THE BLOG

Budget 2013: Our Politicians Need to Build a New Economic Model

21/03/2013 08:10 GMT | Updated 20/05/2013 10:12 BST

It is only in politics that it is considered weak to change a strategy that is failing.

In most other walks of life you would be considered daft to press on, and at work you would probably be out the door. But the politician's reluctance to U-turn exceeds the goalkeeper's fear of the penalty.

It is possible to go through the many announcements in today's budget and divide them into good and bad. On the credit side would be a little more flexibility for the Bank of England, help with mortgages and some of the announcements already made that take up recommendations made by Lord Heseltine. The employer's national insurance move is likely to be more effective than the more complex scheme it replaces.

On the debit side there is much to attack too. The public sector real terms pay cuts go on and on. The increase in the tax threshold to £10,000 is poorly targeted as it mainly helps the better off - and in general this is a budget that hits low to medium earners harder than those above average. Moving welfare and pension payments into departmental spending limits sounds dull, but could result in cuts if they go above budget.

But such commentary misses the main problem with Wednesday's budget. This is that it answers the wrong question because the government has an incorrect diagnosis of our economic woes.

They say the problem is the deficit. But this is no more than a symptom of the growth, jobs and living standards crisis that is the root cause. If the economy flatlines then of course the tax take will be poor and the deficit high. And as the IMF now says, when the global economy is depressed spending cuts can make the deficit worse. This is because they depress tax income and increase spending on unemployment more than the savings achieved in the budget that is cut.

And because they have the wrong analysis of what is wrong, ministers fail to understand what caused the problem in the first place. Whatever you think of the last Labour government's spending, it is clearly absurd to blame it for a global economic collapse which is still - as we see in Cyprus - working its way through the banking system.

Rather we should admit that the economic model accepted by political leaders in all parties irretrievably broke down in 2008. We learnt the hard way that inequality did matter, that neglecting the living standards of the many fueled a credit bubble, and that markets do not automatically provide the best answer in every circumstance.

We face therefore a twin problem. We need action in the short to medium term to recover from the crash, and a longer term strategy to build a new economic model to replace the discredited one that did so much damage when it crashed and burned.

You can see hints that even the Chancellor understands some of this. He increased spending on house building and found a little more for infrastructure - if not quite yet. But he is still locked into a mind set that refuses to accept that borrowing - even at current record low cost - should not be used to boost the economy.

But that position looks increasingly isolated as his Business Secretary, the IMF and even the Economist want to slow austerity even if it means more short-term borrowing. Yet the Chancellor funded his extremely modest moves by cuts elsewhere. The net economic effect is likely to be hard to even detect. There is little to boost the living standards of the many or encourage the wage-led growth that a real attack on inequality and investment driven productivity boost can secure.

Similarly the government's business and green investment banks are desperately needed as part of a new approach to a new economy, not to mention a way of meeting the real and growing environmental challenge. But they need far more resources, and the power to act as proper banks.

Of course there are no quick fixes, silver bullets or magic wands - choose your cliche - that can secure immediate rescue. But simply stopping making things worse as the government's austerity programme continues to do would be a good start. Stepping up investment in house building, skills and infrastructure would be a good next step. And couple this with a recognition that we need a new economy that works for ordinary people, not a return to the model that did so much damage, and you have a good basis for real and sustained recovery.