Growing our way out of the crisis

The Tory narrative is now clear. To get the economy back on track the population will apparently have to pay a heavy price, with deep cuts to basic services. This painful remedy, so the story goes, is necessary to address years of reckless expenditure by the Labour government on public services.

The coalition appears to be treading the path taken by Ronald Reagan, who famously once said: "Government is not the solution to our problems - government is the problem."

The deficit has overwhelmingly come about because tax receipts have plummeted during the deepest recession since 1929-31. It's certainly not the result of government profligacy. Increased government spending was required to maintain demand and prevent an even deeper downturn.

There's a real risk that a cuts agenda will send the economy backwards. Far from tackling the deficit, such a development would see it rise as tax revenues fall further. Ireland is already in such a vicious circle.

So if not cuts, then what? We need to go for growth.

All the economies that have suffered badly in this recession have seen a huge collapse in investment. In Britain, the fall in investment accounts for around £6 out of every £10 by which the economy has shrunk.

Without investment to generate demand and rebuild the economy we will fall back into recession or, like Japan, be left with years of low growth. In these times, when the private sector will not invest, the government needs to step in.

Not only would this boost the economy from which all would benefit, but a programme of major investment works presents a great opportunity to reshape the economy away from its imbalance on the financial sector and onto a higher skill base.

This would help address the legacy of greater inequality, a sense of vulnerability and a race to the bottom in conditions and wages left by 30 years of neoliberalism and the domination of the finance sector.

A strategy to increase wages and the overall skill base is not just economically important but is a key political issue for Labour.

While Labour's support broke down among all social groups between 1997-2010 losing five million votes, the greatest levels of decline by far and away were among social classes C2, D and E.

These groups, manual workers of all skill levels and welfare dependants, make up almost half of the population and are at the core of Labour's support. Their importance to a winning coalition for Labour can be seen from 1997 when 50 per cent of C2s voted Labour, as did 59 per cent of DEs. In May this had fallen to 29 per cent and 40 per cent respectively.

While Labour's loss at the election cannot be attributed to any single factor, a failure to properly ensure that people's living standards were rising among the middle and lower income earners, even before the recession started, clearly hit Labour hard. According to IFS, from 2002-3 median income growth was never above 1.1 per cent meaning, for the majority of people, living standards rose at most by just a few pounds a week. Such sluggish income growth at a time the economy was moving forward clearly left many people feeling abandoned by the party.

Even before the recession hit, between the 2005 election and April 2008, "income growth was negative for the bottom 20 per cent ... and below 1 per cent everywhere except in the top 15 per cent [of the population]."

Government investment to modernise the economy, especially in housing and transport where investment has collapsed the most during the recession, and a focus on developing a low-carbon and high-skills economy would boost growth in the short term as well as improving long-term prosperity.

The Green New Deal is one example. HSBC has said that in some green industries every £1 invested can expand the economy by as much as £4. Much of this would then come back to the government in taxes. The Green New Deal group of economists say a £10 billion green investment would re-skill 1.5 million people, bring 120,000 back into work and increase the earnings of those on low incomes by a total of more than £15bn. Such investments would save the government billions of pounds in reduced benefits and increased taxes alone.

Government investment in transport would have a similar impact. Consultancy firm KPMG says investment in high-speed rail would "drive economic growth and ultimately bring substantial additional tax revenue to the exchequer." It could "contribute between 25,000 and 42,000 additional jobs ... [and] additional annual economic impacts on this scale could increase annual tax receipts by between £6bn and £10bn by 2040."

The economic benefits of these two examples could easily apply to a programme of massive council house-building, addressing a critical social need and employing more than the 300,000 construction workers who have lost their jobs. It's also clear in the globalised world that the British economy cannot compete in the future on low wages and low-tech industries. Britain's prosperity must be based on high-skilled sectors which means many more graduates are needed. This underlines just how reactionary the Conservative Party policy is of scrapping thousands of university places this year and their softening up of the population for higher student fees that will merely restrict access.

We can learn from history on this. In the aftermath of the second world war Britain's national debt was at 250 per cent of GDP, but the government embarked on a massive infrastructure programme to get the economy back on track. This included the creation of the NHS and greater numbers of council homes being built.

Cuts may now be the consensus of the elites. But with every person set to be affected, the urgent task of all progressives today is to put in place the policies and alliances to create a counter consensus.

Jon Trickett is Labour Member of Parliament for Hemsworth.

Eve of Budget discussion:

Progressive alternatives to the cuts agenda

Monday 21 June, 7.30pm

Committee Room 10, House of Commons (main entrance)

Speakers include:

• Jon Trickett MP

• Jon Cruddas MP

• Larry Elliot, Guardian economics editor

• Ann Pettifor, New Economics Foundation and Green New Deal Group

• Kate Hudson, CND

• Mehdi Hasan, New Statesman

Public meeting hosted by Jon Trickett MP. To register please email: haighl@parliament.uk