Dividing Lines & Economic Policy
The newspapers this morning have put me in a very good mood. The front page of the FT leads with two stories. First we have ‘RBS sound retreat of big bonuses’.
Royal Bank of Scotland has signalled that it will succumb to pressure to pay its high-flying investment bankers substantially less than rival institutions amid an escalating row with the government.
The bank, which is 70 per cent owned by taxpayers, is hoping to avoid a high-stakes showdown after it was forced to give the Treasury the final say over the total size of its bonus pool as a condition of signing up to a scheme that will insure £240bn in toxic assets.
RBS insiders insisted on Thursday that pay-outs in its investment banking division would be “at the low, low end of the scale”, even if that meant losing experienced staff to competitors.
The most interesting story though is ‘Darling to defer moves to cut deficit’:
Alistair Darling will next week set out a pre-Budget report that will increase taxes on the wealthy and funnel scarce resources into boosting the economy, while deferring tough new measures to cut Britain’s £175bn deficit.
Mr Darling will argue that a further squeeze on spending now would choke the recovery, contrasting with the Tories who have promised to move more quickly to control borrowing.
A fiscal responsibility bill will be published setting out detailed provisions to cut the deficit to 5.5 per cent by 2014, and giving details of how the chancellor arrives at his forecasts, to boost their credibility in the markets.
Darling is completely correct as this blog as argued for months. The dividing lines are becoming clear. Martin Wolf’s excellent column on the UK economy today offers support:
The path of least resistance on growth would be the desperate hope that a wave of loose monetary policies across the globe would allow a resurgent, but largely unreformed, financial sector to refloat the UK economy. That would be dangerous, economically (because unstable) and fiscally (because potentially costly). The UK can barely afford to insure its current financial sector, let alone one even bigger.
This is basically the Tory position, as advocated by Osborne – a reliance on loose monetary policy:
What we call for is a credible plan to eliminate the deficit that commands international and domestic confidence, and that moves more quickly and decisively than the government to deal with the deficit.
For tightening fiscal policy as the recovery gathers pace will help prolong the low interest rates that are doing so much to cushion the impact of the recession and bring about a recovery
Wolf, having condemned Tory plans, continues, with his ideal solution:
The solution must be found elsewhere: in a growth-oriented policy that encourages emergence of a more diversified economy. This should be done not by suppressing markets, but by supporting and guiding them. Fiscal cutbacks must not fall on activities likely to support growth – infrastructure and research and development. Both savings and investment will need to rise. Immigration policy should seek those most able to contribute. In view of the household indebtedness, attention should go to activities that serve world markets.
Which is the policy that Darling is adopting – a growth-oriented policy of support for the economy. Mandelson’s interview in today’s Guardian only reinforces this:
He wants the government to do more to support hi-tech industries such as biosciences, digital and low carbon manufacturers (which include everyone from reactor suppliers to builders of wind farms).
“I’m unashamedly talking about the reindustrialisation of the British economy, but not by going back to the old smokestack manufacturing past – we know we can’t turn the clock back,” he says. If successful, he hopes the transformation will also spread the wealth more evenly around the UK.
So there we have it, a Labour Government which intends to use fiscal policy to support the recovery and industrial activism to help rebalance the economy versus a Tory Party committed to slashing public spending and hoping that loose monetary policy alone will be enough. Robust recovery & rebalancing versus a possible double-dip recession and dependence on the financial sector. Next week’s PBR will be interesting.