A BUDGET FOR RECOVERY

New Statesman & Society, leader 26 November 1993

Kenneth Clarke's first budget as Chancellor of the Exchequer, to be unveiled next Tuesday, has been the subject of more speculation than any other budget in the past decade. This is partly a matter of the novelty of having a budget in November combined with the autumn state­ment on public spending – but it is also the product of a widespread public feeling that the economy is in a mess, and that what Clarke does next week will determine whether the mess is cleared up or whether it gets worse.

Britain has been in recession for nearly four years now, and signs of recovery are still faint. For all Britain's recent successes in non-EC export markets, there is still a strong possibility that the deepening European re­cession will scupper hopes of a sustained upturn – just ask those Nissan workers now being offered voluntary redundancy because no one in Europe is buying cars.

In any case, if unemployment has peaked, it has only just done so – and it still blights millions of lives. Even those in work suffer its consequences: fear of unemployment is still holding back consumer confidence, and the cost of keeping around three million people on the dole is horrendous. Taking into account benefits and lost tax revenue, each unemployed worker costs the Treasury nearly £9,000 a year, which means that the cost, for example, of keeping the 500,000 unemployed building workers out of work is around £4.5 billion a year.

Meanwhile, everywhere you look there is work to be done: crumbling council blocks, sewers and schools to repair, ancient tube trains and buses to replace, railways and houses to build. The waste of unemployment is obscene and absurd. Britain desperately needs a budget that lays the foundations for a sustained economic recovery.

What is not required is what Clarke seems to be preparing – an assault on public bor­rowing on two fronts, with cuts in state spending and increases in taxation aimed at shaving some £3 billion off the public sector borrow­ing requirement (which is currently running at £50 billion). The fragile nature of the re­covery makes it imperative that the Chancel­lor does nothing to reduce the overall level of demand in the economy: state spending should be kept at current levels or even in­creased, with the overall burden of taxation increased only to fund an expansion of state spending on investment.

In similar vein, any tax or spending changes should on no account be regressive: even leaving aside the persuasive moral and social arguments for a more equal society, pro­gressive redistributive measures have econ­omic benefits. They have a modest reflationary impact because poor people tend to spend money rather than salt it away; and they help the trade balance by putting a block on the tendency of rich people to buy im­ported luxuries, rather than home-produced goods.

Yet all the talk is of Clarke increasing Na­tional Insurance contributions (an income tax that hits the worst-off hardest) and direct taxes on non-luxury items, while reducing benefit entitlements – all of which will harm prospects for recovery.

Some of the measures, both long-term and short-term, that should be taken next week have been elaborated by Gordon Brown and other Labour spokespersons in the past year: tax breaks for industrial investment and for training, a training levy, taxes on speculative share and money market transactions, release of receipts from council house sales to allow new council house building, lease-buying of trains, a windfall tax on privatised utility profits, a stricter regime to prevent tax evas­ion, a redefinition of public borrowing to distinguish borrowing for investment from borrowing for the current account, and so on.

But other measures that are equally applic­able in the current economic climate seem to have been discreetly abandoned by Labour since the shadow budget just before last year's general election. In particular, it dropped plans for a top income tax rate of 50 per cent on those on £40,000 a year and abolition of the ceiling on National Insurance contributions. Both should be re­vived, although both need to be a lot better sold to the electorate than they were last time.

And then there is a whole raft of proposals that never get a look-in these days in Labour's top echelons. The most obvious is abolition of mortgage interest tax relief – essentially a regressive subsidy to affluent home-owners, which is retained by the government only for the most cynical of political reasons. The savings from abolishing MIRAS should be ploughed straight into building houses for those on low incomes.

There are others, too, from wealth taxes, through energy taxes that do not hit the poorest as VAT on domestic fuel will, to disbanding the British Army of the Rhine and using the savings on a massive employment programme. In all these cases, the reason for Labour's lack of enthusiasm has little to do with economics and a lot to do with fear of what the Tory press will say.

Of course, there are limits to what a single medium-sized nation-state can do to conquer unemployment and recession: the experience of France in the early eighties shows that there is little mileage today in the sort of one-nation Keynesianism that used to form the basis of all left-of-centre alternative econ­omic strategies. That is why a programme for recovery in Britain would have to be matched with proposals for a European recovery pro­gramme, initially based on the intergovern­mental framework suggested by Jacques Delors (unceremoniously blocked by the British last week), but ultimately carried out by federal European institutions.

Nevertheless, it remains in the power of the medium-sized nation-state to make a substan­tial difference – and it is a scandal that Clark will deliver a package that does nothing (or worse) for recovery.

CLINTON'S POOR START

New Statesman & Society, leader, 5 November 1993

Bill Clinton was elected a year ago promising to be a president who con­centrated his efforts not on foreign affairs but on changing America for the better. There were some sound political reasons for this: George Bush was widely perceived by voters as having spent too much energy on faraway countries and having ne­glected the domestic front, particularly the economy. But Clinton's ordering of priorities was also a reflection of his own inadequacies: put brutally, he did not, and does not, know very much about the world beyond his own backyard.

So far, his administration's foreign policy has been marked by quite extraordinary in­consistency. On Somalia, where he inherited Bush's ill-advised military intervention, he has veered between backing escalation of US involvement and seeming to want to pull out as soon as possible. On Bosnia, the adminis­tration started off promising military inter­vention and cajoling the reluctant British and French to back its approach – only to end up effectively spurning any role. A similar con­fection of bluster and inaction seems to be the name of the game with Haiti.

The problem is not, however, simply with the spectacular international crises that make it on to the television screens. Clinton has proved just as inept on Cuba, hinting that he might reconsider the blockade and then an­nouncing that it would stay. He has faced both ways on China, attacking its appalling human- rights record and then upgrading US contacts with Beijing. Perhaps more import­ant in the long run, no coherent policy has emerged on relations with Europe or the Pacific Rim countries, on world trade or on nuclear weapons. America has had little or nothing to do with the Israel-PLO peace pro­cess and appears confused about what it wants in the Middle East. Just about the only decisive and effective action by Clinton in the foreign arena was his rapid endorsement of Boris Yeltsin's seizure of power in Russia – and that could all too easily turn out to have been a giant mistake.

The mess is not entirely Clinton's fault: he has been badly advised, particularly by his Secretary of State, Warren Christopher, a veteran of the Carter administration who has plenty of experience, but entirely lacks the vision required to steer the sole superpower in the post-cold war era. Nevertheless, the buck stops with Bill – and he needs to start thinking a lot more clearly about the goals of American foreign policy if his administration is not to go down in the history books as a disaster. What the world needs is a US that is neither isolationist in the traditional sense nor the world's policeman – not a US that one minute seems to want to retreat into its shell and at the next intervenes unilaterally and incompetently in some crisis or another.

At home, the picture for Clinton is differ­ent – but not so different. All the indicators suggest that the American economy is at last making a strong recovery from recession. But it is doubtful whether this has anything to do with "Clintonomics", that familiar mix of austerity budgets, continental free trade and "supply-side'" intervention.

Certainly, the idea of making training the central focus of economic policy, so much admired by the Labour Party here in Britain, looks increasingly threadbare. According to the current issue of the Nation, the New York left weekly, a Labor Department report last month assessing a $200 million-a-year scheme for retraining manufacturing workers who had lost their jobs to foreign competition "concluded that only 19 per cent of the 'retrained' workers found jobs that demanded their new skills and paid at least 80 per cent of their former wages; 20 per cent remained jobless; most of the rest sank into low-wage slots that they occupied for just eight months."

And if retraining doesn't work, isn't the North American Free Trade Agreement simply a mechanism for exporting employment to Mexico? It is no surprise that the administration is currently engaged in the mother of all battles with Congress over NAFTA, with Clinton's political credibility on the line if he loses.

Apart from the economy, Clinton's main domestic policy plank was a promise to re­form America's creaking health and welfare regimes, starting with health. Here too, how­ever, the signs are less than promising. The health package launched by Hillary Clinton in September is unlikely to provide the com­prehensive, accessible service that the country so badly needs, and there are no indications that the welfare reforms now being considered by the administration will do anything other than penalise the poor for the economy's failure to generate jobs.

Clinton's honeymoon with the electorate has been deservedly brief: the defeats suf­fered by the Democrats in New York and elsewhere this week are a taste of worse to come in the mid-term Congressional elec­tions this time next year unless the adminis­tration pulls its socks up – and fast. This side of the Atlantic, those Labour politicians who celebrated Clinton's victory last year with champagne at a swanky London hotel have been remarkably silent about their erstwhile hero. One hopes that the silence does not mean that Britain's Clintonmaniacs are not having second thoughts.