It is worth reading Ed Balls’ speech on the economy yesterday in full because it gives a different flavour from that which ended up on the media last night – a good example of how the interaction of spin and journalistic obsession leads to the public being misinformed about what is really going on.
The focus of attention was on the announcement that labour would remove winter fuel payments from the wealthiest 5% of pensioners. Of course there is an argument to be had about universalism, but this proposal seemed more like a political than an economic judgement. Elsewhere in the speech, there were proposals that were more clearly based on the economics, and that deserves more attention than it is getting.
Balls explains how damaging the Government’s austerity programme has been to growth, how damaging the lack of growth has been to tax revenues, and how damaging the collapse in tax revenues has been to the deficit-reduction plan. He argues that George Osborne’s doctrine of ‘expansionary fiscal contraction’ – that the faster you cut public spending, the greater the boost to private investment and growth – is intellectually bankrupt, with even the IMF now saying that the plans are ‘a drag on growth’. And he also criticises the fixation with ‘trickle-down economics’ – the belief that letting the rich get richer and cutting taxes for the highest earners will lead to more investment and growth, with wage rises trickling down for everyone else – which has been further discredited.
For housing people it is important to note that Balls fully accepts the argument in favour of a major boost to investment even if this involves additional borrowing initially. He says it is ‘consistent with medium-term fiscal consolidation for the Government to act to boost capital spending over the next two years – financed by a temporary rise in borrowing as Labour has also urged – to build our way to a stronger recovery.’
He makes a case that will be very familiar to Red Brick readers: ‘With thousands of construction workers out of work and interest rates at record lows, there is a growing consensus that investing now in improving our infrastructure, particularly housing, would give an immediate boost to the economy, encourage more private sector investment, and give us a long-term return as we strengthen our economy for the future….. If the entire infrastructure boost recommended by the IMF was spent on housing over the next two years, we calculate that it would allow the building of around 400,000 affordable homes across the country, and support over 600,000 new jobs in construction,…… helping people aspiring to buy their own home, reducing waiting lists, and easing upward pressure on rents and housing benefit bills.’ I hear the sound of music.
Trailing another speech later this week to be given by Ed Miliband, Balls had some interesting things to say about benefits. Specifically on housing benefit, he said ‘Labour will…. place a ‘fair cap’ on household benefits, not one that costs more than it saves, …. which takes account of housing costs in different parts of the country – with an independent body, like the Low Pay Commission, advising on whether the cap should be higher in high-cost housing areas like London, but potentially lower in other parts of the country’. He also talked about ‘housing benefit reform which tackles high rents and addresses the shortage of affordable housing’, which reflects Labour’s growing interest in the case for switching spending from housing benefit to housing investment subsidies.
We will need to see where Ed Miliband takes these arguments later in the week, but at least it seems that behind the headlines there is some serious thinking taking place. The biggest fear remains political: will the Government be able to focus all of the attention on Labour’s commitment to borrow more, even though this is economically the right thing to do, or can Labour transform this into a debate about an alternative strategy for growth?
Ed Balls’ speech is a comprehensive statement of his position and hints at a lot of new policy directions behind its tough exterior.
But Labour continues to swim against a tide of media opinion about benefits and ‘strivers versus shirkers’, and dealing with that will require bravery and some clever politics. Ed Miliband is next on to the stage.