Academic journal article National Institute Economic Review

Policy Options under a Labour Government

Academic journal article National Institute Economic Review

Policy Options under a Labour Government

Article excerpt

Our forecasts for the domestic economy in Chapter 1 assume the continuation of present economic policies, and hence implicitly that the Conservatives are returned to power at the next General Election. Here we look at some of the changes in policy which might follow a Labour victory. As yet, relatively few firm commitments have been made by the Labour Party, so we cannot make any overall assessment of their plans. Instead we consider a range of options based on the general statements of objectives which have been made.(1) The aims and priorities of a Labour Government would differ somewhat from those of the present Government; and a Labour Government would consider a wider range of options for policy change, including some that have been ruled out explicitly by government in recent years.

A new Government does not set up business on a green field site and judging by its recent policy statements, the Labour Party, recognises this. But the case for a fresh look at economic policy is strengthened by the disappointing performance of the economy in the last few years. There could be radical change in some areas, but important elements of continuity as well. There is no intention of conducting policy in the way which has characterised previous Labour Governments. This is reflected in the options we have chosen to analyse in this chapter: for example we do not include indicative planning, trade protection or incomes policy.

We begin by discussing relations with the rest of the European Community. The extent to which economic policy is harmonised within Europe narrows the range of options open to a Labour Government, in monetary policy, in industrial policy and in virtually every branch of economic policy. We then discuss the macroeconomic issues, starting from the firm commitments already made for extra spending and tax changes. We assess the trade-off between inflation and unemployment, drawing on an analysis using optimal control techniques in Annex A. There is a separate section on the possible role of credit controls as an additional instrument of policy. In Part Two we consider some of the microeconomic or structural policy options already under debate, especially the effects of higher investment and training. The setting of a minimum wage is discussed in Annex B. In a chapter of this length we cannot hope to be comprehensive-we do not, for example, discuss industrial relations, housing or local government finance-but conclusions do emerge about some aspects of Labour Party policies. Where possible we quantify these conclusions using the Institute's model of the UK economy.(2)

Policy towards Europe

In recent years the Labour Party has been more enthusiastic about the moves towards European economic integration than has the Government. This is most evident in the areas covered by the Social Charter, where the approach in Brussels is more in line with that of the Labour Party than the Conservatives in Britain. The attitude of a future Labour Government to European integration would be influenced by political developments in other major member countries, especially France, where the strongly pro-European policies of the Socialist Government provide an important precedent for a future Labour Government in this country.

Britain is now a full member of the EMS. This means that monetary policy cannot be conducted in this country independently of policy elsewhere in Europe. If the system evolves, as is the declared intention of the other member states, towards a full economic and monetary union, then the remaining possibility of realigning the exchange rate will be progressively eliminated. The Labour Party was ahead of the Government in advocating full membership of the EMS. They have indicated a willingness to contemplate a new European system of central banks' provided that it is politically accountable'. They would also hope to negotiate additional financial transfers, favouring the less prosperous regions of the EC, from which the UK might gain. …

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