Now to restore the balance

[Thinking Man's Idiot]

Now to restore the balance

(Wednesday 05 November 2008)

GRAHAME SMITH

GRAHAME SMITH details the changes government needs to make for a more equal Britain.

THE current economic crisis is not the inevitable result of nebulous global economic forces.

This would let governments off the hook. But the crisis is a result of bad policies, policies which have prioritised marketisation and the finance sector at every turn and dismissed the importance of manufacturing.


The "financialised" economic model pursued with particular vigour by the US and Britain is now dead in the water. It failed to deliver impressive GDP or productivity growth, but it did deliver an exponential growth in inequality.


The priority must now be to secure the demise of the finance-centred economy, rebalance it towards manufacturing and deliver greater economic equality and security.


Financial markets require more effective regulation as a matter of urgency and the priorities must be remuneration, capital reserves and the trading of derivatives and securities. The current consensus in favour of more stringent regulation will soon evaporate. Resolute political will is required to deliver real change.


Events this autumn have only served to highlight the vacuity of the anti-government crusaders on the fringes of Scottish politics and media.


The free-market economy is a myth. Regulation is a public good. Successful economies require appropriate government oversight and intervention.


But more effective regulation is only part of the story. The economy must be rebalanced. The finance-centred model which exaggerated and skewed the role of financial services was never sustainable. It was built on rapidly expanding household debt to income ratios and corporate debt to equity ratios. Policy should now emphasise stabilising and growing manufacturing investment and employment.


The Scottish government should establish a Scottish investment bank to provide patient, committed long-term capital to growing Scottish companies. This should build on the success and seek to extend the work of the co-investment fund.


The failure of Scotland's financial sector to support emerging Scottish industries constitutes a structural problem and should be addressed as such.


The government, working with stakeholders and using all the levers available to it, must also design and implement a low-carbon industrial strategy for Scotland as a matter of urgency. This should be considered a key test of the government's ambition.


Following the recent publication of the Westminster government's manufacturing strategy, there should also be a thorough consideration of whether Scotland requires a standalone manufacturing strategy or whether the government's economic strategy and plans for industry are sufficient.


Other areas for action include public procurement strategies and investment in science, technology, engineering and maths skills. This will also require a renewed focus on in-work training.


The last area for action is economic inequality and insecurity.


With the end of the unsustainable finance-centred economy, there now exists an opportunity to build a society where the fruits of sustainable economic growth are broadly shared with those who create that growth each day of their working lives.


To do this, it will be necessary to create an economic architecture that reconnects a strong, flexible economy to the living standards of all, not just to residents of the penthouse.


A complete overhaul of the UK fiscal framework would be a good place to start. This should aim to produce a system which is truly progressive, ensuring that all income taxes have progressive rates and that indirect taxes operate with exemptions to assist the poor. It must also ensure that the capital gains tax regime does not offer significant tax incentives when compared to income taxes.


Fair and proportionate inheritance taxes remain necessary and we must start to hear politicians outline why. The recommendations on corporate taxation included in this summer's Green New Deal report should also be implemented.


There should be no greater force for economic equality than the trade union movement.


Paul Krugman, who was recently awarded the Nobel Prize for economics, observed last year that "international comparisons suggest that a newly empowered US union movement would make quite a lot of difference in reducing inequality. The sharpest increases in wage inequality have taken place in the United States and Britain, both of which experienced substantial falls in trade union membership."


It is now clear that the economic and social model pursued by successive governments over the past 20 years has failed.


Contrary to popular perception, structural changes have not readied Scotland or the UK for the global downturn. They have instead weakened our ability to cope.


The period of broadly shared post-second world war growth was underpinned by strong trade unions, sharply progressive taxation and controls on the free movement of capital. There is no reason why similar policies cannot ensure that growth is more broadly shared once again.

Grahame Smith is general secretary of the Scottish Trades Union Congress.

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