Vive La France?

The Duncan Weldon economics column

In my first post on LabourList I set out some of the economic challenges that will be faced by the next government and noted how the solutions to these economic challenges must be informed as much by political values as economic sense.

The two key challenges will be plugging the budget deficit and rebalancing the economy away from finance, credit and property. The third issue, the large stock of national debt relative to GDP, is not a great concern, despite the high media profile it has attained. If the budget is once more balanced and the economy growing again, the level of debt to GDP (not especially high by international standards anyway) will fall.

There are several economically possible ways to meet these challenges, some more sensible than others. The Tories are of course correct that massive cuts in public expenditure (and these would have to be more than the axing of a few programmes and some ephemeral ‘cost savings’) are one way to rebalance the budget. This is where the politics comes in. I sill believe in the State. I believe it has the power to combat inequality, to drive social progress and to aid economic growth. Vital to these abilities are public spending, be it on health, education, welfare or support for industry.

The scary 12% of GDP current budget deficit will not last forever. As the economy recovers the tax take will rise and spending on benefits will fall. But I fully accept that over the past few years public spending has risen beyond tax revenue. In the absence of huge profits from the city and consumer spending boosted by credit cards, it is likely that Britain will still face a deficit in the region of 6-7% of GDP. That gap will have to be closed and I’d argue that most of the closing should come from rising taxes not cutting spending.

I want to be straightforward about this: a 50% rate alone is not enough. It is important though that a rise in tax revenue is as progressive as possible. Simply put those who can pay the most should. I’m afraid the basic rate of income tax will probably have to head back up to 22%. I’d raise the top rate (which only kicks at £43,875 – some 75% above median earnings!) from 40% to 45%. Inheritance should not be cut, it should be raised. I’d favour looking into the effects of a wealth tax. What I would not do is raise indirect taxes, as Thatcher in the early 1980’s, which hit lower earners harder.

There is an example of a state which not only enacts these policies but has also run a successful industrial policy for decades across the Channel, France.

Lord Mandelson has praised French industrial policy in recent months, whilst Howard Davies (Head of the LSE, former Head of the FSA and Deputy Governor of the Bank of England) has noted the lessons we can learn from France.

I do worry that there is a temptation for politicians to ‘cherry pick’ a few bits of the French model – especially industrial policy whilst refusing to contemplate a more radical change. I think we need a radical change. I think we need to accept that the Thatcherite experiment of deregulated financial markets has failed and Britain can no longer rely upon the finance industry to make the sums add up. Nor can we adopt the Irish approach of welcoming deflation in order to lower wages in search for ‘international competitiveness’ and ‘export led growth’. The model which looks most viable is staring us in the face. A more active state helping to guide the economy and rebalance towards comparative strengths, namely pharmaceuticals, communications, green technology, aerospace and advanced manufacturing. This will require public spending and hence higher taxes.

The French model is far from perfect. Unemployment has been stubbornly higher than in Britain (especially youth unemployment) and the economy has sometimes lacked the ‘dynamism’ of the UK/USA. But the blue print is a good one to start with and certainly more realistic than any policy based upon a return to a high consumer debt, high property price, finance led model.