It’s hard to remember a time when public finances were more in the news.
The turmoil in currency and bond markets since the mini-budget have sparked debate around the role of the Bank of England, the question of whether politicians or markets are in control and the issue of whether the IMF should be intervening in British politics. So it feels like a good time to be discussing public finance and in particular the issues set out in the new pamphlet from Rebuild Britain “Government Spending and Debt: A New Approach”.
I want to make four points drawing on and building from that pamphlet.
First we need to take back control of the Bank of England and reduce the power of private UK banks. Second, we need to rebuild our industrial base including our transport and utilities infrastructure, re-establishing food and energy security. Third we need to drive forward productivity in the UK which would allow us to address the wage stagnation which has reduced the standard of living of workers and their families. Finally we need to re-invigorate democracy to re-engage the swathes of politically homeless and drive out the technocrats and experts trying to regain control following the populist revolts of Brexit, the gillets jaunes and the Canadian truckers.
Political Control of the Bank of England
It was galling to hear commentators suggest that in the aftermath of the mini-budget, the “adult in the room” was Andrew Bailey the governor of the Bank of England.
People may remember that the Bank of England was given independence by New Labour back in 1997. The arguments for this are that politicians are too short term, too much under the influence of voters, to be trusted with decisions on interest rates and money supply.
But it is this technocratic, expert led Bank of England that has reigned over the massive expansion of the quantitative easing they instigated in the wake of the 2008 financial crisis. They have pumped around £900bn into the banks under this programme. This money has largely not been used to finance new investment but has simply bailed out zombie banks and some zombie companies. But it has also created an asset bubble which we are now seeing explode at home and abroad.
Many of these banks should have been allowed to fail. Instead billions was stuffed into bankers’ pockets. The Bank of England has become the lender of first resort not last resort.
But the problems don’t stop with the Bank of England. The private banks also create money in their lending practices. This money creation is controlled to some extent by the Regulation Authority through the requirement for reserves to be held by banks. But whilst this can establish some limits to the amount of additional money created by banks, it cannot control how that money is spent. As we know this money is often used to finance leveraged buyouts by the venture capital companies who now own many of our companies. This creates businesses with high levels of indebtedness who are vulnerable to interest rate rises and have structures where interest payment rank ahead of claims for higher wages.
The solution outlined in the Rebuild Britain pamphlet is to significantly reduce the level of private sector money creation by stricter reserving requirements. That would create the space for the Bank of England to increase the publicly created money supply – money supply which can be funnelled into rebuilding Britain.
Rebuild the Industrial Base and Establish Food and Energy Security
The first requirement to any rebuilding programme has to be cheap and secure energy. We can get that from UK owned and built nuclear. I’d also pursue fracking and for the short to medium term fossil fuels should continue to be a part of our energy strategy. Renewables and hydrogen can play a part but we shouldn’t imagine they can provide a full solution.
We also need to rebuild our transport, water, sewage and communication structure across the UK. Transport should stop focusing on getting people into and out of London and we should reconnect local towns including our coastal communities. I’d like to see a Northern loop line connecting our great Northern cities. Revitalising our transport should not be about forcing people out of cars but about providing attractive alternatives. We should be aspirational in this looking at mag-lev and other new technologies not used before in the UK.
We need to drive forward new industries forging partnerships between Government, our universities and the private sector. And we need to let zombie, debt ridden companies die in a burst of creative destruction.
Solve the Productivity Puzzle
Productivity in the UK has flatlined for the last forty years. Unsurprisingly this has meant the stagnation of real wages.
Discussion on the cost of living crisis today seems to assume that working people must suffer from the rising level of prices. But in the 1970s when inflation peaked at over 25%, the real disposable income of workers increased. What’s different now? There is clearly far less power in the hands of workers with far lower levels of trade union membership particularly outside the public services. And we have moved from an industrialized economy to one based on services and finances. Large swathes of the country are bereft of any productive jobs and the new economic model does not benefit the vast majority of working people. And we have no clear and thought through economic strategy. No-one talks of the white heat of the technological revolution. Interestingly the Labour Party’s new economic policy does seem to be taking steps in the right direction in this area.
Let’s work that policy up into something more organic – something that isn’t just a top down imposed solution but one that harnesses the skills and ingenuity of ordinary working people across industry, academia and communities.
We also need to rebuild a way of engaging politically. I’m worried that many people find themselves politically homeless – myself included. The re-emergence of political engagement we saw in the Brexit vote is being contained by the political classes as they seek to re-establish bureaucratic control. I had thought that political upheaval had moved us away from that technocratic, expert led plutocracy. But the crowning of Jeremy Hunt – the precise embodiment of that stuffed-shirtness shows they are again circling their wagons.
We need politics and the trade unions to move away from the identity obsessed politics of the liberal middle classes. For non metropolitan Britain especially we need a class based politics that recognizes the common interest of workers. And we need to be braver, more hardworking and more determined. It isn’t leaders but us who will change the world.
Finally and back to where I started on the mini-budget; whilst we may not have liked much in it, the mini budget was a deficit funded stimulus plan. The largest spending revolved around a two year energy price guarantee and it pushed back against the Bank of England’s technocratic balance the books approach. Hard as it is, my instinct is to defend it. As Tim Stanley noted in The Telegraph:
“The Left can revel in the mortality of this Government, at the schadenfreude of a pro-market chancellor undone by the markets but now is not the time for socialists to drink champagne. Comrades we’re in for two years of painful austerity. And Labour having implicitly demanded it from Kwarteng, will not condemn it from Hunt – but be forced to do it when it forms the next government”
We need to gird our loins and be ready to stand up to the markets and demand that we Rebuild Britain.