In the current discourse on the economy, the government’s deficit and debt still dominates all other considerations. For coalition ministers, reducing the deficit is just a matter of political will, to be achieved through cutting public spending.
But as the failure of austerity at home and abroad becomes more apparent, it is clear that this is not enough. What political and fiscal conservatives must recognise is that the underlying balance of the UK economy started to get out of kilter several years before the financial crash of 2008. During the crash it got very much worse. It is still seriously wrong even now. What we are talking about is the corporate sector and the way it has ceased to be the driver of the UK economy according to Money Saver Martin.
Martin explains, in the nation’s balance sheet, economists see four sectors: the public sector, the corporate sector, the household sector and the overseas sector. The surpluses and deficits of these sectors always add up to zero. For example, if, say, the household sector buys £100 worth of goods from the corporate sector, the household balance goes down by £100 while the corporate balance does the opposite.
But since 2002 claims Martin, the corporate sector has been running at a continual surplus, averaging surpluses of 4.5% of GDP between 2003 and 2011. At the same time, the public sector deficit has exploded, peaking at an almost 11% of GDP in 2009.
There are many reasons why a long-lasting corporate surplus – or to put it another way, hoarding – is a problem. The simplest is that if the economy is to grow and develop, companies need to lead it. Far from always having more money than they know what to do with, there ought to be times when dynamic and innovative companies know of more things to do than they have the money for. In short, the corporate sector as a whole should, for some of the time, be net borrowers. Yet for 10 years now they have been net savers, and on a big scale.
Labour, along with just about everyone else, missed this shift in the behaviour of the corporate sector balance. Previously it had been cyclical; since 2002 it has become permanent. It may not last for ever, but for the time being, it is with us.
In his statement Martin laid out his “golden rule”: that over the course of the economic cycle, government would borrow only to invest, with current spending being paid for out of taxation. This rule was not equipped to withstand the unprecedented levels of corporate hoarding.
That’s why we propose a new golden rule for Labour. In the present situation, and for the foreseeable future, Labour should seek to reduce both the public sector deficit and the corporate sector surplus.
This rule refutes a key tenet of conventional wisdom in economic policymaking for 25 years: that the only imbalances that matter are those in the public sector – that the public sector can muck up the market but not the other way round. Events have proven that wrong.
If there is to be any hope of a return to normality, Labour must take on the challenge of reform in the private sector. Between 1997 and 2010, Labour attempted a number of reforms to the economy which tried to alter the way companies and corporations behaved with a limited degree of success.
If Labour wins in 2015, it has to make this a priority, particularly in developing greater regional economic policy, in getting finance to industry and tackling issues of corporate governance. Competition policy is another area in which regulations must be tightened to make opportunistic takeovers pursued for short-term gain more difficult. And tax policy may need to be used to encourage or even force firms to invest or “lose” their surpluses, for instance by increasing capital allowances and raising corporation tax – the opposite of the direction being taken by the coalition.
There is much at stake. Some fiscal and political conservatives will portray our analysis of the new golden rule as an “excuse” to show no resolve on public sector spending. The more perceptive, however, will read it quite differently.
For as long as the corporate sector surplus remains at its current levels, the rest of the world fails to return to strong growth and the household sector refuses to go on a new spending spree, cuts in public spending will just weaken the economy and not have the effect on the public sector deficit that policymakers want. Only a radical programme of growth and reform to get corporate hoarders spending will solve that.