Clegg’s economic gear shift must be driven by Plan C

With the UK’s double-dip recession biting harder than previously thought, growing unease at the economy’s failure to recover appears to have elicited something of a change of emphasis at the heart of government. If Nick Clegg’s Financial Times interview (£) signifies a genuine change of direction in economic policy, and it would be welcome if so, we should ask in which direction we’re now facing. The Social Liberal Forum recently published Plan C, our approach to achieving a fair, sustainable economy, so it pays to benchmark Clegg’s call to “shift up a gear” against the values and policies we set out.

It also pays to pause and reflect on just how politically significant a moment this may turn out to be – second only perhaps to Chancellor Osborne’s 2011 Autumn budget statement that laid bare the extent to which austerity is hurting the economy’s chances of recovering.

 Acknowledging that growth, prosperity and jobs won’t return through austerity alone is the easy part, and the need for greater investment in infrastructure follows just as easily. The hard part is figuring out where the required investment will come from, and what role the state should play in bringing it about. Scant though the details are about Clegg’s vision, a number of things are clear even now.

 Firstly, it’s unlikely that any of the ‘massive amplification’ of investment will come from extra public borrowing, nor indeed from any easing up on the pace of spending cuts. Plan A seems firmly in place in that sense, which is hardly surprising given that Clegg and colleagues still firmly believe that low long-term interest rates (leaving aside record spreads between central bank rates and those ordinary households and businesses are facing) are attributable to public austerity and not a lack of investor confidence. It may be that we see a little more of what’s already in place – pension funds investing in infrastructure, loan guarantees and credit easing – but little beyond.

 Secondly, it does appear that the Deputy Prime Minister has taken on board one of the key principles of social liberal thinking – that a balanced economy requires an enabling state to share at least some of the risk inherent in making long-term investments with the private sector. Flush though the latter is with record cash surpluses, fear stalks the economy and the expectation of low – or worse, uncertain – returns keeps firms from sticking their neck out. Efforts to ‘crowd in’ some of the private-sector surpluses aren’t new, but have amounted to little more than exhortation to date and aren’t likely to offset a fear-laden climate of low demand. Not to mention the exposure to downside risk that such schemes entail, without the commensurate possibility of returns in the event that the investments pay off, something that PFI schemes were particularly prone to.

 SLF’s Plan C attempted to tackle the conundrum of how to foster co-investment by proposing the creation of Public Interest Corporations, in which public and private entities would come together by pooling more than just cash and by sharing both risk and reward according to their respective contributions. I won’t claim PICs alone would plug the investment gap, but by addressing the issue of who takes on how much risk and by hard-wiring the principle that prosperity is best when co-produced between the public and private sectors, they would undoubtedly contribute. And no, this isn’t just another ruse pulled out of the air – seven American States have legislated to allow companies to set themselves up as Benefit Corporations as advocated by Yale economist Robert J Shiller, which gives us a framework upon which PICs could be based.

 No matter what the mechanism, it is crucial that in calling for more investment, the government is mindful of overall macroeconomic conditions – without root-and-branch reform of our financial system, reforming companies so that they provide secure and rewarding work for all those who seek it, and fostering the innovation and skills needed to meet the challenges we face, all the depressingly-supply-side-focussed adjustments that the IMF is talking about will be like pushing on a string. Clegg’s apparent change of emphasis regarding investment is a chance for those of us calling for wide-reaching economic reform to advocate the sort of reform that would help bring about said investment, and help shape a fairer and more sustainable economy.

* Prateek Buch is Director of the Social Liberal Forum and serves on the Liberal Democrat Federal Policy Committee

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13 Comments

  • John Roffey 27th May '12 - 9:51am

    I hope this is not also removed, but this reality has to be acknowledged:

    The extent to which we are ruled by our collective “super-government” in Brussels may be immensely boring and complicated to grasp. It may be much more entertaining to cover British politics as if it was still just a soap-opera ding-dong between our politicians here at home.

    But don’t we often wonder why our politicians these days seem so sadly diminished, and why voters are walking away from the electoral process because it seems so irrelevant?

    It is, Booker concludes, because our real government is sitting elsewhere, as around that dinner table in Washington – incapable of sorting out a catastrophic crisis which their megalomaniac project has, with a terrible inevitability, brought on itself. [More at:]

    http://www.eureferendum.com/

  • Despite the wise words of of Mr Cable I can see a lot of momentum building up behind the red herring of cutting red tape as the answer to economic ills. It will not work, because consumer confidence is not going to be boosted by making people worry about keeping their jobs.
    As for the bigger problems, I think this government will go for more of the same until the end and that the recovery may come from undoing the mess left in its wake.

  • Andrew Suffield 27th May '12 - 1:06pm

    Where is the state led infrastructure spending?

    Most of it’s in the regional growth fund, which has already disbursed billions, and the green investment bank, which after months of Tory delays has finally started up and is now in operation. There’s about £5bn of government funding in those two, and it’s being used to leverage over £20bn of private investment.

  • Daniel Henry 27th May '12 - 1:28pm

    Any other suggestions than the PICs?

  • Simon McGrath 27th May '12 - 1:33pm

    Desperate stuff. “Public Interest Corporations” simply means more state spending which is what got us into the situation in the first place.
    the right way to get the economy kick started is to have tax cuts targeted at the low paid. This will increase incentives to work and give money to people who will go out and spend it. Finance these through real reductions in state spending ( which there haven’t been so far).
    Not only will this be good for the economy it is absolutely in line with liberal principles that as far as possible people should decide how to spend their own money, not the state.

  • Andrew Tennant 27th May '12 - 2:47pm

    What evidence is there to support the assertion that ‘prosperity is best when co-produced between the public and private sectors’?

    Why does investment need the public sector be involved to deliver products and services legitimately demanded by the public? Why, if I want my money spent on it, would I not spend the money on it myself?

  • Geoffrey Payne 28th May '12 - 6:12am

    @andrew, because not all parts of the economy are the same. We should not imagine that simply because for example the technology sector has brought us IPads which we all want (albeit not at a price we can all afford), that the market forces that delivers that can also deliver us a transport infrastructure or an education system that meets the needs of our economy. Sometimes when a consumer makes a choice it causes competition to work but not always. For example in the 1980s the British economy benefitted hugely from North Sea oil. The problem with that was the private sector wanted to maximise it’s profits from oil exploitation at that moment in time and did not consider the future. Today we have passed peak oil in the North Sea. If we had conserved our reserves in the 1980s, we would be making much bigger profits today, and not be so vulnerable to rises in oil prices.
    Markets are good for short term profits. The state is better (although far from perfect) for long term investments.

  • Andrew Tennant 28th May '12 - 6:24am

    Again Geoffrey, what evidence is there to support the assertion ‘the state is better for long term investments’? Is it not the state that has such an appalling record of overspent and escalating budgets for many capital infrastructure projects?

  • I have taken the trouble to read Prateek’s argument in full. Thank you Prateek for a well argued piece, which offers a realistic view on the economic policies of the coalition and makes eminently sensible and practical suggestions for moving forward. As a heterodox economist, I concur wholeheartedly with his view that the problems we face need a multifaceted approach and that orthodox solutions, much trumpeted, will not work.

    If only those people who do nothing but denounce the coalition would start to accept that debt really is a problem and that ignoring it will not give us the growth we need. The approach put forward in this paper tackles both the debt and growth issues and should be welcomed.

    Can we now have a serious discussion about how the coalition can be persuaded to move forward with plan C, rather than continuing the sterile debate about the alleged evil of the coalition?

  • jenny barnes 29th May '12 - 10:49am

    I don’t see why the state – with record low borrowing costs – should not invest in public goods directly. Nuclear power stations (rather than some weird subsidy-that-isn’t-a-subsidy-honest- I-have my fingers crossed behind my back), social housing ( rather than housing benefit), mend the roads, sort out the railways and water… some things are actually best provided by the state – like justice, policing, the NHS .

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