How economic rebalancing fell victim to politics

Joe Wright, 6 May 2015

The recession beginning in 2008 sparked a debate about the nature of Britain’s economy. But the agreed answer: rebalancing toward production and stronger economic growth outside of the south east, has become strangled by the campaign. The parties have allowed economic debate to become stripped down to government expenditure and a competition in fiscal restraint.

For the Conservatives, a strong rebalancing strategy would mean acknowledging that the collapse of the economy and the last government’s spending are two separate issues. A deeper analysis ─ financial sector dependency, long-standing declines in productivity and rising housing costs fuelled by lack of building and cheap credit – muddies the waters of a strategy built on blame and overspending. Where rebalancing is mentioned in their manifesto it is in the context of building HS2 and the creation of a northern powerhouse through devolution only. While both are welcome, they are a far cry from the Conservative’s pledges in 2010 or the ‘massive rebalancing’ promised after entering office.

The Coalition struggled to make a meaningful impact on manufacturing or construction while in office. Both sectors are down for the second quarter running with no sign of achieving the momentum needed. Catapult centres and some light industrial policy-styled funding have proved the economic equivalent of treating a severed foot with TCP and cotton wool. ‘Stability’ for Britain is all but won.

Global economic conditions have been unkind to the Coalition, tempering demand for British-manufactured exports, but problems at home cannot all be blamed on the lacklustre Eurozone. The National Institute of Economic and Social Research warned this week that Britain’s low productivity cannot continue to be ignored. The failure to provide a successful Business Bank to supply businesses with credit, particularly medium-sized companies, is also to the discredit of the last government. A financial system with a regional focus would be far better at matching industry needs.

It is perhaps these failures which have made the Conservatives revert to type on industrial strategy. That the debate has pulled in borrowing for capital spending is testament to how far we have come from the original agreement on Britain’s imbalance. Failure to spend on building is both a cause of Britain’s dismal construction figures, higher living costs and historically the driver of Britain’s financial instability by incentivising risky lending. But while all parties promise more building, none will firmly acknowledge that it is this kind of spending Britain can and should borrow for during the next parliament.

Labour hasn’t found stable footing on any of these issues either. When not losing the debate on capital spending, they have chosen to campaign primarily on the symptoms of economic imbalance ─ high living costs. Too little of an attempt has been made to explain what rebalancing would require. The politics of this campaign – primarily the destruction of Labour’s and the Liberal Democrat’s bases in Scotland ─ have left even less room for either party to affect the agenda. The result is stalemate, where the state of industry or real solutions to construction remain peripheral.