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There comes a time in every government’s life when it makes a futile gesture. We’re at it. Our gesture is deflation. The Governor of the Bank of England tells us we need eighteen months hard with high interest rates to “defeat inflation”. The Chancellor has produced an incomes policy for public servants: inflation over 4% but pay increases of 2%. Gordon wants MPs and Cabinet Ministers to freeze pay. Soon the calls for sacrifice and “seeing it through” will ring and we`ll be in full scale confrontation with every union available.
We`ve been here before. In l966, l968, l974, l978 and l980 to name but a few. The old problems, stagnation, freeze, squeeze and deflation are re-emerging and with them the old solutions of imposing sacrifice on our people while the greedy and wealthy escape. Labour always does its duty and protects best those who loath it most. It didn’t work in the past and will be worse now. We’re all hung down with debt which will be unbearable if interest rates remain higher than every one else`s. House prices are higher, ownership more universal, so the consequences of a fall are more severe. Domestic production is much smaller and weaker, so it will be harder hit.
Deflation is urged as an antidote to inflation but how serious a threat is that? In the past inflation was higher and the unions had collective bargaining power. Now it`s only at 4\%, the power of labour is broken and the workers know that if they ask too much markets will be supplied from China and immigrants will work for less. High interest rates to combat a non-threat merely keep costs higher than they should be.
Let`s face it, our obsession with prudence wasted the good years of low inflation by not boosting growth enough. Now growth is faltering. It was driven by consumer demand, underpinned by rising house prices and high government spending. Now consumers are crippled with debt, house prices are falling to levels where negative equity and repossessions will become a real problem, and public spending has plateaued. All this is compounded by credit squeeze. Banks and financial institutions have over-extended themselves and are now desperate to restore capital ratios, while the special purpose vehicles into which they have bundled debt are unsaleable. These threats have already brought down Northern Rock, threatened Bradford and Bingley, even HBOS, and undermined several of the hedge funds which flocked to our under-regulated London market. Deflation compounds that problem by damaging the assets acquired by dodgy bank and excessive sub prime lending.
All this means lower growth, looming recession and a credit squeeze as we follow nine months behind the American economy. Ministers assure us that we are better protected but they are whistling in the wind. The causes are the same as in the US. So are the consequences but the American economy still has a powerful protective capacity, our manufacturing sector has shrunk too far and Finance, the cause of all the problems, is both lopsidedly dominant and cruelly crippled here.
This is a new ball game. It demands new policies and approaches. Growth will no longer come automatically and easily. The NICE years of low inflation are over. Ministers can`t just sit there preaching “enrichisez vous” and taking credit for growth. They are going to have to work hard to check the downhill slide to recession and that on a tight timetable as the election looms. To compound the problems by a ritual deflation means we slump and shamble into defeat. We must change the policies, go for growth bring Keynes out of the deep freeze and put Prudence into the whorehouse. What worked in the 1930s will work again. The panaceas and soft options used since 1997 won`t.
The essential job is to boost demand. So reduce interest rates. The Americans have taken theirs down to 2% which is about right for us too, though it would have to be enforced on the Bank of England by changing its rubric from the single emphasis on inflation to a requirement to maximise growth and jobs. That would bring the pound down after years of shoring up to uncompetitive levels by high interest rates. The exchange rate of any nation with a balance of payments gap as large as ours will eventually be brought down by markets. Lower interest rates will expedite that process, allow markets to work and give Britain the competitive exchange rate it needs to tax imports and make it profitable to produce in this country. All that will ease the liquidity crisis but the Bank could also administer a laxative to our constipated banks by providing funds to restore their balances, in return for a stake in ownership of the type they will be forced to concede if they raise the money abroad.
Then borrow to spend. Scrap the so-called golden rules. Public finance is not piggy banking and borrowing is comparatively low by historic standards and compared to many other countries. Direct the new spending to those who suffer most from the great inflation by tax cuts to raise the level at which taxes are paid and by benefit increases. A big boost to the winter fuel allowance and direct help for families faced with repossession and taking their houses into the local authority stock are obvious needs.
The great house building boom of the thirties did almost as much as rearmament to boost recovery but Gordon’s building drive is already faltering as private builders cut back or go bust. Only public money can now boost it by financing Housing Associations to build and bringing councils, who in the past did so much of the building, back into a game Government has forced them out of by keeping spending tight to force them to privatise their stock. You can`t fight them when you need them. So provide funding for councils to build again and put the private builders back to work in a drive which will stimulate the economy.
Fairness demands fair sacrifices. The better off have benefited massively over the last decade and should now pay their share. So shift the burden of taxation upwards and outwards by bringing the increasing number of corporations which use tax havens to escape their obligations back into the net. A new and higher top rate of tax won`t require increasing taxes in recession if it comes in in two stages. The first should ensure that the increase in allowances to take more out of tax is not passed on to higher rate tax payers. Next year when things are easier top rates should rise substantially.
Most of this programme will yield immediate benefits. Yet its importance is not just in boosting demand and protecting the people. It changes the Government`s stance from deflation, which damages our prospects, to hope and buoyancy, both happier election auguries. It shows that the government is doing something instead of drifting helplessly. It restores confidence, not only in the economy but in Labour, to give us a real prospect of winning an election which can`t be delayed beyond June 2010. Win then and we can go on to be a better, more Labour, Government which sets out to rebuild our failing economy. We may be learning our true role late but learn it we must if we are to serve our people
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