Dermot Finch

Ed Miliband and business

I was on 5 Live this morning (very early), talking about Ed Miliband and Labour's relationship with business. They asked me in, partly because I'm a former Treasury official - but also because I wrote the opening chapter to Labour's Business - a collection of essays on what Labour needs to do to regain its credibility on economic policy.

Miliband took a step backwards with business in his party conference speech in Liverpool last September - all that talk of predators didn't do him any favours with big biz. Digby Jones called it a "kick in the teeth" at the time, and the CBI's John Cridland wasn't too pleased either.

Since then, Miliband has recrafted his pitch to business - he's dropped the "predator" language, and to his credit pioneered the "responsible capitalism" agenda. His call for Stephen Hester to refuse his bonus will have scored him a few much-needed points on his own backbenches, and with the public - but equally it will have alarmed some business leaders.

Miliband's biggest headache, though, is the deficit. Following the OBR's gloomy projections last November, it's now clear if Labour were elected in 2015, it would have to continue cutting spending. That's why Ed M and Ed Balls decided to agree with the public sector pay freeze, and are injecting a small dose of fiscal conservatism into their rhetoric. 

But Labour is still not credible with business, on the economy or the deficit - despite the worsening economy. The latest Guardian ICM poll says only 28% trust Miliband and Balls on the economy, well below Cameron/Osborne's 46%. Even though GDP went negative in Q4, most business leaders are sticking with the Coalition's plan - for now. Miliband's hope is that business runs out of patience with the Government, and starts looking to Labour for an alternative. But that moment has not yet arrived.

This is in stark contrast to 1997, when Labour was riding high with business. Back then, Labour figures such as Geoffrey Robinson, David Sainsbury and Ronald Cohen (I worked for all three) led the party's charm offensive with the City, and succeeded in securing the loyalty of British business for a decade.

Fast forward to 2010, and - as David Miliband pointed out in the New Statesman this week - no major business endorsed Labour in the general election.

As I say in my chapter for Labour's Business, the party must do more to reassure business that it has the right approach to the economy, and adopt more of a private enterprise approach to job creation - as it can no longer rely on growing public sector employment.

Here is John Springford from the Social Market Foundation, responding to my chapter - he argues for a stronger "people" approach to growth, with more investment in skills. But he warns that Labour invested heavily in skills in the boom years, and much of it was wasted. The challenge now is to find more effective ways to upskill our workforce.

Blockbusters: Miliband tweets himself in the foot

It was sad to hear about Bob Holness's death last Friday. When the news first broke, the story didn't have any political potential at all. But thanks to Twitter, "Blackbusters" could go down as Ed Miliband's defining blunder.

I have my own reasons to remember Bob. I was on Blockbusters in 1986, and made a complete idiot of myself by answering 10 questions wrong in a row - including "What B were the King's suede shoes?" (Brown) and "What L is a disease of tropical Africa, especially Nigeria?" (Laryngitis). I never got anywhere near the Hot Spot.

BBC News invited me on last Friday evening, to share my memories of Bob - you can see my interview here. It's quite funny.

Bob also caused Ed Miliband to make a complete idiot of himself - not on Blockbusters itself (he would surely have won several Gold Runs, had he been on), but with that Twitter blunder ("Sad to hear that Bob Holness has died. A generation will remember him fondly from Blackbusters").

That tweet capped off a bad week for Miliband. After a deliberate media offensive over the holidays, designed to promote his credentials as potential future PM, Miliband's efforts were scuppered first by Maurice Glasman's snipe (that he has "no strategy, no narrative and little energy") and then by tweeting himself in the foot.

There's no doubt Miliband was trying to use the holiday period to bolster his own position, with this piece from Toby Helm in the Guardian and this one in the Daily Mail. Both gave credit to Miliband for his handling of the hacking scandal, and for the occasional bright spot at PMQs. But awkwardly, both compare him to failed Tory leaders William Hague and Iain Duncan Smith, and both dwell on his geekiness, his oddness, his weirdness (in the words of people like Tim Montgomerie).

One saving grace, according to Toby Helm on 31st Dec, was that Miliband hadn't by then made a "defining blunder" - as Hague did in that baseball cap back in 1998.

Will "Blackbusters" be that defining blunder for Miliband? More substantively, can he reassert his position with his own party and with the public? Some of his own party are already calling on him to turn things around, otherwise they will start casting around for an alternative leader. Meanwhile, I fully expect Cameron to ask for "an 'O' please Bob" at Prime Minister's Questions this week.

City Deals: Clegg promises real powers for cities

Nick Clegg is in Leeds today, to announce plans for a series of "City Deals" - extra new powers to boost growth in and around the Core Cities outside London - that's Birmingham, Manchester, Liverpool, Newcastle, Nottingham, Sheffield, Leeds and Bristol.

So far, the Coalition has set up Local Enterprise Partnerships (38 of them) and wants to see directly elected mayors in the 12 biggest cities outside London. But no major new powers have been on offer for LEPs or mayors, so neither has been taken very seriously.

Clegg's announcement today could change that. He will set out specific details about how the Government will devolve new powers to the eight Core City LEPs - but only if the LEPs promise a "step-change" in governance, and deliver "stronger and more accountable leadership". The Government would like to see directly elected mayors in Birmingham and other cities, but mayors are not essential to these City Deals. Instead, the Government will encourage each of the eight LEPs to come up with their own "tailored models" of stronger leadership.

The menu of possible new powers for LEPs include:

• Single capital pot, for local infrastructure (instead of lots of different funding streams)
• Fast-track access to tax increment financing, to deliver new infrastructure
• Business rate discounts for local businesses, and an incentive to pool business rates across a LEP
• Devolving local transport funding, and increasing LEPs' control over rail and bus services
• Devolving housing (Homes & Communities Agency) funding to LEPs
• City Skills Fund to tailor FE provision to local skills needs

Greater Manchester is the LEP that is most ready for these new powers - it already has a statutory Combined Authority in place, covering all ten authorities. Birmingham & Solihull LEP is not as firmed up, but Birmingham now has a real incentive to vote "yes" to a mayor in May's referendum. Liverpool might also go for an elected mayor.

The full details of these new City Deals will be published in a report from the Cities Policy Unit (based inside the Cabinet Office) called Unlocking Growth in Cities.

Autumn Statement: game-changer

Last week's Autumn Statement has changed the political dynamic, for the rest of this Parliament and beyond. Here's why.

The game changer was George Osborne's confession that the structural deficit will still be around until 2016/17 - two years later than initially planned, and well into the next Parliament.

The Chancellor is still on course to meet his fiscal tests (just), but only because he's pencilled in £15 billion of additional spending cuts in each of the two years after the 2015 election.

This means that the next election will be another austerity election. If we are to remain credible on the international stage, each of the three main parties will need to fight the election on manifestos that include spending cuts - not the usual promises of financial largesse.

For Osborne, the risks are clear. His personal credibility is now on the line. He will not want to repeat Tuesday's experience of telling the House of Commons about another downward revision to his growth plans.

If the structural deficit gets any worse, and stretches beyond a five-year horizon, it will look like Osborne has lost control of events. So he will be praying for a euro rescue package and a growth rebound in 2013.

For Nick Clegg, the dilemma of Coalition life has just become sharper. For as long as they remain in the Coalition, the Lib Dems have to continue supporting the Chancellor's deficit reduction plan - which now includes those £15b per year spending cuts right after the 2015 election.

Although they plan to fight their own separate campaign in 2015, the Lib Dems have just been pulled deeper into their pact with the Conservatives, and are now collaborating on spending cuts into the next Parliament. This will make it harder for them to present a separate face to voters in 2015.

For Labour, the new fiscal reality is just as uncomfortable. Although the immediate sense of schadenfreude might appeal, the longer-term implications of a prolonged structural deficit are very tricky.

Eds Miliband & Balls will now have to contemplate making their own deep spending cuts, if they win the 2015 election. They will inherit a depleted public sector, impatient for payback after five years of real-terms pay cuts. But Labour won't be able to promise much.

Voters won't be bothered that much by the structural deficit itself. But they will be bothered by the implications - prolonged spending cuts. The three parties are only just coming to terms with what this means for them - and it's not pretty.

Labour's Business

Ed Miliband's speech to Labour's conference in September went down like a lead balloon with British business - especially that bit about "predators versus producers". Since then, the Labour leader has tried to clarify his argument, most recently in two speeches to the Social Market Foundation and IPPR. In both, he makes a better case for a more responsible brand of capitalism.

Even so, Labour is still not trusted on the economy - a real problem ahead of the Autumn Statement, and as the economy remains the biggest issue for the electorate.

Today's publication of Labour's Business is therefore quite timely. It's a collection of essays from businesspeople and policymakers, on how the Labour Party can regain its credibility on the economy - particularly on small businesses. Chuka Umunna writes the foreword, and chapter authors include Kitty Ussher, Hazel Blears and Tessa Jowell.

Labour's Business warns that Labour is letting the Conservatives run away with the "party of enterprise" title, and sets out how the party can promote a stronger enterprise culture and reclaim its credibility on the economy.

I've written the opening chapter (pages 16-19), about Gordon Brown's period as Chancellor and his mixed record on enterprise. I was a Treasury official for most of Brown's tenure at Number 11, and saw his enterprise strategy up close. Although he personally championed "an enterprise culture open to all", Brown launched too many initiatives and left too many areas of the UK excessively reliant on the public sector and vulnerable to the spending cuts that are now underway.

My advice to the current Labour leader: "rather than just defending the public sector, Labour needs to set out more clearly how it will deepen the private sector element of the UK economy".

Autumn Statement preview

Tomorrow's Autumn Statement will have plenty of bad news - lower growth, higher borrowing, higher unemployment. The Chancellor knows he can't bury all that bad news tomorrow - that's why he's been pre-releasing his response over the past few days, to give it some airtime. So what are the key elements of this growth package? And how will Labour react?

First, it's clear the Chancellor will miss his self-imposed target to eliminate the structural deficit by 2014/15. Andrew Marr pressed him on this yesterday. Osborne dodged the question, and told us this was "an exceptionally difficult time". In fact, as I wrote 10 days ago, the independent Office for Budget Responsibility will probably say the structural deficit won't disappear until 2016/17 - well into the next Parliament. That means we'll all have to be in it together for quite a bit longer.

Meanwhile, the Treasury is understood to have stepped up its contingency planning in case of a break-up of the eurozone. Osborne said yesterday that a disorderly euro collapse would be massively damaging, and was already having a "hugely chilling effect" on the UK economy.

Faced with that gloomy prospect, the Chancellor has been forced to respond with a package of new and additional measures to boost growth. He will say he's sticking to his plan, but as Alistair Darling said yesterday: "Plan A is slowly but surely being left behind".

1. Credit easing is by far the most important element of the growth package. Labelled the "national loan guarantee scheme", the Government will underwrite up to £40b of bank loans to SMEs, over a two-year period. The Treasury is calling this a "game-changer", and it is a potentially massive step. But it does rely on the banks to lend, and SME confidence to borrow. Labour is suspending judgment until tomorrow, although Darling did say it is a "welcome step" and "right in principle".
2. Infrastructure spending will get an additional £30b boost over the long term (mainly from pension funds), with £5b due before the next election (paid for by under-spends elsewhere). The PM and Clegg have already announced a £400m plan to build 16k new homes. Labour will no doubt remind us that public sector net investment in capital was due to fall from £49b in 2009/10 to £24b in 2013/14, so this extra spend is a relatively small increase. Also remember that the £5b announcement was almost made at the Lib Dems' conference in September, before George Osborne stamped on it. My colleague Tom Wadsworth has written more on infrastructure, here.
3. The £1b Youth Contract will address youth unemployment, which now stands at just over 1 million. As Nick Clegg announced last week, the three-year scheme will give employers subsidies worth £2,275 to take on 160k 18-24 year olds for six months. Labour will say this is too little, too late - and just another version of the Future Jobs Fund, which the Coalition scrapped in 2010.
4. Rail fares will increase by 6.2% in January, but not by as much as initially planned (8.2%). And a 3p rise in fuel duty, due in April, will be delayed. That will be something of a relief for commuters and drivers, but Labour will say that inflation is still hurting many families.   

It's not exactly clear how all this extra stuff will be paid for - probably a combination of departmental underspends, less generous tax credits and some kind of extension to the bank bonus tax.

This Autumn Statement should be a humiliation for Osborne, and an open goal for Labour. But it's not quite as simple as that. Labour is not yet credible on the economy - most people still buy the Coalition's argument that they are just clearing up Labour's mess. As the fiscal numbers get worse, it could actually be harder for Labour to make the case for higher levels of spending.

That's why it's interesting to see some growing signs of fiscal conservatism within Labour's ranks - most recently, Ed Miliband talking last week about the need for Labour to pay down the deficit from 2015 onwards. Cutting "too far, too fast" has been the Labour mantra so far. Look out for a slightly different message from Miliband tomorrow, that Labour would reduce the deficit in a more responsible manner.

The structural deficit: 5 things you need to know

George Osborne has spent the last 18 months telling everyone that he will eliminate the structural deficit by the end of this Parliament. As I wrote back in July, that now looks impossible.

The Office for Budget Responsibility will confirm its more gloomy fiscal outlook on 29th Nov, the same day as the Autumn Statement. It is likely to say that the structural deficit will not disappear until 2016/17, due to worse-than-expected growth. Eds Miliband and Balls will pounce on this, as a huge indictment of the Coalition's spending cuts. Osborne will need some good answers.

Just to get you in the mood, here are five things you need to know about the structural deficit:

1. The structural deficit is the bit of the overall deficit that does not go away when the economy recovers. In the OBR jargon, it's the "cyclically-adjusted current budget" (and it doesn't include capital spending on transport, housing, etc.).
2. Since June 2010, the OBR has been forecasting that the structural defict would shrink from around 4.6% of GDP in 2010/11 and disappear by 2014/15, ending up in a surplus of around 0.4% of GDP. That's why the Chancellor has said he would eliminate it by the end of this Parliament.
3. But the economic outlook has worsened over the past six months. We're not going to bounce back to the levels of output we enjoyed before the recession. As a result, a bigger chunk of the deficit is structural rather than cyclical. In OBR-speak, the "output gap" is smaller than earlier thought and there is less "spare capacity" in the economy.
4. The Chancellor's "fiscal mandate" is looser than he has made out. It's "a forward-looking target to achieve cyclically-adjusted current balance by the end of the rolling, five-year forecast period". So his goal isn't to eliminate the structural deficit by the end of this Parliament (2015), it's to achieve structural budget balance over a rolling 5-year horizon. On 29th Nov, the OBR will publish forecasts across the 5 years from 2012/13 to 2016/17.
5. Whereas we were due to eliminate the structural deficit by 2014/15 (i.e. within this Parliament), the OBR is likely to say we won't eliminate it until 2016/17 (i.e. well into the next Parliament).

So, Osborne will miss his self-imposed target of eliminating the structural deficit by 2014/15. This will be politically embarrassing for him, so he'll need an impressive performance on the 29th. He will need to steady nerves inside the Coalition, and reassure the public that he is still on the right track. Meanwhile, he could come under pressure from the markets to cut spending further than he has already planned.

Looking further ahead, the next government in 2015 will still inherit a structural deficit - which may mean more spending cuts post-election, on top of those already planned up to 2015 under the current Spending Review. No sunny uplands for a while, then - looks like more pain to come.

Labour's response to this is tricky. Politically, the gloomy fiscal outlook will allow them to trash Osborne's Plan A as misguided and self-defeating. But economically, there will be even less room for the additional spending that their Plan B calls for.

The structural deficit might sound geeky, but it's actually going to define the economic debate from now on...

Sir Bob to replace one third of GOD

Normally, the announcement of a new head of the Home Civil Service is quite predictable. They've all tended to be HM Treasury permanent secretaries (e.g. Gus O'Donnell, Andrew Turnbull), Prime Ministerial private secretaries (e.g. Robin Butler) or other versions of long-standing Whitehall mandarins (e.g. Richard Wilson).

Bob Kerslake is none of those things. That's why today's announcement of his appointment as the new head of the Civil Service (from Jan 2012) is such a first. It's not just that he, Jeremy Heywood and Ian Watmore will between them split the three jobs carried out by Gus O'Donnell (otherwise known as GOD): Civil Service chief, Cabinet Secretary and Cabinet Office permanent secretary.

The real surprise is the choice of Sir Bob himself. He must be the first council and quango chief to rise to the very top of the civil service. Chief executive of Sheffield City Council (1997-2008) and then head of the Homes & Communities Agency (2008-10), Kerslake was closely involved with the Labour Government and with many of its policies.

But like every good public servant, he displayed exemplary chameleon skills when the Coalition arrived last year, first switching from the HCA to running the Department for Communities & Local Government; and then implementing perhaps the deepest of all departmental staff cuts across Whitehall.

Kerslake's local government roots would normally be the kiss of death for an aspiring mandarin. But for David Cameron, Sir Bob's local credentials are hugely appealing - they underline the PM's own commitment to localism, and usefully contrast with Jeremy Heywood's Downing Street-Treasury-Morgan Stanley background. Just to reinforce the "first" point, Kerslake will continue as permanent secretary of CLG - highly unusual, and perhaps only a short-term arrangement, but a very handy and high-profile efficiency saving (for now).

Other permanent secretaries had been more strongly tipped for the post - including Suma Chakrabarti at the Ministry of Justice, and Helen Ghosh at the Home Office. Many other perm secs - Lin Homer (DfT), Bronwyn Hill (DEFRA), Martin Donnelly (BIS) - are new to their posts, and will be surprised at Kerslake's rapid elevation. They will have to wait until 2015 - when Kerslake reaches 60 - before the top job comes up for renewal.

Evidence-based policy

"Evidence-based policy making" might seem a rather obvious pursuit. Who, you might ask, could possibly make up policies on the back of no evidence whatsover? But in Whitehall it's a relatively recent trend (formally, at least). Championed by the likes of Gus O'Donnell when he was Treasury permanent secretary (2002-05), evidence-based policy making was all the rage under New Labour. 

Before 1997, policy making was based on a slightly thinner evidence base. Interest rates, for example, were set by Ken Clarke & Eddie George, with decisions sometimes based more on the electoral cycle than on economic data. The Monetary Policy Committee changed all that, and put interest rates decisions firmly in the hands of the Bank of England and its economic datasets.

But, as Evan Davis pointed out at the Institute for Government last night, more evidence hasn't necessarily resulted in better decisions. (In fact, he thinks that economists have been quite rubbish in recent years.) And although evidence is helpful, it doesn't simply churn out a clear answer to every policy problem - politicians still need to make judgements.

So yes, we now have a lot more evidence. Star panellist Vince Cable highlighted his Top Five evidence-based policy moves: Lord Stern's report on climate change, Lord Turner's report on pensions, Lord Browne's report on student finance, the Low Pay Commission, as well as the MPC. All good.

But ironically, all that extra weight of economic evidence didn't prevent the Bank, FSA or Treasury from making a series of major decision-making errors in the run-up to the financial markets collapse of 2007/08. 

And although evidence is always helpful, it can be used to support two completely different arguments - like in a court of law. As Jonathan Portes pointed out, the decision by the Coalition to scrap the Educational Maintenance Allowance was a classic piece of "policy-based evidence making". One minute, Labour was publishing evidence that EMAs were vital - the next, Michael Gove was scrapping EMAs based on "new" evidence. Who was right?

Also, take localism. The Labour Government was largely sceptical about the rationale for devolving power to local authorities and community groups. Towards the end of their time in power, Labour ministers did start commissioning and exploring evidence on localism - but progress was painfully slow. The Coalition, by contrast, simply announced that localism was a good thing, committed itself to the localist cause, and got on with implementing its localist agenda - not on the back of a new pack of evidence, but because Conservatives and Lib Dems both believe in it.

So, evidence-based policy making has improved and become more widespread in recent years. But it doesn't provide the full answer, it doesn't guard against bad decisions, and it still allows politicians plenty of room to be, well, political.

 

I used to be Rachel Reeves' boss

Honest. Back in 2002, she was a Bank of England economist and I was the Treasury's economics attache to the British Embassy in Washington DC. My economics skills weren't too hot, and it was quite busy after 9/11, so we needed reinforcements. Cue Rachel.

We worked together for just over a year, until mid-2003. My formal title was First Secretary (Economic Affairs) - I focused on the secretary bit, and let Rachel do most of the economics stuff. And she was very good at it. I probably learned more about monetary policy, inflation targeting and fiscal loosening from Ms Reeves than anyone else.

Nine years on, Rachel is about to be elevated to the Shadow Cabinet  - and is eminently well qualified for the shadow Chief Secretary role. Her strong professional track record outside politics - at the Bank, Embassy and HBOS - is often cited as the reason for her rapid advancement inside politics. A good example of why MPs should not just be drawn from the ranks of special advisers and think tanks.

She's been Labour MP for Leeds West since last year's general election. Before then, she fought her local Bromley & Chislehurst seat twice - first, against Eric Forth in 2005; and then in a by-election against Bob Neill (now a CLG minister) in 2006. Realising that Labour would find it hard to win seats in the South East, she moved up to Leeds and - with the help of local MPs such as George Mudie - secured the nomination for John Battle's seat, ahead of the 2010 election.

If she is made shadow chief secretary, Reeves will fancy her chances against Danny Alexander. Like Reeves, he took PPE at Oxford, but his comms roles at Britain in Europe and Cairngorms National Park don't quite match up to Rachel's stints at the Bank, DC and HBOS. He does have the full force of the Treasury behind him, though. Look out for Treasury Questions on 1st November, for the first Reeves v Alexander contest. In the meantime, she could do worse than consult Alistair Darling - who was shadow chief secretary before the 1997 election.