Thursday, 26 November 2015

A New Vision Is Needed

Mariana Mazzucato writes:

Let’s start with the good news.

In today’s spending review, George Osborne was forced to backtrack on his grossly unfair plans to cut working tax credits, a plan that would have left many worse off.

This is a victory for anyone who believes that it is wrong to make the poor pay for the faults of the private banking system – a system that caused the public budget to rise following the crisis.

But as Labour supporters congratulate themselves on the chancellor’s U-turn, and Conservatives cheer on the chancellor’s latest bit of political escapology, we shouldn’t lose sight of the bad news.

Let’s face it, there are still £12bn in cuts to welfare spending to come in this parliament. This remains not only unfair, but unnecessary.

As expected, Osborne’s economically illiterate goal of generating a budget surplus by 2020 has provided cover for another round of cuts and sell-offs, reducing the size of the state still further to 36.5%.

But what question is 36.5% the answer to? The question the government should be asking is what we want the state to do.

From that starting point it should then try to establish what size and what form is required for the state to deliver this objective. Instead, the chancellor is relentlessly pushing his own agenda.

With huge cuts in central departmental budgets, a garage sale of government assets and an ongoing threat to organisations such as the BBC, it is not clear what strategic capacity the state will have left once all the cuts have fallen. Osborne claims to act in the interests of Britain’s long-term economic security.

But rather than fixing the roof when the sun is shining, he is introducing structural weaknesses in the economy that are likely to cause serious subsidence in the years ahead.

Even the IMF has woken up to the fact that cuts do not cause growth.

Growth is determined by strategic spending on areas that increase productivity, which in the UK is still below the OECD average.

This includes investing in training, education, research and development, and state-of-the-art infrastructure.

So while there has been a boost to some infrastructure spending, the lack of vision on what kind of economy we need for sustainable long-term growth means there has been little discussion about the direction of growth.

Not long ago the Conservatives wanted to be the “greenest” government ever – and claimed today to have delivered this in the last parliament.

But by subscribing to a false dichotomy where more green industry means fewer jobs, and allowing many energy-intensive industries to remain exempt from tax, they have drifted a long way from that goal – so far, in fact, that Al Gore recently paid the UK a special visit to reprimand the government.

Short-term thinking is having devastating consequences for the science budget in the Department for Business, Innovation and Skills.

The chancellor says thatscience spending will be protected in real terms – but while inflation remains at 0%, all this means is that Britain’s investment in science would remain nominal.

The actual increase from the last review is no more than £9m, while countries ranked high on global innovation scales are increasing it by double-digit percentages.

Indeed, placing Innovate UK, the UK’s innovation agency, inside the research councils will result in a real cut, and the department’s eagerness to accept its 17% reduction is part of the “low tax, low regulation” view of competitiveness held by Sajid Javid, the business secretary – a far cry from the more serious attempts at reviving industrial strategy of his predecessor, Vince Cable.

This leads us to the fundamental problem with Osborne’s economic plan. His short-term work to patch up the roof is eroding the foundations.

The deficit – in the short term – is not going to determine the UK’s long-term economic stability and growth. After all, many countries with low deficits have had a high level of debt as a proportion of GDP (including Italy, Portugal and Spain).

And, vice versa, many countries with high deficits have also had a high level of growth, and hence have kept debt as a proportion of GDP in check (such as the US after the financial crisis in 2008).

The key issue is not whether a country runs a modest deficit, but what it is actually spending the money on.

It is a strategic composition of spending that will affect the denominator of the debt-to-GDP ratio, and hence better enable the debt to be paid back in the future.

It is this focus on the deficit that has also caused a wave of state asset sell-offs, including the privatisation of the Green Investment Bank and the business investment bank – two sources of patient finance that could have become pillars of a serious investment-led recovery.

But where is the scrutiny of these decisions?

While in the short run privatising Eurostar, Royal Mail, RBS or the Green Investment Bank might reduce government assets, and hence expenditure (making the deficit look artificially low), there have been no proper studies showing the long-term costs of such sales.

The effect of the latest Eurostar sale may be to increase public debt as the state loses out on future dividends.

Paradoxically, because the UK is so allergic to industrial strategy, it has started outsourcing strategy to other states – hence the recent decision to sell off public assets to long-termist China.

It’s almost as if the anti-state ideology only applies to the UK’s public sector.

The chancellor loves to talk about Tech City, yet he forgets that the key to the IT revolution was an ecosystem of public institutions making strategic public investments across the innovation chain – and much patient long-term finance to lead the way.

Long-run investment-led growth requires the same kind of vision that led to the IT revolution – a point recently made by no one more statist than Bill Gates.

But this kind of smart, innovation-led and inclusive growth requires vision and a belief in public value. The government has neither.

And the Labour party seems to have lost its confidence and ability to talk about investment-led growth in a way that enables both business and the public sector to think big again. We cannot keep having the same old debates.

A new vision is needed.

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