails to make an essential distinction between investment by Britain and investment in Britain. In practice the main concern of Labour policy is to make British firms invest more, taking a longer-term view of their opportunities for growth and accepting a lower prospective rate of return. Labour would also like to see British shareholders, especially British pension funds and insurance companies, accepting lower current income from their financial stake in British business in the expectation of growth in the value of that stake in the longer term. However, British firms and British financial institutions, taking a long-term view of the global economy, may well decide to locate production or financial assets overseas. There is nothing wrong with that, but it will not of itself contribute directly to the growth of output or employment in the British economy.

To promote investment in Britain it is necessary to make this country an attractive location for production, whether for British or for foreign firms. This means competing with other countries, especially other countries in Europe, in terms of infrastructure, education and training systems, industrial relations and labour market regulations. It also requires that taxation and social security contributions compare well with those of our competitors. This approach to investment is not seriously incompatible with the Labour policy agenda as a whole, but it suggests a rather different emphasis.

The concept of partnership is very difficult to define and the word is often used very loosely in the policy document. Two very different models of economic policy need to be distinguished. One sees the State as an active agent in the economy, seeking to maximise some measure of national economic well-being, using the structure of its own revenue and expenditure as well as its influence on particular private sector decisions. The other sees the State as providing the framework of law and regulation within which firms compete with one another. If the main role of the State is to act as umpire, then conflicts of interest will arise if it intends also to enter into partnership with some of the players.

For some, the word 'partnership' will revive memories of the old days when government was involved in a process of bargaining with representatives of industry and trade unions, about taxation, about industrial policies and of course about wages. This is not the sense in which the word is used by the Labour Party now. To judge by the document as a whole the main concern now is to ensure that a Labour government would have the necessary support from industry and commerce to be able to carry out a specific programme of reform. In particular it would need the co-operation of the private sector in its plans for public investment.

Beyond that there is at least an expression of hope that employers and employees, borrowers and lenders, within the private sector itself may see their roles in terms of partnership rather than conflict. Of course this is an attractive idea, but it is not so easy to see what government can do to encourage a spirit of co-operation if it does not already exist. Nevertheless, even if it is only rhetoric, it should be welcomed as a necessary corrective to the overdose of the rhetoric of competition which we have been given under the present government.

The Labour Party's position is that the objectives of economic prosperity, and social justice do not conflict. They are 'two sides of the same coin' - a very optimistic view of the market economy. The more orthodox position would be that inequality of income is inevitable if there are to be incentives for hard work, for saving and investment, for risk-taking and for training, all of which contribute to economic growth and prosperity.

The policy document reflects the analysis of the Social Justice Commission, which distinguished three approaches to poverty and inequality, identified as investment, deregulation and levelling. Investment was the preferred approach. The assumption was made that investment would reduce inequality as well as raising incomes for the population as a whole. But this will be true only if investment is targeted towards the relatively poor and disadvantaged sections of the community, for example by improving the infrastructure in derelict city centres or by training schemes for the unemployed. There is, unfortunately, no reason to suppose that the return to investment targeted in this way would be higher than say the return to investment in high technology manufacturing, which would create few if any new jobs and directly benefit mainly a few entrepreneurs and shareholders who are already relatively well-off. There is a choice to be made between maximising growth and maximising social justice. The Labour Party should tell us where its priorities lie.

Macroeconomic Policies

The Labour Party has now adopted a position on domestic monetary and fiscal policies which is not very different from that of the present Government. They have accepted that inflation must be kept very low and they do not expect to add much to employment simply by stimulating aggregate demand. They express the hope that they would be better at smoothing out the cycle of 'boom and bust', but this is essentially a technical job at which there is no reason to expect that a Labour Chancellor would be any better or worse than a Conservative one. In any case no policy design can insulate the British economy from shocks. The best assumption to make is that the cycle will continue its erratic course whoever runs, or claims to run, the British economy.

That said, the detail of the policy document contains some quite attractive ideas. It would be sensible for example to increase the accountability and reform the management of the Bank of England, given the increased responsibilities it already has in the conduct of monetary policy. The Bank's position in its current controversy with the Treasury over interest-rate setting would, for example, be stronger if its views could be attributed to a broadly-based monetary council, not just the judgement of the Governor and his staff.

The precise definition of fiscal rectitude is a difficult issue of accounting. It is discussed in more detail, with reference to current projections on pages 10 and 11 below. The merit of the Labour Party position is that public investment that is justified by its prospective return would not generally be sacrificed in order to balance the books of the public sector. There is a compelling case for more investment in the public sector, for example in social housing.

In practice a Labour government committed to the 'golden rule' would find it difficult to keep current spending in line with current revenue. The present Government has been obliged to take a series of unpopular measures to raise taxes and to contain spending. Even so, a new Government in 1997 would have little if any margin for manoeuvre in meeting any defensible target for fiscal rectitude. The Labour Party, or any other party for that matter, would be unwise to promise that tax rates need not rise again.

The main strategic issue in the area of macroeconomic policy left unresolved is the attitude of the Labour Party to European economic and monetary union. The disarray in the Conservative Party over Europe is obvious, but the Labour Party is also divided. The extent of the division is not so obvious because some natural Labour opponents of EMU have apparently convinced themselves that a European monetary policy could provide a much-needed Keynesian demand stimulus of a kind which they no longer advocate for Britain on its own. In political terms, this ignores the whole substance of the Maastricht Treaty and the role assigned to the European central bank. EMU with a Keynesian remit is not negotiable with Germany, and is therefore not worth discussing. In economic terms, the case for a concerted European expansion at the present time is arguable, and our own analysis of its effects is given on pages 53 to 58 below.

It remains true, however, that a Labour Government might well take Britain into an EMU in 1999 or subsequently, whilst a Conservative Government almost certainly would not. One reason for this is that a Labour Government still faces a greater threat from a run on sterling than a Conservative Government and would therefore gain more from giving up the possibility of exchange-rate depreciation. Another reason is that the economic philosophy of the Labour Party is more in sympathy with that of Continental Europe, as symbolised by the Social Chapter. This difference can be illustrated for a variety of policy issues, microeconomic as well as macroeconomic.

Microeconomic Policies

Vocational training retains its central place in this policy statement as in previous ones. Few would wish to quarrel with this, least of all at the National Institute where the deficiencies of national training policies have been singled out for criticism for more than a decade. The nature of the reforms to be introduced by a future Labour Government is now left open, pending the results of further consultations. It is appreciated that, in a flexible labour market, the main benefits of training may well accrue to the employee and not to the present employer. This raises the question of who should pay the cost of extra training which is needed, given that the employees will often be unable or unwilling to do so on their own. In the past Labour has supported a levy scheme with rebates for firms who contribute directly to training their own workforce. New ideas under consideration include a more explicit payment to the employee, who may then choose what kind of training he or she wishes to undertake. In a competitive market some at least of this payment would effectively be made by the employees, since real wages would be reduced.

Whilst life-long learning is certainly needed as technology changes, the most important issue is still the training of new recruits to the labour force. Here the Continental pattern of apprenticeship still has a great deal to recommend it, although it may need education reforms on Continental lines as well to realise its full potential. The cost of such training falls partly on the employer and partly on the employee, since trainee wages are low. There is a strong case for a taxpayer subsidy as well - an idea which the Labour Party may now be loathe to take up.

On investment incentives the Labour Party is also consulting. It appears to be very receptive to ideas offered to it by industry - indeed its ideas for corporate taxation are closely in line with CBI thinking. Whether they would really make much difference to company behaviour in line with Labour Party aims is more doubtful.

There is a school of thought within the Labour Party which sees an urgent need for institutional reform so as to overcome the 'short-termism' of the British economy. The German and Japanese systems are much admired. It does not appear however that these ideas have as yet won a place in policy statements. Indeed Tony Blair's Mais Lecture went out of its way to discourage them, saying that the 'Anglo-Saxon' structure of financial markets had its merits as well.

The most significant institutional proposal seems to be that the burden of proof in takeovers should be shifted to the bidding company who would have to show that the bid would serve the public interest. (The paper by John Kay and Aubrey Silberston on page 84 of this Review has some much more radical proposals on corporate governance to offer.) It remains very doubtful whether reforms of this kind will have a significant effect on aggregate economic behaviour. There is a strong case, which can be made in its own right, for greater openness between management, large shareholders and employee representatives. By all means, a Labour Government should encourage openness; but it should not mislead itself into thinking that this will contribute much to the solution of national problems such as low investment ratios or slow growth in output per head.

The present Government has run into difficulties in attracting private finance for public sector projects. The Labour Party thinks it could do better, but its basic approach would be the same. As government departments and merchant banks get more experience of negotiation it is likely that the scale of operation will increase, irrespective of the party in power. Some element of risk sharing is clearly needed, to justify the return to the private sector, but also to ensure that the return to the private sector is not embarrassingly high. A Labour Government would be particularly sensitive to the latter problem.

The section of the document on employment commits Labour to 'the goal of full employment, as expressed in the 1944 White Paper'. Indeed it goes further by adopting the aim of 'full and fulfilling employment', recognising the dissatisfaction which many have expressed about the type of jobs now on offer for the unemployed, often low-paid, unskilled, and insecure.

The concrete proposals focus on the long-term unemployed and school-leavers. This does indeed seem to be the right place to start. The schemes are more ambitious than those now being tried out by the present Government. They are nevertheless described as having 'no net cost to the taxpayer' and being 'within existing budgets'. This suggests a surprisingly grudging attitude to expenditure in this area. If Labour really gives the objective of full employment a high priority one might have thought that extra money could have be found from somewhere to make the schemes even more effective.

A Labour Government would opt into the Social Chapter of the Maastricht Treaty. The immediate implications would not be at all dramatic. However it could in principle open the way to social policies on a Continental pattern which would be difficult to reconcile with maintaining competitiveness. Labour Party supporters may well admire some aspects of employment conditions in Germany or France. These countries have relatively high real wages, rights of employee representation, limits on hours of work and so on. No doubt this is in some ways a more appealing model than the United States, where there is widespread poverty in work, rapid labour turnover and not much social protection.

If we mean to go the Continental way then we should begin by introducing Continental education and vocational training, with perhaps some move to Continental styles of finance and management as well. Gradually over a generation or so we would be able to move towards a Continental style of social policy as well. But we would need to do better than the French, Italians, Dutch or Belgians if we were to claim that we had also achieved full employment. It should be possible within the terms of the social chapter to negotiate a social policy regime which is realistic as well as humane.

The national minimum wage is discussed in the section of the policy document concerned with the welfare state, and not in the section on employment. It is claimed (in the face of conventional economic theory) that a minimum wage will improve economic efficiency as well as social justice. (Again, it seems that we can have our cake and eat it.) It is also seen as underpinning the benefit system, by reducing the cost to the Exchequer of in-work benefits like Family Credit. If full employment however is the first priority then we should be pleased that some of the effect of in-work benefits is to reduce wages as well as to increase the incomes of the poor. This will help employers to create or maintain jobs for those most at risk of unemployment.

When it comes to setting the rate for a minimum wage, the Labour Party, quite rightly, recognises the need to consider 'the economic and employment consequences'. The present expectation is that the minimum wage would be introduced at a relatively low level. If this can cope with the very real problem of exploitation, well-documented in some kinds of employment, then it deserves support. There are questions of definition and enforcement which would need to be resolved, however, before any commitment to a national minimum wage could be effective. The areas where regulation is most needed involve part-time work, often paid at piece rates equivalent to very low rates per hour. One danger of an ill-designed minimum wage is that it would actually favour such methods of payment at the expense of more formal employment contracts which offer better conditions of work and job security.

Conclusions

It is perhaps unfair to submit a political statement to critical analysis as if it were an academic article. However, the optimistic assumptions underlying Labour's policy presentation ought to be questioned. Choices will have to be made if Labour takes office and some expectations will have to be disappointed. The post-war Labour Government faced many difficulties, but it was nevertheless able to promote social justice, economic growth and full employment all at the same time. As compared with the pre-war situation it could claim advances on every front. Memories of that period should not mislead the Labour Party now into thinking that the same opportunities exist today. If full employment is the main objective then progress could indeed be made in that direction - but not without cost to the taxpayer and not at the same time as a substantial rise in real earnings is achieved. If, on the other hand, the first priority is to improve pay and conditions for the average worker (or voter), then significant steps could be taken in that direction - at the cost of slower growth in employment.

Had the Conservative leadership crisis led to the fall of the Government, the Labour Party would not have been well-prepared to take office. Too many of its key economic proposals are still under discussion. If, as now seems likely, it has more than a year left for preparation, a clearer picture should emerge. As things stand there is a contrast between the optimistic assessment of what Government can do and the modest scope of the specific measures identified so far.

The Labour Party now seems to be more open to new policy ideas than it has been for many years. It has abandoned the old framework and is in the process of constructing a new one. Although more can be done to deduce specific policy proposals from a general philosophy, the voters at the next election cannot know for certain what kind of Government the Labour Party will be offering them. If a Labour Government is elected the implications of the new philosophy will reveal themselves in the course of policymaking in practice, reacting to threats and opportunities which cannot now be foreseen.