On Saturday 14th January, the Institute of Education in central London played host to the 2012 Fabian Society New Year Conference.

Hundreds of Fabians attended the all-day event, which featured some of the leading lights of the British Left and a selection of some of Labour’s most prominent frontbenchers.

This year’s theme was ‘The Economic Alternative’. Unsurprisingly, I left the conference with a sense that the Left is not offering just one alternative to the Coalition’s programme of unchecked austerity, but several, each occupying a different space on the political spectrum.

The alternative offered by Labour was set out by Ed Balls in his keynote speech. To the acclaim of some, and the horror of others, he made it clear that Labour would not reverse the cuts imposed on the country by the Tory-led government. However, in contrast to the Coalition, he did promise that the party’s focus would be fixed firmly on job creation rather than blind deficit reduction.

The overall impression received from those representing the Labour party on Saturday – which included Rachel Reeves and Chuka Ummanu – was that they were firmly sticking to their leader’s view. As Ed Miliband explained earlier last week, regardless of the Coalition’s performance over the coming three years, the next government will still inherit a deficit and in consequence have few spending options available to them. A future Labour government, therefore, would be a government of austerity too.

The need for Labour to allay suspicions that the party is, in Ed Balls’ words, “out of tune with the public mood” on the deficit is obvious from the view of narrow, immediate political interest. But as Sunny Hundal explains, by shifting the debate onto Tory territory, Labour instantly puts itself at a disadvantage. Labour will never look comfortable using the language of ‘fiscal conservatism’, or be able to dislodge the country’s preference for Conservative stewardship of the economy by promising “tough decisions on tax and spending”.

Historically, Labour has a poor record on economic management. From the historic debts of 1945 to the strikes and public sector strife of the 1970s, Labour has either inherited or created dire economic circumstances. Even New Labour, which was unique among Labour governments in presiding over eleven years of GDP growth, failed the economic test in the end when the financial storm broke. The Conservatives will always be able to claim that they are the party to be trusted with the economy when times turn hard. A Labour party promising to ‘out-macho’ the Tories will always struggle to make headway.

Other Left thinkers offered alternative visions of a future progressive approach to the economy. Caroline Lucas MP, leader of the Green Party, argued against our current economic model and stated her support for the introduction of alternate measures of national prosperity based on citizens’ perception of their own well-being and consideration for the environment. She also impressed on the audience the need to redistribute the existing wealth in society through a programme of progressive taxation and capital investment in Green infrastructure projects. The applause she received from the conference rivalled anything Ed Balls mustered, suggesting that the Left is not ready to pull on the hair-shirt of austerity just yet.

What I discovered throughout the conference is that Fabians responded better to policies and positions that promoted positive messages. Chuka Ummuna MP struck a chord by arguing that the British economy needs to be geared towards ‘pre-distribution’, and shaped in such a way that the proceeds work to lessen inequality rather than exacerbate it. The conference warmly acclaimed Will Straw’s pitch on the need for a National Investment Bank to fund SMEs, embracing the positive message that even a little investment could go a long way to transforming the fortunes of those trying to make their way through the economic turmoil.

Effective intervention, equality and redistribution were the buzzwords of the day, and if any consensus emerged from the conference it was that the economic alternative would have to reflect these three values. Let us hope that Labour’s more positive messages on jobs, ‘pre-distribution’ and ‘a responsible capitalism’ can shift the debate onto the Left’s territory, and force David Cameron to fight on our ground and on our terms.

If you were at the 2012 Fabians Conference and want to share your thoughts on the blog, please contact the team at: blog@youngfabians.org.uk

Louie Woodall is Assistant Editor of the Young Fabians Blog

Louie Woodall responds to Stephen Boyle’s argument for a new economic strategy based on ‘fiscal conservatism’.

The question absorbing Labour leaders, activists, and think-tanks alike is how the party can earn back its economic credibility. Recently, a quartet of Labour thinkers published ‘In the Black Labour’ , which offers one answer to this question. However, the paper does little to advance a distinctive economic strategy that traditional voters and activists can relate to, and does even less to bolster Labour’s chances at the next election.

The fundamental problem with ‘In the Black Labour’ is that it does not provide the alternative narrative that an opposition is supposed to offer the electorate. The authors are essentially trying to sell the electorate the same product pedalled by the Coalition: austerity, a small state, and the fictitious ‘Big Society’.

By placing ‘fiscal conservatism’ at the heart of its strategy, ‘In the Black Labour’ cedes the moral argument on the economy to the Conservatives and attempts to move the party onto the Coalition’s turf. It is easy to see why this would be an attractive course to take in the current political climate. November polling revealed that some 30% of respondents still blame the debts racked up by the previous Labour government for the continued economic slump

However, it also revealed that 46% believe Osborne needs to slow the pace of austerity, and that 35% favour a programme of public works to create jobs. Labour needs to remember that by 2015, the Coalition will no longer be able to capitalise on the excuse that their failures originated in the actions of the previous government. Osborne would have had a full term to place the country on the road to economic recovery, something which many indicators suggest he is far from achieving. Telling the electorate that it favours the government’s strategy but disagrees on the tools to achieve it will make Labour look uninspired and shallow to the victims of the Coalition’s policies.

By promising rigid controls over future budgets, the authors miss the opportunity to excite the electorate with a positive vision of economic growth. It is difficult to convince people that by cutting the deficit, more jobs and higher wages will follow. Labour should instead promote a programme of public works, with a focus on housing and infrastructure, and continue to sponsor the ‘green industrial revolution’ promised in the last manifesto. The Coalition is making tentative steps in these areas, and Labour should steal a march on them by promising a much more extensive campaign. ‘Effective Keynesianism’ can be sold to the electorate without recourse to fiscal conservatism.

Labour should not shackle itself to the same ideology dictating the actions of the Conservatives by promoting macho fiscal discipline over the more desirable aim of a resurgent economy. It should not reject deficit spending outright just to win back the votes of the City. The very idea that any government could commit to producing a budget surplus within a fixed timescale- as suggested by the authors of this pamphlet- is ludicrous considering the volatility of national and international economies. Setting targets that cannot be realistically met is an own goal in politics- just look at Osborne’s current woes.

Labour is suffering a crisis of identity, and every centre-left thinker is casting around for a narrative it can adopt that fits with the party’s heritage, while accommodating the current economic reality we face. ‘In the Black Labour’ seeks to gain the party short-term popularity by copying the Coalition’s approach to the public finances and planting the red flag squarely in centre ground. The authors should remember that the centre ground is always in motion, and may be some way more to left by 2015 than it is now if Tory policies fail to achieve their objectives.

Louie Woodall is a member of the Young Fabians and Assistant Editor of the Young Fabians Blog

In this member post, Jeevun Sandher – a member of the Young Fabian Renewing and Reforming our Economy Policy Commission -

Most of us have a vague idea of what the “squeezed middle” is. However, a precise definition seems to elude many in the Labour movement. Understanding precisely who this group is and designing economic policy to promote their interests is the key to building a fairer economy.

To define the “squeezed middle” we could do much worse than to look at the work of the Resolution Foundation, an organisation working to improve the lives of people with low-to-middle incomes. For them, this group constitute about 11 million working adults who tend to earn less than the median income but are above the bottom ten percent in the income distribution.

In short, they are people who are neither too rich nor too poor. They are too wealthy to get substantial state support, but too poor to flourish in an open market economy. Increasing amounts of them are unable to buy homes, and struggle with household bills. More than half have less than one month’s income in savings and face comparatively higher rates of inflation (due to the basket of goods that they buy).

However, the real tragedy for the squeezed middle is that while the economy grew by 11 % between 2003 and 2008, the median wage remained static. At the same time, those on higher wages saw their pay packets increase and executive pay rose exponentially. The squeezed middle saw their living standards reduce at a time when the economy grew and productivity rose, giving the lie to the neo-liberal idea that people are paid their “marginal product” – that the wage chosen by the market is a fair wage.

This problem runs straight to the heart of Labour’s “fairness” strategy. By and large, these are people who work hard, do the right thing, but still struggle to stay afloat in an increasingly precarious economic climate. Meanwhile, CEO’s saw their pay rise dramatically in the decade before the financial crisis and bankers continue to take home multi-million pound bonuses.

The challenge for Labour at the next election is to construct a vision that rewards hard work and shapes a free and fair economy. There is no silver bullet, however. What is needed is a raft of policies to build an economy in which all gain when there is growth.

To begin with, those in the squeezed middle tend to be those with low-to-medium level skills. Any economic strategy must be focused first on investment in education, in order to build up human capital. Given the increasing returns to education we have seen in the past 30 years, this is just common sense.

However, it is important to note that this does not merely mean reducing tuition fees. As a recent IFS study has pointed out, those with similar A-level grades tend to go to university in the same proportion but it is much less likely that the poorest students will get the top A-level grades. Earlier intervention is key (e.g. Sure Start, the pupil premium etc.) to promoting social mobility and building people’s skills.

But this should just be the beginning. For too long Labour has accepted the Thatcherite free market consensus as gospel, and only aimed to tweak it at the edges to help those on low to middle incomes with measures such as tax credits and lower basic tax rates.

It is time to consider and undertake more radical measures. We must design policies which create better corporate governance structures as well as more accountability and transparency surrounding pay in the private sector. Only then can we ensure that all people will share in the proceeds of growth and be paid a fair wage. Hopefully, with these goals in mind we can create a compelling economic vision that helps us win the next election.

Jeevun Sandher is a member of the Young Fabian Reforming and Renewing our Economy Policy Commission.

In this Guest Post, Bren Albiston, a member of the Young Fabian Renewing and Reforming Our Economy Policy Commission, explores the ways in which we can change the way the country does business.

We have a big decision to make as to what future we want for this country.

Do we want to continue ever further down the road of an economic system that rewards rent-seeking more than productivity? Do we want to sustain an unfair system that generates friction between the Square Mile and the rest of the economy?

No. We can, and need to, improve this sorry state of affairs.

We have to grow our economy at more than 3% a year until 2035 in order to make up the losses incurred from the double-whammy of the credit crunch and recession. If we fail, we will lose something in the order of £4 trillion of productivity* . The task may seem insurmountable, but we must work to secure as much of that 4 trillion as we can.

Our capitalism is broken. This has been made clear by years of recession and static growth. We continue to pay the price of other people’s hubris; those who thought they could predict the unpredictable.

Despite this, we are still over-reliant on a financial system that is too cautious to invest. At the same time, the government is scaling back the public sector, our most potent means of inducing social mobility. We must reinvent the way we do business and the way that we create and encourage growth, not just because we need to recover economically, but because we need to recover socially as well.

Britain should not be afraid of taking the lead in reform. There are many ways in which the nation could change the way it does business. The establishment of a properly funded and empowered ‘Green’ investment bank is one option. As Will Hutton suggests, we should explore the benefits of a ‘Knowledge Bank’, a ‘Life Sciences Bank’ and perhaps a ‘National Infrastructure Bank’.

Through these institutions, we can invest in the technologies and expertise required to rebuild our economy. A new lending infrastructure will incentivise innovation, while benefiting traditional funding streams at the same time.

The new system would channel funds to those areas that are thought to be risky bets by orthodox lenders. However, it would need the backing of the state to succeed. It alone can provide the security and effective strategic direction needed, alongside a highly autonomous set of investment apparatus to keep its influence in check.

Fairness and just desserts should be the foundation stones of our new capitalism. In many ways, small business does more for this country than big business. At present, we neglect the small- and medium-sized businesses and leave them exposed to the predatory practices of our largest firms.

These giants operate largely unchallenged by both smaller competitors and government watchdogs. A study in 2005 revealed that the more competing firms were matched in terms of performance and productivity, the more they tended to register new patents** . We need a competition framework that actively promotes competition rather than protecting incumbent corporations.

Unfortunately, the balance between today’s consumers and tomorrow’s is too heavily in favour of the former. In consequence, there is little room for innovation and even less for emerging companies to replace those which are uncompetitive. We need an infrastructure capable of sustaining new corporate growth and innovation.

Britain is, in many respects, a world-leader in high technology and services. Yet as our manufacturing sector continues to decline, we remain over-reliant on financial institutions as the engines of growth. As the state retreats from its key role in encouraging social mobility, we are faced with a huge task: we need to reconstruct our capitalism to benefit society, and we need new institutions to help us do that.

• You can learn more about what the ‘Renewing and Reforming Our Economy’ Policy Commission has been doing by clicking here.

* H.M Treasury (2009) Pre-Budget Report: Securing the Recovery: Growth and Opportunity, HMSO. See Also: Will Hutton (2010) Them and Us. Little, Brown.

** Phillippe Aghion, Richard Blundell, Rachel Griffith, Peter Howitt and Susan Prantl (2005) ‘The Effects of Entry on incumbent Innovation and Productivity’, CEPR Discussion Paper No. DP5323.

Young people need to show they care about the type of jobs that are being created and not just the numbers.

Yesterday’s labour market figures are truly depressing. 38,000 more people unemployed than the previous quarter, 2.49 million people without work.  It puts Eric Pickles’ trumpeting of the Government Enterprise Zones, with the promise of 30,000 jobs by 2015, into perspective.

As David Blanchflower predicted last month, the Prime Minster is going to have to do some nifty footwork given his assertion that unemployment will fall each year this Parliament; both the PM and the Chancellor have been given their come-uppance.

But policy makers and politicians need to be mindful of the longer term social effects of this economic pain. George Eaton has pointed out the five worrying trends in the published figures but there are two areas Young Fabians should be especially concerned about:

1) Youth unemployment continues to rise and it is lasting longer –

One in five economically active 16-24 year olds are not working. A massive 39 per cent of have been unemployed for over 12 months (up 2.5 percentage points on last year) and 95,000 have been waiting over two years for a job.

That means more  young people starting life out on benefits which is precisely what the Government says it doesn’t want.

More worryingly, the longer young people stay out of the workplace the deeper and longer-lasting the social and economic consequences (David Blanchflower lists 10 reasons why politicians should care).

So the question is: how is the Chancellor’s Office of Budget Responsibility going to cost these long-term social and economic effects? And what is this going to cost us in the long run?

2) There’s a deepening dependence on part-time and temporary work –

Both the number of people in temporary and part-time work are up (1.2 and 0.1 percentage points this quarter respectfully).

But it is the number who fall into this type of work because they couldn’t find permanent or full-time work that is most worrying: a 5.1 percentage point increase and a 7 percentage point increase respectfully.

Let’s not pretend a job is a job is a job. The Government should recognise the negative and perverse effects of long-term involuntary involvement in part-time and temporary employment. It can be a trap as well as a short-term solution.

If young people are starting their careers here it needs to be out of choice not desperation. And there needs to be a clear route into permanent, full-time work.

It is easy to just see numbers when we talk about jobs and the economy. Instead young people need to start championing the kind of job creation they want to see, not just what politicians think they can make do with.

Vincenzo Rampulla is Officer without Portfolio on the Young Fabian Executive.

There seems to be two approaches: the rational and the romantic.

Of the large net contributors to the EU budget, the French and Germans seem to fall on the romantic side, they hold a deep routed historical and ideological commitment to the European project following the aftermath of WW2. However the significant CAP and Structural Funds they share between them bend towards the rational. The Italians have the EU to thank for ridding them of the Lira, another rational argument. But what has Britain got to shout about? And will it be rational facts or romantic ideals that will work to make case for EU membership in any potential future vote on the matter?

During our period in government, departments successively made the case for Britain’s EU membership rationally and dispassionately, dealing with hard-headed facts. We spoke about trade, jobs, market access and a single set of market rules all meaning British companies and jobs are better off with Britain in, even if we pay more to the budget than we get back in hand outs (the rebate included). So our position in effect was (and largely still is) this: we pay more in, but without it, we’d be poorer. So in effect, EU membership is an indirect fiscal benefit to the Treasury and thus UK taxpayers.

So far so rational, but it’s not exactly going to send people rushing to the polling station to cast a yes in any prospective future referenda. So what is?

Do we need instead need to break the issue down to the emotive and evocative, using stories and images backed up by hard-headed facts?

The image that Europe, a continent that had been in conflict for centuries, has been at peace for over half a century is strong but it doesn’t seem as relevant today as in the last century.  But twin that with the rational facts of our inter-dependent trade and we might just have a script.

So to tell a story evocatively, as well as dealing in rational facts, Labour should weave a narrative of Britain needing to stand on the world stage with others and not alone, needing to draw on the resources of others to forge a way forward, needing to help those in their greatest need and a Britain that looks outward not inward and to quote a phrase, looking forward not back.

Brian Duggan is Young Fabian Policy Officer.

You can find out more about the 2011 Young Fabian Policy Commissions by clicking here.

In this member post, Young Fabian member Max Krahé argues that Labour should own up to its economic mistakes, or risk losing the argument at the next general election.

In order to win the next general election, Labour must grapple honestly with its economic past. It should highlight its mistakes, and not overstate its achievements. Labour has everything to win from admitting mistakes, and everything to lose from denying them.

This article is not about actual economic analysis and will not dissect Labour’s economic record. It is about taking a step back and looking at narratives that can credibly be constructed. It is concerned with the image of Labour’s economic management, not with the actual record.

Labour got a lot of economic decisions right in government. But attempting to tell a story about ‘Labour’s decade of economic golden years’ is foolish: in the midst of the largest recession since 1929, a narrative of success is unlikely to wash.

The recession started under Labour, and in a sector closely associated with the Labour boom. People who have lost jobs, seen their savings wiped out, or find themselves in negative equity do not care if inflation was under control for the last 10 years. Labour’s economic successes are too far removed from most people’s day to day experience.

Negative stories on the other hand, including of course the Tory ‘deficit denier’ narrative, fall on fertile ground: they effectively exploit a gulf between positive Labour statements, e.g. ‘look at how well we managed the economy’, and people’s daily lives.

As a simplistic positive narrative about the economy is not viable (nor indeed true), what should Labour’s message be? A simple story might be this: Yes, debt was on the high side, and not every pound spent was spent wisely. The deficit was structural.

Nostra culpa, nostra maxima culpa*.

It’s not a line that should be used unprovoked, but could form part of any response to the next round of deficit denial and ‘Labour mess’ allegations.

How might it play out? By accepting the Conservative’s accusations we end the argument about national debt levels, and vacate ground on which the Conservatives are winning. Reducing debt levels is generally perceived as a good thing (as distinct from the narrative of ‘cuts and austerity’). So let’s not talk about debt.

Of course, the Conservatives may continue to attack ‘Labour’s high deficit’. So much the better: criticising a previous government’s policy would make the Conservatives look like an opposition party, undermining claims of being forward-looking and concerned with growth and the future of this country. It would lend support to our rival narrative of the ‘no-vision austerity Tories’.

Compare this with a continued defence of the deficit. In the short term Labour risks looking like a sore loser, and the deficit denier story may sink in for good (dishonesty is probably more damaging than excessive spending).

Even if the Tories eventually stop making ‘deficit denier’ accusations, this would merely freeze the debate. At the next general election expect the Tories to wheel out the same accusations: Labour cannot be trusted on the economy, they are still deficit deniers etc etc. Unless a credible counter-narrative has been established in the meantime, these statements will fall on fertile ground.

So if we don’t settle this debate now, we risk being branded (successfully) as economically incompetent at the next general election. Or we admit to our mistakes at a later time, taking the inevitable hit in the polls closer to the election.

The time to own up is now.

We should not be afraid of buying into the Tory story of the ‘Labour mess’. This will settle the issue, neutralise one of the more potent rhetorical weapons in the Conservative armoury, and will do so with plenty of time to spare before the next elections.

If we do not own up to our mistakes now, we leave ourselves open to Conservative attacks. And doubts about Labour’s competence on the economy are likely to re-surface at rather inconvenient times.

*Admitting to leaving behind a bit of a mess shouldn’t taint Labour as economically incompetent, if managed well. In owning up to the ‘Labour mess’, we regain the credibility needed to argue that 2008 was 1929 but 2009 was not 1930. Yes, debt may have been on the high side, but let’s not miss the wood for all the trees: Labour has prevented a catastrophic collapse of the banking sector; Labour has saved the country from the brink of an economic depression. Maybe it’s ok if we didn’t leave the kitchen spotless in the process?

In this member post, Young Fabian member Louie Woodall suggests a cure to the current NEET epidemic.

Unemployment is rightly termed a social disease, and it is rapidly turning into an epidemic within one of the most vulnerable and important groups of all: the young.

Figures released on 13 April were stomach-turning: more than 1 in 5 people aged 16-25 are now out of work; within just a few months, the number of jobless young could reach 1 million.

The prognosis for the economy is bleak. Research by the London School of Economics suggests that the average ‘NEET’ (young person Not in Employment, Education or Training) costs the state £97,000 over their lifetime. More importantly, there are shocking implications for the future health and wellbeing of an entire generation of Britons. A survey conducted by the Macquorie Group Foundation/You Gov between 26-29 November 2010 revealed that those young people who were unemployed were twice as likely to suffer debilitating physical and mental health conditions, including self-harm and panic attacks. Research undertaken by The Young Foundation also publicised that NEETs are more likely than their peers to have mental health problems, learning disabilities and a dependence on substances.

This epidemic is virulent and wide reaching; touching the poor school drop-out and middle-class graduate alike. An effective cure must therefore consist of a variety of interlocking programmes that serve to prevent and protect all those at risk.

First, the inoculation. The most consistent predictors of NEET status are poor school attendance (recurrent truants are seven times more likely to be NEET at 16); belonging to a home where no-one works; exiting the care system; and being a teenage parent. Remedying and reducing the incidence of these predictors at an early stage in a child’s life is key to solving the problem.

The solutions are varied, and there’s no harm in trying them all.

An increase in alternative education environments, such as Studio Schools, after-school clubs and community youth centres, could help cultivate those children and teens floundering in our regimented state schools. Employment schemes that target jobless parents should be broadened. A reconstituted care scheme that prioritises the support of those undergoing the transition into adulthood, and a more comprehensive network of state services that seeks to both reduce incidences of teen pregnancies and improve the range of support options available to young mothers and fathers, would also tackle the NEET disease at its very roots.

Second, the antidote to the current wave of youth unemployment. Interestingly, arguments that suggest youth unemployment is attributable to sloth and a range of perverse disincentives in the welfare system seem wide of the mark. NEETs in Leeds interviewed by The Guardian in January claimed they had a real desire to work, and that they wanted to have a purpose, to have a reason to wake up in the morning. Similarly, a survey of NEETs in Bedford reported that when asked, young people listed possession of a job as their uppermost need.

Therefore, the problem must be understood as the product of economic and institutional failure. The Adam Smith Institute suggests that the National Minimum Wage prices young people out of employment, as businesses are reluctant to shell out between £4 and £5 an hour for unskilled labour. Furthermore, the leap from the Youth National Minimum Wage to the National Minimum Wage, for which Britons become eligible at 21, has been highlighted as a reason why those under this magic number are disinclined to seek employment. Why not do something radical, and standardise the Minimum Wage across all ages?

On institutions, the evidence suggests that those services attempting to meet the needs of NEETs are overstretched, understaffed, and ill-equipped to provide the lengthy, one-on-one support needed to ensure a successful transition into full-time work. Some services are bureaucratic labyrinths to the uninitiated, and some choose not to seek available state help because of the complexity of its workings and/or previous experience of disappointment.

This is an area where ‘The Big Society’ needs to step in, and there are some encouraging steps in the right direction. Make It Happen is a government-sponsored programme helping graduates to establish their own firms, while the Calman Trust recently secured £16millon for a training hotel in the Scottish Highlands, designed to both teach and employ jobless youngsters.

If, as David Cameron insisted in PMQs in January, “the long term structural problem of youth unemployment” is one which the government has “to get a grip on”, it needs to start now, and it needs to recruit those outside parliament – you and me – to lend a hand.

In this member post, Will Lord puts forward a case for a smarter industrial policy in the UK.

Perhaps the greatest economic challenge for policy-makers over the next few years will be creating a new and more sustainable model of growth for the economy. The dire GDP figures from the last quarter of 2010 shows this is not just an issue for the long-term; it needs to be found urgently.

Much has been made of promoting the growth of hi-technology industries as a fresh source of wealth for the UK. Hi-tech industries have great economic value and could become key export industries. Furthermore, such industries tend to cluster close to quality universities – something London has no monopoly on. Promoting hi-tech growth could therefore contribute to balanced regional growth that benefits all areas of the UK (the growing video games industry in Leeds and internet businesses in Manchester are useful examples).

Britain is well placed to expand its technology sector and government has a crucial role in ensuring this. Successful clusters of technology firms have emerged in the UK, such as the famous “Silicon Fen” in Cambridge. But such examples are limited and small in scale – the UK will need to capitalise and expand on these successes if it is to compete.

Proponents of smaller government might argue that the best way to promote such growth is by letting innovative new companies flourish on their own with minimum interference. To do so would be misguided as some of the most important hi-tech institutions – for example, Silicon Valley and Israel’s technology sector – emerged with government links and assistance.

It would be foolish not to utilise public funds and help the growth of advanced industries when governments across the world are bolstering their hi-tech sectors and investing record amounts of money in new technologies.

But any government support must be carefully and intelligently designed and implemented.

Arbitrarily handing out loans and grants to individual companies can be wasteful – companies might fail, or survive only with government support, preventing dynamic new companies from entering the market. In some instances, there may be a strong case for lending to companies if the impact is near-assuredly good, such as the now cancelled loan to Sheffield Forgemasters, but making a comprehensive strategy out of it may not work.

It is fashionable to look to the USA for inspiration for hi-tech growth, but a better example lies eastward in Israel. Israel began the 1990s with a stagnant economy and very little in the way of high-tech industries. The Israeli government’s response to this was to create the “Yozma” (Initiative) Programme in 1992 in an effort to direct venture capital towards Israeli high-tech companies and promote their growth. Some $100 million of public money (around 0.15% of GDP) was put aside to pay for large shares of investments made by venture capital firms; tax breaks were also offered for firms investing in Israeli technology. Money offered by private firms was matched by the government and large companies with substantial research and development operations in Israel were given a corporation tax break of 10%.

By 2000 Israel had one of the world’s most vibrant technology sectors.

Israel has more start-ups per head than any other nation and the country receives around twice as much venture capital investment as the United States. There are more Israeli companies listed on the NASDAQ than European, Indian and Chinese firms combined. The “Silicon Wadi” on Israel’s coast now easily ranks alongside California’s Silicon Valley.

Britain can learn lessons from this eastern example, perhaps by creating its own Initiative Program. One key reason why the UK’s technology sector struggles is the lack of venture capital provided to small tech firms. Ever since the Dotcom bubble burst in 2001, venture capital firms have been cautious in offering money to hi-tech start ups. Britain’s large pension funds have also been shy of investing in new firms.

If the government were to alter incentives and direct investment towards our small and medium-sized technology firms, the UK would really have a chance to see its hi-tech sector flourish. Britain might even have the potential to create national champions on the level of Google or Verizon, something Israel with its smaller finance sector has been unable to do.

With a little change in policy from government, Britain would be well on its way to achieving a more sustainable model of growth and could see its financial sector properly working for the real economy.

Firstly, why are we so concerned about retaining the parts of the financial services sector whose reckless practices resulted in one of the worst contractions in UK economic output in history?

On the one hand bankers are vilified for their part in the recession and the attendant increases in unemployment and reductions in tax revenues; on the other we are reticent to do much about them for fear of losing jobs and tax revenues.

Secondly, why are politicians of all colours at pains to ensure that interest rates remain low primarily to ensure that houses (by which, strictly speaking, they mean mortgage debt) remain affordable when overleveraging of households both contributed to and compounded the effects of the financial crisis?*

On the one hand we are concerned by over-indebtedness of households; on the other we want household debt to be affordable.

I suppose you could argue these are consistent positions to hold by appealing to practical issues of addressing the issues in the short term.

While parts of the financial services sector contributed to the global financial crisis, it is difficult for the UK to wean itself of them in the short term – how would you replace foregone tax revenues? If this isn’t possible, would it result in steeper and faster fiscal contraction? Would this make recessionary pressures worse?

As for household debt, it’s reasonable to have a short-term concern about the potential impact of rapid household de-leveraging: the potential for a vicious downward spiral of consumer expenditure. (See The Economist this week on the related issue of interest rates).

And yet. And yet.

Arguments about the forgone taxes bank relocations would cause seem overblown to me. A Reuters special report argues that it would be harder for banks to relocate than they would have you believe.

And I sense politicians – like most of the country – have an irrational love of home-ownership; affordable mortgages are at least as desirable as a means of allowing first-time buyers onto the housing market, or existing home-owners to trade up, as they are of reducing recessionary pressures.

If we prioritise short term imperatives over longer term considerations, then we are unlikely to find much reason to change at all.

Alex Baker is Secretary of the Young Fabians.

* A related issue is supply of new homes – other things equal, home ownership would be more affordable if the government built more houses. If that’s the policy goal, then you’ve got to ask why successive governments have shied away from building more homes.