On conventional measures, few economists or commentators dissented from the view that the economy was performing well before the crash of 2007. The economy grew at three per cent a year between 2003 and 2007. Inflation averaged a shade under two per cent. Measured in relation to GDP, public sector debt averaged 35 per cent, while the annual public sector deficit was under three per cent. And yet, with the benefit of hindsight, it is clear that below the surface, something strange and disturbing was happening: from 2002, the business sector started to run surpluses.
In 2002, in the wake of a slowdown of the world economy, such a surplus was to be expected. What was not expected was for this surplus to persist and grow into 2004 and beyond. The private sector continued to run an annual surplus through to 2007 – after which it jumped sharply to above five per cent of GDP, where it has remained ever since.
Such a large and long-lasting corporate sector surplus is bad for two reasons. So long as businesses and households are running surpluses (as they are), the public sector has to run a deficit. The public sector deficit won’t come down without one or more of the surpluses coming down too. The coalition, banking on a return of normal times, looked to rebalance exports and imports – but a world economy in the doldrums has dashed this hope. No one should want households to stop saving, so if the public deficit is to come down, the corporate surplus must come down.
As the most innovative part of the economy, business is the one that should be running a deficit, borrowing to invest, exploiting the profitable opportunities it sees and raising productivity. An economy with a large and chronic corporate surplus, which is what we have today, is the opposite of one that is dynamic and productive.
By calling for a new golden rule that takes both the public deficit and corporate surplus into account, we are saying that reducing both should be the government’s business. Put another way, economic policy has to be about more than austerity. Public sector deficit reduction is needed, but this has to be linked to the pace at which the corporate surplus comes down.
How might that happen? A Labour government might get the privatised utilities to up their investment spending on things like broadband, water supply and distribution and green energy; or insist that firms pay the living wage; or use investment allowances instead of corporation tax cuts (which just increase profits which are still not spent).
In an important sense, however, such specifics are up for debate. The problem we identify is a problem now, not just in 2015. The policies may be different, but the need for government to develop policies towards the business sector is not. This requires abandoning a doctrine that has held sway for 25 years: that disturbances to the economy arise in the private sector are self-correcting, provided only that the public sector does not destabilise things.
Mainstream opinion is reluctant to embrace the implication of the facts. Governments need once more to develop active industrial policies. After 2007, in Peter Mandelson’s second spell as secretary of state, Labour started to do this. We think Vince Cable would like to too – if only the chancellor would let him.
This is not a party political issue, it’s about the balance of power within government over economic policy between the Treasury and other departments. And change here might be the hardest change of all.
Dan Corry is a former Downing Street and Treasury adviser to the Labour government. Dr Peter Kenway director of the independent think tank the New Policy Institute.
A New Golden Rule is published by the Fabian Society.