How the state can save Britain

This is indeed a strange election for the British public. Both the main political parties are focusing on one central issue - how far and how fast the budget deficit should be cut. But that is the wrong policy. And what should clearly be the central focus of this election doesn't even get a serious mention. Cutting public spending, whether drastically or sensitively and straight away or a bit later, is not the right policy when the "recovery" is so precarious and particularly when the deep recession is mainly due not to the bank bail-outs, but to the collapse in private investment. That investment, especially in housing and private transport equipment such as buses, trains, cars etc, had already fallen spectacularly by 15 per cent between the first quarter of 2007 and the second of 2008 - before the September 2008 financial crash. The banking failures, which then exacerbated the collapse in lending to businesses and homeowners from a 20 per cent-a-year growth at the start of 2007 to nil or negative two years later, compounded an already dramatic fall in private investment.

The obvious correct response to both these failures in a deep recession is to step up public-sector investment to compensate. A major public investment programme in job creation in house-building, infrastructure enhancement and the new green digital economy would provide a triple whammy to meet the current impasse. It would boost aggregate demand to compensate for fading private investment as the unsustainable housing and credit bubbles finally burst. It would go some way to filling the void left by the collapse of bank lending to businesses, especially if it was funded by an Obama-style levy on the banks. And with house-building at its lowest ebb since the 1920s, it would give huge impetus to the provision of affordable social housing. This has left 1.8 million households languishing on council waiting lists - by far the biggest unmet social need in Britain today.

The main argument used against public investment is that the bond markets won't stand for any further extension of the already swollen budget deficit of £178bn this year - not even if it were largely funded by a supertax on the banks in repayment of the bail-outs. If the bond traders walked away, goes the argument, the government would then be unable to finance its debt and Britain might even lose its prized triple A credit rating. The opposite is true. What has caused the recent unsteadiness in the financial markets is not the size of the deficit, but rather the government's retrenchment from its modest reflation of the economy. This will make the downturn much more prolonged. The VAT increase, the National Insurance increase and the ending of quantitative easing will once again squeeze demand at far too early a stage in the recovery - and an economy flat-lining on the bottom is what scares markets. So why hasn't the obvious policy of public-sector reflation taken root?

The culprit is the neoliberal agenda. It remains dominant in both the main political parties and dictates that private markets must be the exclusive mechanism for economic activity. The Tories are only too pleased to have an excuse for major public expenditure cuts because they have always wanted to shrink the state. New Labour remains dogmatically opposed, against all the evidence, to major public sector-led recovery initiatives. Neither the Disraelian paternalist wing of the Tory Party nor the social democratic wing of the Labour Party has enough influence - so far - within their own parties to offer any real choice at this coming election. The choice is exclusively neoliberal and narrow. Yet the neoliberal system is clearly broken. The banks remain dominant and regulation is piecemeal and ineffective. The necessary shrinking of the bloated financial sector has not taken place, nor the needed expansion of the country's productive base.

The obsession with market fundamentalism, even though it has now been tested to destruction, has not given way to a needed rebalancing between the roles of the markets and the state. Privatisation, deregulation and labour market flexibility have run their course without producing stable growth or full employment. The grotesque ballooning of inequality has also generated a social recession, the stubborn persistence of poverty and unresolved and arguably deepening problems of an alienated sub-class. Nor does the concentration on exclusively market-driven criteria look like resolving the fast-approaching debacles of energy crunch and climate catastrophe. What is missing from the very narrow prism of neoliberal "solutions" is any recognition that the state has a unique role in regulating market excesses, redressing market failures, overseeing a balanced and sustainable economy, promoting the proportionate interests, rights and freedoms of all classes within society and taking a lead in national security issues like energy supply and climate threat. None of these is being adequately addressed today.



The alternative to the dead-end of neoliberal capitalism that Britain has now reached is better regulated markets, particularly in the financial sector, a new and specialised role for the state in key areas of the economy, a much stronger focus on reviving and strengthening Britain's manufacturing base, a much more co-operative and participatory industrial relations framework and a stringent overhaul of pay and incentives to provide for much fairer remuneration across the range of incomes - especially at the lowest and highest level. We need a national infrastructure bank to drive regeneration. We need a people's Girobank to offer affordable banking for all classes. We need a government-led house-building drive to rehouse up to a quarter of the population and upgrade the energy efficiency of almost all housing. An economy that swings back from unemployment support for nearly three million towards large-scale job creation of earning and tax-paying workers could begin to realise this alternative vision. It should be linked to a very different political and social order.

We need not a moribund Parliament, but one that is empowered to respond much more proactively to the electorate's demands as well as holding the executive more robustly to account. We need a much more liberal civil order that rebalances the increasingly repressive state control and surveillance in favour of reinvigorated civil liberties. And we need not a resurrected old-style welfare state nor a neoliberal-inspired whittling away of social support mechanisms, but rather a deeper and better targeted intervention in intergenerational poverty and discrimination to make the ideal of equal rights a reality. Now that would be a real choice for the election.