Political fallout from the PBR

By Charles Clarke MP

The politics of the Pre-Budget Report should have been crystal clear. Labour is a long-standing government at the end of its third term facing an imminent General Election after the worst economic crisis the world has experienced in many decades.

The essential issues for the PBR were:

* how banking should now be organised

* how the enormous fiscal deficit would be addressed and

* how fairness would be central to our approach in both areas.

The obvious course for Labour was a PBR unequivocally in the national interest, without reference to brazen pre-election ‘dividing lines’ with the Conservatives or crude party advantage.

Labour needed to set out a frank and rigorous assessment of our economic position and the reasons why we are where we are.

How is it that the enormous British economic success story of 1997 to 2007 has turned into the economic adversity of today? This is still a mystery for millions of people. Moreover, for Labour’s future, it is absolutely essential to explain why the events of the last two years should not demolish the reputation for economic competence which Gordon Brown built so successfully in our first two terms of office.

In this explanation it is not enough simply to blame the ‘world economic crisis’, or evil bankers. We also need to acknowledge that Labour in office has made serious misjudgements, albeit in common with others, and to set out what we have learned which will inform and change our policies for the future. It is essential to explain openly what happened and why, and what we are going to do about it.

Such a narrative should be fairly straightforward.

Explaining What Happened
In common with most of the world, we did not foresee the serious and malign impact of the expansion of bad credit. We did not pay sufficient attention to the way in which we regulated banking and we permitted banking to dilute its core responsibilities for enabling the economy to function efficiently and to shift towards the finance of speculation. We did not prepare properly for banking failure, for example intervening too late in Northern Rock. These failures were particularly significant in the UK because financial services are so important to the British economy. We were guilty of damaging complacency in proclaiming “No More Boom and Bust” in a way which suggested that there was little need to guard against, or prepare for, failure.

When the crisis struck in the autumn of 2008 the Labour Government was first to understand that world governments needed to provide previously unimaginable levels of financial support to the economy.

This support has reduced the negative impact of the crisis and remains necessary but one consequence has been to raise Britain’s public sector deficit to unsustainable levels.

Reforming Banking and Cutting the Deficit
This Pre-Budget report needed to be much stronger in drawing the lessons from this story, both in reforming banking and in reducing the deficit. It had to set out clear, transparent, fair and easily understandable remedies for what has gone wrong.

In banking, a small extension of regulation coupled with a theatrical one-off tax on some bonuses simply do not measure up to what is required for the banking sector. We need to divide ‘retail’ and ‘casino’ banking, to strengthen mutual financial institutions, to break up the ‘too large to fail’ banks and to strengthen consumer protection.

The Chancellor should take some credit for his overall budget judgement. This was broadly right and sets a better framework than the instant cuts proposed by the Conservatives. However it is insufficient to rely upon the vacuous and irrelevant proposed Financial Deficit Bill. Substance is what is needed and this is no time for deliberate vagueness.

Spending: Setting the Public Sector Free
On the spending side, Liam Byrne’s efficiency savings are necessary but not enough. Some ‘big ticket’ commitments such as Trident renewal and other major military equipment contracts have to be dropped.

The best way to reduce spending and improve the use of assets is to take a far less centralised approach. For example the blanket public sector pay limit of 1% is rigid, populist and shortsighted.

State organisations, from schools and hospitals to local authorities and quangoes, should be given more independence and responsibility. Each one should be given a tight rolling three year financial allocation for which they are fully responsible. Within this they should be responsible for their own pay and employee numbers. They should receive 100% of the efficiency gains, or other income generated, which they achieve. Local foundation hospitals and trust schools should be extended so that they can own and benefit from their own assets.

Such a programme would have to be carefully implemented over a Parliament since the level of competence varies. But the expectation should be that all national and local public organisations would work in this way.

Taxation: Fair and Accountable
But the debate on reducing the fiscal deficit has concentrated too much on spending. Taxation should also be increased. Of course people will rightly only accept higher taxes if they believe that the money is well spent and that they support the spending it funds. ‘Hypothecation’ of tax should be extended for example in funding health and social care. A much closer link between local decisions and the level of local taxation should be established and local authority bonds could be used to fund particular infrastructure investments.

General increases in taxation are possible as we have seen with the increase in National Insurance. As in many other countries VAT could be increased to 20% and some other goods could be taxed at the full rate. Income tax could be increased by 2p to the level before Gordon Brown’s last budget in 2007, where he abolished the 10p rate.

Moreover, additional means of raising money are possible. Alistair Darling announced some measures to reduce evasion of corporate taxation. ‘User-charging’, which is fair and promotes efficiency, can be extended. Road tolling and congestion charges, which also have environmental benefits, are probably the best examples.

Fairness
Finally Labour needs to put fairness at the centre of its proposals. This could be done in a variety of ways such as raising tax threshholds, re-establishing lower rates at lower levels of income or targeting benefits. There is also a good case for examining in a systematic way how to deal with the highest levels of wealth and income. However, scattergun ‘class warfare’ attacks on certain groups such as high-paid public service leaders and bankers getting bonuses is a crude and ineffective way of going about this.

Conclusion
Of course the right combination of these measures on taxation, reduced spending and reform of the public sector is a difficult political judgement. But it was absolutely essential for this Pre-Budget Report to set out Labour’s view and so establish the benchmark for public debate. This would have forced our political opponents to make their proposals on our agenda, rather than allowing them to set the context for public debate.

Though the truth about the complicated discussions between the Prime Minister and the Chancellor will not be known for many years, I suspect that the reason why this Pre-Budget Report has been so disappointing is that the Prime Minister used his constitutional authority as First Lord of the Treasury to ensure that no full account of our economic predicament was provided, no systematic reform of banking was promoted and no clear account of Labour’s approach to closing the fiscal deficit was made. He felt that the main purpose of this pre-election Pre-Budget Report was to recycle his old political dividing lines.

This weakness can only come from fear of discussion of our past failures and fear that it is too dangerous to set out our future plans.

The real danger for Labour is that this weakness will pave the way to political defeat in 2010.