Bail-out banks need a strong-arm, not a sell-off

The announcement that Lloyds TSB are back in profit has automatically triggered discussion of the government selling off its 39% share in the bank, back to the private sector. For Labour, it should trigger a discussion on an increasingly interventionist approach to the economy.

Britain’s privately-owned banks were bailed out with billions from the taxpayer when they failed. Cameron and Osborne plan to sell them back to the same people at a cut-price rate. As has been written about Lloyds and RBS in The Guardian, the government wants to ‘sell them off fast, regardless of the loss to the public purse or the damage to the economy.’

What has the government done with the banks over the past five years, whilst it has owned large or even majority shares? Though bailed-out by the taxpayer, the state has kept the job of running the banks at arms-length. The government has not made use of the economic levers available to it.

As one economist said,

‘the government kept out of the running of these state-owned banks even though the taxpayers are invested in them. The government allowed the top executives to continue with their grotesque bonuses, speculative investments and rate-rigging…the banks have failed to revive lending to the small businesses and households who need it.’

Michael Burke described these banks, sitting on growing funds, as having,

‘uninvested profits sitting idle in state-owned banks … the private sector’s refusal to invest is because they cannot be certain of making a profit’.

On the other hand, he said, the state,

‘can make successful large-scale investments which are not profitable to the private sector because uniquely it derives its return from taxation… It is simply a matter of political will to tap these vast resources for investment in housing, energy, transport, infrastructure and education.’

But rather than use its control of the banks to rebuild the economy, when private investment has collapsed, the government’s, ‘overriding political concern has been to prepare them for re-privatisation.’

Labour has already announced its commitment to an investment bank but did not outline an alternative strategy for using the bailed-out banks. Neither has it made a commitment to significantly increase investment if elected in 2015, including borrowing whilst interest rates are low. It has instead called on Osborne to bring forward planned spending.

At the TUC in 2012, the Congress backed a statement for ‘turning the government ownership of RBS into 100% ownership as a State Investment Bank’, while also backing ‘full public ownership of the sector and the creation of a publicly owned banking service, democratically and accountably managed’, such is the level of public disgust with the banking sector.

The sell-off of Lloyds and with RBS only a matter of time, is part of the Tory commitment to shrinking the public sector and leaving economic decisions to the market. A strategy that has demonstrably failed since they took office in May 2010.

In contrast, the Labour Party must make a much clearer commitment to making use of economic levers, directing banks it owns to invest in major infrastructure projects, as part of a wider commitment to a more interventionist approach into the economy as a whole. The bail-out banks need a strong arm, not a sell-off.

Labour can invest its way to recovery

There are probably some Tories pinning their hopes on economic recovery to save them from a crushing defeat in 2015. And I recently heard LibDem peer Susan Kramer talk about the coming economic boom.

Yet apart from the foolish and the terminally deluded, almost everyone knows that austerity in Britain has been a failure – even the IMF says so. Austerity killed a mild recovery and the economy has stagnated ever since. As a result, the deficit too has stagnated at £120bn a year. It will probably stay there over the next few years, despite the ever-optimistic forecasts from the Office of Budget Responsibility.

Most attention on Ed Balls’ recent Thomson/Reuters speech has focused on the issue of removing eligibility for the winter fuel allowance from better off pensioners. But there was too a pledge to use the Tories 2015/16 spending plans as the starting-point for Labour’s own budgets.

In the same speech, Ed Balls argued that the government needs to adopt a growth strategy and that otherwise the British economy would remain in the mire. He is right of course. But the same must also be true for Labour. It too needs a growth strategy. Yet the speech contained only a commitment to increase infrastructure spending by £10bn over the life of the next Parliament. In economic terms this is a ‘rounding error’, so small as to be completely irrelevant.

To get back to pre-recession growth and prosperity, the British economy would need to grow rapidly by between £250bn and £300bn. It would need to be led by investment, which now accounts for more than the entire decline in output since the recession began. So the idea that there can be an investment-led recovery ‘paid for’ by minor welfare cuts is simply ridiculous.

Instead, while being economically irrelevant the roll-back of the universal principle in welfare payments has major political consequences. Those consequences are an erosion of the principle underlying the welfare state. Ed Miliband used to defend the universal principle, saying that ‘benefits for the poor lead to poor benefits’. Universalism is needed to maintain the political support of the better paid. Without it, they withdraw support.

In addition, it is impossible for Labour to mount a serious criticism of any Tory cuts between now and the election. The retort will simply be that Labour will also implement them.

The undermining of Labour’s long-held position on welfare also has an electoral consequence. Europe is littered with political graves of social democrat former Prime Ministers who implemented austerity. It should hardly need saying given where the Tories are in the polls, but austerity is massively unpopular in Britain. Even against a shambolic Tory party at all-time lows in the polls, Labour is threatening to undermine its own electoral prospects by embracing failed austerity policies.

Across the world global stock and bond markets are in turmoil because investors are uncertain about recovery. Yet during these wild swings the British government was able to borrow at MINUS 0.76% real interest rates. In fact new borrowing isn’t needed at all as the government can command huge resources for investment. But it does demonstrate the fact that large private investors are willing to pay the government to hold their assets. There is no fiscal crisis. There is an economic crisis.

Instead, the alternative to adopting the economic and politics of failed austerity is very clear and rather simple. The decline in investment is the cause of the slump. The incoming Labour government can invest its way to economic recovery. That way, by growing the economy and increasing employment the public sector deficit will take care of itself.

 

Join Next Generation Labour for a discussion on Labour’s economic plans with Peter Hain MP, John Healey MP, Cllr Catherine West, Heather Wakefield and Michael Burke – 6.30pm on Monday 10th June, Grimond Room, Portcullis House.

Full employment must be at the top of Labour’s 2015 agenda

employment

Austerity continues to ruin economies across Europe; the EU’s unemployment rate has hit a record high of 11%, France has been plunged back into recession and Britain has narrowly avoided a similar fate.

Even Germany’s economy only grew by 0.1% in the last quarter. 

Despite the OECD’s recent downgrade of its growth forecast for the UK economy this year and next, Osborne is ploughing ahead with a new tranche of £11.5 billion spending cuts. It is becoming increasingly clear that by 2015, Tory austerity will have delivered a flatling economy for five years.

For Labour the challenge at the next election will be to deliver a positive agenda that rejects the failed and discredited Tory cuts and embraces a pro-growth investment strategy – and this programme must have full employment as a key objective.

It is not just figures on the left who recognise the damage that austerity-induced unemployment is having, Chairman of the US Federal Reserve Ben Bernanke said last week that “high rates of unemployment and underemployment are extraordinarily costly: Not only do they impose hardships on the affected individuals and their families, they also damage the productive potential of the economy as a whole.”

He added that “the loss of output and earnings associated with high unemployment also reduces government revenues…thereby leading to larger budget deficits and higher levels of public debt than would otherwise occur.”

Getting people into work means they’re paying taxes and spending money in their local shops; generating the demand in our economy that spending cuts have sucked out. It would also slash the amount being spent on out-of-work benefits and neutralise the poisonous debate on welfare the Tories hope will kill off chances of a Labour majority in 2015.

Labour cannot allow the Tories to set the agenda for the next election. Accepting their spending plans would be disastrous for jobs, living standards and the economy and mean cutting deeper than Osborne already has.

This government has shown that the Tories don’t know best when it comes to the economy and the persistent levels of unemployment are a testament to their economic failure. A Labour plan for a growing economy could create no better contrast with Osborne’s jobless millions than to put full employment at the top of our 2015 agenda.

Join Next Generation Labour for a discussion on Labour’s economic plans with Peter Hain MP, John Healey MP, Cllr Catherine West, Mick Burke and Heather WakeField – 6.30pm on Monday 10th June