‘Reindustrialisation is fiscal discipline in action’

The bond markets are sending us a warning. We should listen to it. But we also need to understand what they are actually telling us.

Today, the yield on ten-year government bonds has risen above 5.2 per cent, its highest level since 2008. That matters. Higher borrowing costs mean more taxpayers’ money spent servicing debt and less available for our public services and investment. The OBR was already forecasting debt-interest spending of £109 billion this year.

The immediate cause of the latest rise is not simply British government spending. This is a global bond sell-off, with the conflict in the Middle East pushing up oil prices and reigniting fears about inflation. We must not panic.

But Britain does have some weaknesses which leave us exposed and we can only get back on top of our financial situation if we address them.

The conventional response to pressure from the bond markets is fiscal contraction. Cut spending. Put up taxes. Cancel investment. Borrow less. This will not work, because it does not address the core structural problems that have led us here. Britain does not produce enough to pay for our standard of living.

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Fiscal responsibility matters. I have never believed there is anything progressive about spending ever greater amounts of taxpayers’ money servicing government debt. If we lose control of the public finances, we lose the ability to do many of the things a Labour government was elected to do. 

However, we need a new economic strategy of production if we want to generate the revenue and balance our trade so that we create the conditions for financial stability.

The latest figures show an underlying current-account deficit of £15.1 billion in the first three months of this year. Within that, we had a goods trade deficit of £59.5 billion. Our fantastic services industries clawed much of that back with a £51.8 billion surplus, but the underlying weakness is obvious.

We buy enormous quantities of goods from the rest of the world and rely on the rest of the world continuing to invest its money here.

That matters for sterling too. A weaker pound makes the things we import more expensive: energy, raw materials, components and finished goods. When oil and gas prices rise internationally, as they are doing now, that vulnerability becomes painfully clear. Inflation rises, pressure on interest rates returns and servicing our national debt becomes more expensive.

These relationships aren’t automatic. There are many things which determine exchange rates and bond yields. But we should not miss the bigger point.

This is why I strongly support Andy Burnham’s focus on reindustrialising Britain and developing a new politics of production. Reindustrialisation is the only route to financial stability and is fiscal discipline in action.

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I spent much of my career working in and around science, technology and global businesses. I know Britain can compete. We have extraordinary strengths in pharmaceuticals, chemicals, advanced manufacturing, engineering, defence and technology. What we haven’t had for too long is an economic policy determined to build upon these strengths.

We need competitive energy, investment, skills and infrastructure. We need British companies making more here and selling more overseas. And we should be much less embarrassed about saying so.

The Burnham response to the bond markets should therefore be different from the old Treasury orthodoxy, it must be productive expansion to bring financial stability. This is real fiscal responsibility.

These are not competing objectives. Producing more, exporting more and becoming less dependent on strategically important imports strengthens the economy from which our debts ultimately have to be paid.

Britain cannot austerity its way to prosperity. Nor can we borrow our way there.

We have to produce our way there.

This is the message the Chancellor must give to investors and businesses next week if he wants to regain the initiative on the economy.

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