THE BLOG

Rebalancing the Budget

18/03/2013 18:36 GMT | Updated 18/05/2013 10:12 BST

So George has lost his treasured AAA rating. We are now heading for record consecutive quarters of stop-start growth. Youth unemployment is at an all-time high. Neither the deficit nor the debt is coming down and there's no money to do anything about it. If we want to spend more we have to borrow more, and even Ed Balls can't be sure we'll end up better off if we do.

So politicians rightly talk about rebalancing the economy, not only in terms of an industrial policy less reliant on financial services and unsustainable asset bubbles, but at the highest level, of a recalibrated relationship between private, public and social sectors.

This is why Ed Miliband talks about pre-distribution - meaning the private sector has to deliver more social impact up front rather than leaving the state to take on an ever increasing and unsustainable burden of mopping up market failure further down the line. (Perhaps the advantage of pre-distribution over the less snappy neo-endogenous growth theory is that Labour Party activists can actually spit it out before the door slams in their faces.)

But this is also why Cameron has talked about the Big Society - meaning the social sector has to take on some responsibilities from the public sector to deliver social justice. (Perhaps the Big Society also sounds pretty appealing on the doorstep when compared to its earlier incarnation as the Post-Bureaucratic Age).

What these two little-loved philosophies share is an acceptance that the state has become too big to fail but without the means to keep bailing itself out. Just like the banks, we need to break up the model of a universal state that tries to do everything, and instead transfer some of its functions into a more traditional model.

But if these ideologies are to be anything more than rhetoric then the state must do more than simply withdrawing to sulk in the corner. Businesses aren't going to wake up one morning and decide to start acting with greater corporate social responsibility. Equally, communities, charities and volunteers are not going to magically spring up when people's time and money are in such short supply. The state needs a transition plan.

So what would a budget that takes practical steps to truly rebalance the economic system look like?

When it comes to spending measures, we could look for measures which follow the principle in the new Social Value Act, ensuring wider social impacts are taken into account. This could mean: greater integration and joined-up budgets through the devolution of the 'Heseltine pot' to the local level; an industrial policy more targeted at those green and creative SMEs which drive sustainable growth and jobs; and models of infrastructure finance that kick-start local and regional development - not only grand schemes and Boris Islands.

On the regulation side, recent legislation that mandates the Financial Services Authority to consider how investors can address wider social and environmental considerations beyond a single financial bottom line is a good start. The Treasury can do more in this regard to ensure pensions funds and investors look beyond a short-term and narrow view; to enable more democratic and participative ownership models; to shift businesses towards a living wage and paid internships; and to improve transparency and accountability, applying the principle of open government to open business.

On tax, the Treasury needs to think more creatively about how to better target the weapons it already has at its disposal. Existing tax reliefs such as VCT (Venture Capital Trusts) and EIS (Enterprise Investment Scheme) could be tweaked to reward long-term investment in, say, social care, in cleantech and sustainable energy, and away from short-term speculation in the likes of tobacco, fizzy drinks, and horse burger processing plants. This would have a net neutral effect on the public finances in the short-term but a very positive one in the long-term. So Osborne and Alexander could bank both long-term savings and short-term political points by taking the tax breaks created by Balls and Miliband and using them to encourage long-term investment in producers and away from predators. Or corporate strivers and skivers, if they prefer.

Finally, if the government really believes in its own powers of nudge, the budget needs to send a few positive signals to the markets about the kind of businesses that are already punching above their weight. Despite everything, we have a buoyant social economy. We should expect the bright young things in the Treasury to be finely tuned to the sectors that are creating social, economic and environmental value, jobs and growth. Yet the last few budgets have made little reference to social enterprise, co-operatives and employee-owned businesses - which are financially outperforming red-blooded businesses at their own game. Social enterprise is outstripping mainstream business for growth, optimism and start-up rates, has a glowing global presence and a UK sector that attracts interest from around the world. If the Treasury can't see the link between the rhetoric of rebalancing the economy towards responsible capitalism and the reality of a thriving social economy (against the odds) then they're missing a trick just when they need something up their sleeve.

This is where the political can become practical. Francis Maude's recently found affection for mutuals and Labour's talk of co-operative councils reflect the need to lift some of the weight from an overburdened public sector. But both sides of the equation have to balance, and socialising enterprise is the forgotten half of the equation. Politicians' rhetoric of a more responsible capitalism and a rebalanced economy needs to get real. To make the numbers add up, we must start with a better-balanced budget.