Labour’s future: A tale of two political-economies

The authors of this article worked as advisers to Labour politicians in the last parliament. They are anonymous and write in a personal capacity. This is an abridged version of an essay that appears in Fabian Review, which can be seen here.

Last month’s defeat leaves Britain’s centre-Left facing a crisis of its political-economy. Yet our leadership election looks set to be cautious – a phoney war which fails to address the challenges before us.

To win again, the centre-Left must unite two distinct strands of thought: the post-crash market and the post-crash state.

The first strand (the post-crash market) believes that the centre-ground gravitated leftwards in the aftermath of the financial crisis, when markets failed and the state stepped in. There are market failures in labour, where wages do not rise with workers’ productivity; in finance, prompting excessive risk and short-termism; and energy, meaning anti-competitive prices for consumers. These result from unfair and unregulated concentrations of power, which prevent a fair sharing of economic growth. They require state intervention to correct, and confirm a reasonable distinction between responsible and irresponsible business.

This strand is important because when public finances are weak, governments will find it harder to raise living standards through taxes and benefits. Alternative policies will have to build an economy where growth is fairly shared.

However, the last five years has shown that, on its own this strand proved limited for three reasons.

First, building a more responsible market economy required the support of business. It is ironic that Labour had a vision of business which saw it as a vital driver of fairness in a modern economy but used rhetoric which at times demonised it. Failure to articulate clear parameters and guiding principles for intervention made our approach appear ad hoc and limitless to some.

Second, concern with living standards must be a project that appeals to a majority of people. It is also ironic that we understood the fatal flaw in New Labour’s economic model, that over many years of unadulterated economic growth barely anyone got a pay rise, yet our approach suggested that we were concerned only with the bottom 10 percent.

Finally, this strand ignores state failures. While we argued fiscal policy should support the economy in recessions, we did not have a sufficiently robust acceptance of the need to run surpluses in recoveries. For all its rejection of New Labour’s economic model, the first strand was unable to accept that New Labour should not have run a deficit on the eve of the crash. As a result, we failed to meaningfully engage with the debate around deficit reduction, which was politically fatal.

The second strand (the post-crash state) understands that New Labour should not have entered the financial crisis with a deficit. It would support future surpluses as insurance against future shocks, without compromising spending on public services and investment. Taxes should remain low, including for higher earners given the risk of alienating business and enterprise.

It recognises that concerns over public spending drive contention over our welfare and immigration systems. It believes public services should be run in the interests of consumers not producers and advocates reform through increasingly devolved structures.

However, on its own this strand will not succeed as a political project for three reasons.

First, while accepting that New Labour entered the crisis in a weaker fiscal position than it should have, it misses the fundamental point that its economic model drove higher borrowing. Whenever tax revenues fell short, borrowing was the only answer on how to fund £15 billion of in-work benefits which subsidised an economy in which wages did not keep pace with productivity.

Second, the same logic of tackling concentrations of power in the state, so that public services are run in the interest of the consumer, is not applied to markets. Thus it fails to support more robust interventions to address problems in markets like energy, finance or low-wage labour.

Finally, having no rounded critique of markets means it offers little to raise living standards when public spending is so limited. A project confined to the reform of public services is insufficient.

A post-crash centre-ground is only open to the centre-Left if it fuses these two strands of thought. This means:

First, the acknowledgement that we live in an age of tight public finances must be coupled with an acceptance of the inescapable and tough policy decisions this requires.

Second, while reform of public services is unquestionably essential, there can be no going back to agenda that fails to place equal emphasis on economic reform. Raising living standards means accepting that unfair concentrations of power must not be tolerated in markets.

Third, raising living standards depends on partnership with business, where the state ensures business acts responsibly through cooperation rather than demonisation and where the case for interventions are clearly defined to correct failures.

The Third Way fused support for markets with an effective state, but it ended in the aftermath of the crash when markets had been proven to fail and the state was forced into retreat. Labour’s leadership contenders now stand at the foothills of a project that can replace it. The centre-Left needs a new programme which prioritises reform of both market and state.