Plan B starts here
Howard Reed is co-author of Plan B, an important new report that offers an alternative to George Osborne's failed economics. We asked him to outline its main themes.
In last year’s emergency budget and spending review, George Osborne embarked on the most ambitious “fiscal consolidation” that the UK has seen for decades – a combination of spending cuts and tax hikes amounting to more than £100 billion over 5 years. Osborne’s solemn advice to the nation was that a large and painful dose of austerity was the only way to eliminate Britain’s "structural deficit" in the public finances; memorably, he claimed “there is no Plan B”.
The coalition government argued that the British economy would be able to offset the deflationary effects of fiscal consolidation – and in particular, hundreds of thousands of public sector job cuts – via an increase in private sector job creation, an export boom on the back of a weaker pound, and monetary stimulus via low interest rates and quantitative easing.
Just over a year on from the spending review, those assumptions look wildly optimistic. The economy has flatlined for the last nine months and may be about to fall back into recession. Unemployment is rising sharply as job losses caused directly and indirectly by the cuts heavily outstrip new job creation. Data released last week suggests that consumer confidence has fallen to its lowest level since just before the 2008 recession.
As Plan A visibly falters, a consensus is emerging on the need for an alternative. Across industry, civil society, academia, journalism and politics there are a growing range of voices calling for a different approach. A new report launched today from Compass called Plan B, edited by Neal Lawson and myself, answers this call by setting out an alternative plan for economic recovery.
Plan B starts by showing why Plan A isn’t working – drawing on the latest evidence from economic forecasters to show why the austerity measures are likely to decrease the deficit by nowhere near as much as the government claims, and could well even increase it. We also show why the idea that the government has been forced into austerity by "bond vigilantes" who would otherwise increase the costs of servicing our debt is misplaced, along with several other misconceptions propagated by the Coalition government to justify its actions. Plan A is not a necessity but a choice – and a wrong-headed one.
The report then sets out an alternative strategy for economic recovery. We start by outlining a range of emergency recovery measures including a halt to the cuts programme, a new round of quantitative easing (QE) to finance a "Green New Deal" of environmental investments, a fiscal stimulus via increases in benefit and tax credit spending on the poorest families, and a financial transactions tax. Over the medium to longer term, we argue for an ambitious set of economic reforms to ensure no return to the unsustainable economics of the New Labour period. This involves a wide range of policies including:
- Tax reforms to close the £70 billion tax gap and make the tax system more progressive so that the poorest families don’t bear the greatest tax burden.
- An industrial policy based around increased business investment, spearheaded by a state-owned British Investment Bank focused on low carbon, high employment sectors such as housing, transport and renewable energy.
- A range of financial reforms to separate utility or retail banking and casino or investment banking, and to tackle the excessive pay and bonuses in banking that lead to excessive risk taking.
- Action to combat the growing inequalities in the labour market by rolling out a living wage across the public sector, tackling excessive pay at the top of the labour market, and increasing employees’ voice and influence in the workplace.
Plan B builds on work being undertaken by myriad progressive thinkers and campaigners, many of whom contributed to its drafting. It pulls several strands of new economic thinking into the start of a coherent alternative economic future. It is a starting point for a new and workable British economic model – one that rejects cuts, austerity and stagnation in favour of a move towards a more equal, just and sustainable economic future.
Howard Reed is director of the economic research consultancy Landman Economics.
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