The new economics

Economic solutions are shifting as quickly as financial markets, because every Western economy is in deficit. What counts with a deficit is how much you need to spend to service the debt, which means the amount of debt, the years needed to pay it off and the interest rate paid.

But what we are seeing is a rising spiral of debt as speculators, not using money that they currently have, are betting on currencies and on the debt itself. Exactly as the banks exploded under the pressure of this speculation so countries will implode.

The traditional monetarist solution of cutting taxes and growing out of debt will not therefore work, and it is this trap that the two Eds have fallen into.

The contradictions are glaring. The Eds will stimulate growth by cutting taxes – in their policy VAT at a budget deficit cost of £50 billion lost revenue each Parliament. So Labour ups the deficit in order to stimulate future growth. But simultaneously they will cut the deficit by freezing public sector pay at 1% and thereby cut growth. Their position is entirely contradictory.

Rationally to boost growth they should do exactly the opposite – keep public sector workers disposable income up and reduce the deficit by keeping the VAT increase, as the correlation on spending is much clearer with the former than the latter.

But we also need an industrial policy if growth is to be the answer. The starting point, as the Germans and Chinese have realised, is to increase competitiveness by upskilling, innovation, and lowering costs.

The immediate priority is therefore to reduce our reliance on imported energy. The failure to invest in domestic sources of energy is the UK’s key economic weakness and the case for renewable is far more an economic growth argument than an environmental argument today. Those who invest now, will profit from lower costs and greater security tomorrow.

It is time for substance rather than gestures in determining the two Eds’ economic policy.

John Mann is the MP for Bassetlaw